Key Takeaways
Not sure where to park your money until the housing market calms down? It depends on your time frame and risk tolerance.
Stocks will generally deliver higher returns than bonds, money markets, and CDs but you could face “sequence risk” right before you want to make a down payment.
Short-term Treasuries, money markets, and CDs allow you to ride the interest rate wave, without fighting against it. And they offer plenty of liquidity.
If you think mortgage rates and housing prices are crazy right now, you’re not alone. A young professional couple I work with is expecting their first child in a few months. They got married a few years ago. To save money, the husband gave up the apartment he was renting during their engagement and moved into the condo of his fiancée (now wife). They don’t want to buy a house in this market, so they’re staying put in the condo until housing prices and mortgage rates come down. It will be a little cramped when the baby arrives, but they’ve set up a joint high-yield savings account to which they’re both contributing every month. The account is yielding close to 5% interest. With all the money they’re saving and accumulating, they’ll be able to make a much larger down payment in say, two years, and hopefully meet the 20% threshold for avoiding mortgage insurance.
When clients ask about parking money, we always ask what their time frame is before recommending specific savings or investment vehicles. Is it two years, five years, or ten years? The time horizon makes a big difference in the savings vehicle we recommend. We also need to understand their experience with investing and help understand their tolerance for investment risk.
As for the couple above, the husband has a pretty high tolerance for risk and can handle market volatility, but the wife prefers to be safer. If they were looking 10 years down the road, I’d probably recommend some exposure to the market – say a 50% stock/50% bond portfolio -- because there’s no other place to get that kind of growth potential. But of course, there would be ups and downs along the way. Since their timeframe is two to five years, they probably don’t want their money exposed to the market for so long since there could be a big correction right before they need to make a down payment. We call that “sequence risk.” So now we are talking about a money market or maybe short-term Treasury, which are both very secure, have a low chance of default, and are yielding close to 5%. They are also very liquid, so it’s very easy to access the money when the time comes.
Another option is a certificate of deposit (CD), which is not quite as liquid, but you can lock in a very attractive rate for any time period you’re saving for. When they come due, you can continue to roll them over until the time comes to make your major purchase.
What I like about each of the named strategies above is that you don’t have to stress about timing mortgage rates, and interest rates. Instead, you’re riding along with it. When rates are high, you can park your cash and get a competitive yield. And then when rates start to come down, and you’re earning less return on your savings, you can start to think about a mortgage again, since rates will have come down. As the old saying goes: “Never fight the Fed.” So, it’s always better to be riding with the interest rate wave than against it.
Contributing extra money to a high-yielding “house fund” every month also gets you used to writing bigger monthly checks that come with being a homeowner vs. being a renter or apartment/condo owner. Think of those extra monthly contributions to the “house fund” as mortgage payments to yourself.
Of course, with a child on the way, the couple also wanted to start a 529 college savings account, so they couldn’t put all of their extra cash into the “house fund.” So now we had to have another conversation: “Okay, let's look at your budget and see what your capabilities are.” Saving for college, like saving for a house and retirement, is a good example of long-term saving. It requires the discipline to invest toward a specific future goal. Depending on your personal goals and priorities we discuss how much of those funds to allocate to that bucket. There is no magic formula for that allocation, but we can help you determine how to divvy up your savings based on your personal goals, timeframe, and risk tolerance.
By the way, I’m in the same boat as many of you. My wife (then fiancé) and I tried to buy our first house during the peak of the market in 2022 and home prices and mortgages just got way too expensive. So, we plan to continue renting in this market for a while. In the meantime, we have a joint savings account that’s used specifically as a house down payment fund. When rates come down a bit, we’re going to look at places within a reasonable commute to our respective jobs in which we can afford to make at least a 20% down payment. Doing so means we won’t have to pay mortgage insurance (typically 1% of the mortgage amount).
Suppose You Can’t Wait for Prices and Rates to Come Down
If circumstances require you (or the adult child in your life) to purchase a house now, there are still ways to do it, but there are tradeoffs. You may have to move to a town or neighborhood that’s less desirable, with fewer schools and/or a much longer commute if you can’t continue to work from home. You may also have to purchase a fixer-upper which will require less money upfront, but more money down the road. That can be an option if you’re very handy or have contractors in your family. Just remember that every home renovation project takes twice as long as you expect and costs three times as much. You can also tough it out with an expensive mortgage and refinance in a few years. It’s also one of the rare times when you might be better off with an adjustable-rate mortgage since the re-set will likely be lower, not higher than they are today.
Conclusion
If you or a family member has concerns about the high cost of housing and mortgage rates today, reach out any time. I’m happy to discuss strategies for buying a home that may work for you.
BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners