Wednesday, February 27, 2008

What to do with your money while you wait to buy your house?

As a potential homebuyer I have often struggled with what to do with my downpayment as I wait for housing prices to drop. I have read many trading and investor reports and there are many different opinions on how to approach this.

The first thoughts many may have is to put your savings into a money market fund. During this period of market volatility I would advise against this. Many money market funds have tried to increase their returns by purchasing CDO's that are filled with subprime mortgages. These CDO's during the housing boom were very attractive to money market funds because they offered a tremendous return to these funds. Since these CDO's were AAA rated money market funds assumed they were safe. As the housing bust hit this turned out to be a huge mistake!!! Many of these CDO's will eventually end up being close to worthless because the forclosure rates are so high both in subprime and even prime mortgages.

As a result many of these CDO's are unable to be sold in the credit markets and will eventually be written down as losses. When this happens money market funds will have to write off all of their CDO exposure and as a result take huge losses to their capital. Some of these funds could become insolvent due to the subprime exposure!!!

If you are looking for a safe money market fund then I would advise you to invest in
Vanguard Prime Money Market Fund ticker symbol (VMMXX). they have virtually zero subprime exposure and is one of the most conservative money market funds out there. Treasury funds like symbol (SHY) are also good because they are made up of government backed treasuries.

Another thing to consider is putting the money into a CD at your bank. CD's are FDIC insured up to 100k. This means the government will insure your money if the bank happens to go under. If you have more then 100k then spread it out over many banks because the FDIC will not insure anything over 100k in any one account!!!

If you are looking to speculate in the market with your savings I would suggest making it a very small percentage of your overall cash and make sure its diversified. My current trading account is many made up of about 10% precious metals, 30% long in some biotechs and the rest is in short funds which offer returns if the stock market goes down. These funds are highly leveraged so if the sector you shorted drops 1% then on average your ultra short fund will increase 2% in value. My current short holdings are symbol (QID) Which shorts the Nasdaq top 100 technology stocks and symbol (SDS) which shorts the S&P index.

I am currently short because I don't think the market has fully priced in all of the losses of the financials and I am short tech because I think the consumer is tapped and does not have the money to go out and buy a $500 I-phone when their overpriced housing payment is due every month!!

I must stress that the majority of your holdings should be in cash and/or treasuries because the market can be very unpredictable. I hope some of you find this usefull and if you have some more ideas then feel free to share them in the comments section!!!

4 comments:

Anonymous said...

Would you recommend the Paypal money market, seems like a safe place with a nice yield.

A potential homebuyer(Jeff) said...

Anon

Paypal looks pretty safe and is managed by Barclays.

However at 3.39% return you might want to take a safer route and place your money into a CD. I might suggest M&T Bank E-money market if you plan to use an online money market.

M&T has a 3.70% variable rate vs. the 3.39% and is FDIC insured unlike PayPal which is not FDIC insured.

The FDIC linsurance limit is 100k so if you plan on investing more then this then make sure you spread it out among other banks so your money is insured.

Here is the link if you are interested:

http://www.mandtbankmarketing.com/emoneymarket/home.php

Anonymous said...

you should buy now- since rates are going to climb- however it is difficult to get a house that is in foreclosure-it takes a LONG time...months. In CA investors are back- also in FLA-as noted in WSJ today.

A potential homebuyer(Jeff) said...

Anon

Rates will climb but this will also put more pressure on the sellers because buyers will not be able to qualify for as much. As a ressult they will be forced to drop prices so that buyers can qualify.

If you have a lot of cash the best thing to do is wait because higher rates go, the further prices will drop which will put cash buyers in a much stronger position.

A lot of it depends on how much cash you have to put into a house. Short term if you have little cash as I buyer I would not try to find a bottom here. You will also need a very high credit score to qualify because banks are requiring more cash down especially in the bubble areas.

CA and FL are starting to get interesting in a few areas. Miami/Tampa and Stockton/Sacremento areas of CA.

I still believe if you wait prices will drop in these areas simply because there is so much inventory. The banks have also not felt the full blow of the credit crunch because the mortgage resets from subprime dont peak until later this year.

If you see a buyer in CA/FL thats desperate and willing tt take a ridiculous offer then go for it!