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!!!
Wednesday, February 27, 2008
Tuesday, February 26, 2008
Case Shiller index home prices dropped 8.9% in the Q4
The Case-Shiller index is one of the best guages when looking at the trends in home prices. Today the Shiller index shpwed that nationally prices dropped 8.9% in the fourth quarter versus last years Q4. There were only 3 markets that showed flat or rising prices of the top 20 US markets that the index uses to come up with its price analysis. the three cities that showed growth were Portland, Charlotte, and Seattle was flat.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw61M2mwbf48
This was the WORST decline in the 20 year history of the Case-Shiller index. this is an excellent tool to use when trying to guage how the housing market is trending. I am sure that many of you have realtors telling you"now is the time to buy" because "prices have never been so low!!!".
To put this in to perspective the last housing bust was in 1990/91. Housing in some areas in California dropped 30% plus in value. This means whats happening now is a worse then 1990. IMO the declines have just begun and its never smart to try and time a bottom. Especially when its one of the biggest financial decisions you will ever make in your life. This trend downward has shown ZERO signs of slowing based on this data.
Until you see a trend of several months where prices have flattened you should find a nice place and rent. Remember, When you buy a house you are still renting except its from a bank. You own nothing until its paid off. So who cares wether you rento from a bank or a landlord.
Put your money that you saved for a house into a CD and wait. It will be well worth your while.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aw61M2mwbf48
This was the WORST decline in the 20 year history of the Case-Shiller index. this is an excellent tool to use when trying to guage how the housing market is trending. I am sure that many of you have realtors telling you"now is the time to buy" because "prices have never been so low!!!".
To put this in to perspective the last housing bust was in 1990/91. Housing in some areas in California dropped 30% plus in value. This means whats happening now is a worse then 1990. IMO the declines have just begun and its never smart to try and time a bottom. Especially when its one of the biggest financial decisions you will ever make in your life. This trend downward has shown ZERO signs of slowing based on this data.
Until you see a trend of several months where prices have flattened you should find a nice place and rent. Remember, When you buy a house you are still renting except its from a bank. You own nothing until its paid off. So who cares wether you rento from a bank or a landlord.
Put your money that you saved for a house into a CD and wait. It will be well worth your while.
Monday, February 25, 2008
How much should I pay for a house?
As a potential homebuyer I was always confused as to what is a fair price to pay for a house. After many readings and years of research I learned that historically the average homebuyer typically pays 3 times their income for a house.
In some of the bubble areas on the coasts homebuyers have paid 10 times income for a place to call their own. The only way this happened was through poor lending standards. Banks and mortgage brokers started to approve loans without documented income and offered "subprime loans" that offered very low payments for two years at a low interest rate but then escalated to higher interest rates that became unaffordable for the average buyer.
This type of lending is now gone. Banks have had high foreclosure rates which has resulted in tighter lending standards because a lot of their assets are tied up in loans that are going to never be paid back.
My advice to all of you is to wait until the lending standards have had a drastic effect on home prices. Many sellers have not realized the credit crunch and its effect on peoples ability to lend. When you are looking for a house make sure your offers are close to 3X income and don't hesitate to lowball sellers!!! Many are starting to get desperate and you might get lucky and they will accept your offer.
I expect these offers to be taken at a much higher rate as we get into the colder months of 2008. when the spring/summer housing sales are a bust sellers will start to panic.
In a nuthsell, be patient, underbid, and don't be in a rush. According to the most recent housing stats 30% of homes are underwater versus what people payed for them.
In some of the bubble areas on the coasts homebuyers have paid 10 times income for a place to call their own. The only way this happened was through poor lending standards. Banks and mortgage brokers started to approve loans without documented income and offered "subprime loans" that offered very low payments for two years at a low interest rate but then escalated to higher interest rates that became unaffordable for the average buyer.
This type of lending is now gone. Banks have had high foreclosure rates which has resulted in tighter lending standards because a lot of their assets are tied up in loans that are going to never be paid back.
My advice to all of you is to wait until the lending standards have had a drastic effect on home prices. Many sellers have not realized the credit crunch and its effect on peoples ability to lend. When you are looking for a house make sure your offers are close to 3X income and don't hesitate to lowball sellers!!! Many are starting to get desperate and you might get lucky and they will accept your offer.
I expect these offers to be taken at a much higher rate as we get into the colder months of 2008. when the spring/summer housing sales are a bust sellers will start to panic.
In a nuthsell, be patient, underbid, and don't be in a rush. According to the most recent housing stats 30% of homes are underwater versus what people payed for them.
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