Author Topic: Down payment investment - correlation with stocks and real estate  (Read 1568 times)

dios.del.sol

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I've been on the forum for a while and have searched the archives, but I haven't really seen a post exactly discussing the following :

We live in a high cost of living area, so for now renting is OK. We have a sizable chunk of change waiting around to put towards a house if the conditions are right. For the moment it's just in cash, but it would be better to invest it more effectively. The difficulty is that if we're waiting for a downturn in the real estate market, and if real estate is correlated with other investments, then what kind of investment strategy is there to expect a good return at exactly the time that real estate is down?

How have others dealt with this?

Ideas or links to previous posts are appreciated.

respond2u

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Re: Down payment investment - correlation with stocks and real estate
« Reply #1 on: August 05, 2017, 12:07:24 AM »
On an inflation-adjusted basis, the stock market took 15 years to recover from the 2000 high (http://www.multpl.com/inflation-adjusted-s-p-500) and at one point was down nearly 60%.

So you got to ask yourself: Do you feel lucky? Well, do ya? (https://youtu.be/8Xjr2hnOHiM?t=125)

Seriously, for a down payment I'd avoid risk. Others will feel differently, of course.

BTW, Is it easier to time the housing market than the stock market?

phil22

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Re: Down payment investment - correlation with stocks and real estate
« Reply #2 on: August 05, 2017, 06:51:54 PM »
we are in the same boat in a pricey market, waiting 1-5 years probably to make a down payment on a property.  we have down payment savings split between cash and short-term bonds, but we're not sure if the risk is worth it for that time frame to put more into bonds.  we are certainly not putting that money into stocks.

the alternative i'm considering is starting a 1-year CD ladder to get around 1% returns.  on the other hand, it may not be worth the hassle for only a few hundred dollars of returns per year.

as respond2u says, trying to time the housing market is probably not a good idea.  since we'd be looking for a multi-decade primary residence, hopefully we can find the right property for us and view it as a lifestyle decision rather than an investment/returns decision.  if property values start to fall and we buy a property, we don't want to be upset if prices continue to fall for a few years after that.  and i don't want to get the urge to uproot and sell if property values are up dramatically a few years after buying either.

bender

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Re: Down payment investment - correlation with stocks and real estate
« Reply #3 on: August 05, 2017, 07:52:39 PM »
it seems you are engaging in market timing of the real estate market.  Isn't that as bad as timing the stock market?  It could be worse if you're also putting off other life decisions such as having children while you wait for everything to leave me up perfectly.

Radagast

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Re: Down payment investment - correlation with stocks and real estate
« Reply #4 on: August 06, 2017, 10:34:21 AM »
High quality bonds should be poorly or negatively correlated, but who knows what your local real estate market will do. 20% stocks 80% bonds should provide decent returns with very little risk. When I look to buy a house I'll probably be at about 40/60.

Hargrove

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Re: Down payment investment - correlation with stocks and real estate
« Reply #5 on: August 06, 2017, 12:19:10 PM »
Contrary to some conservative advice, I am saving for a house with straight stocks. Why? Because what if I don't buy a house right away? What if I get another apartment and like that one? What if the market skyrockets another 50% and housing prices soar and we're all still waiting for the dip?

I would put a house down on a planned move in <1 year into something like a bond index, or even one of those rare 3-5% savings accounts.
« Last Edit: August 06, 2017, 12:20:55 PM by Hargrove »

respond2u

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Re: Down payment investment - correlation with stocks and real estate
« Reply #6 on: August 06, 2017, 07:25:26 PM »
High quality bonds should be poorly or negatively correlated, but who knows what your local real estate market will do. 20% stocks 80% bonds should provide decent returns with very little risk. When I look to buy a house I'll probably be at about 40/60.

"should be"? That's traditional wisdom, but that was before the Central Banks pumped $20T into the markets, including a far amount even this year (one report said approximately $1T in 1Q17). In the "it's all a bubble" world, who knows? (Someone might, not me).

bender

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Re: Down payment investment - correlation with stocks and real estate
« Reply #7 on: August 07, 2017, 10:42:49 AM »
Contrary to some conservative advice, I am saving for a house with straight stocks. Why? Because what if I don't buy a house right away? What if I get another apartment and like that one? What if the market skyrockets another 50% and housing prices soar and we're all still waiting for the dip?

I would put a house down on a planned move in <1 year into something like a bond index, or even one of those rare 3-5% savings accounts.

I think this is a smart plan given your plans are flexible.  I wonder if there's a REIT you could invest in that attempts to match the residential real estate market.  I've seen a few smaller local REITs, but not many.

dios.del.sol

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Re: Down payment investment - correlation with stocks and real estate
« Reply #8 on: August 07, 2017, 05:46:54 PM »
I thought the "market timing" advice might come. It's more like market indifference. At the moment, renting and buying are sort of equivalent (NY times rent vs own calculator, my own calculations, etc.), especially given all the intangibles. For the moment we're renting, but if the conditions change, we'll consider differently.

The risk with the status quo is leaving a large amount of money un-invested for a long time if the rent-own balance never changes. That's like locking in a 100% loss in real terms once inflation is considered (most of it is in a 1% account). Not terribly sensible for the long term. I'm just not sure how to think of this particular aspect of the scenario.

But the replies are helping me formulate an answer - it's really has to do with how much I want to be able to buy a place when the price drops. If I really want it a lot, then I should invest conservatively, and take the loss of potential growth as my price for wanting. If I'm truly indifferent, then I should invest aggressively and make a sensible decision in the future for whatever plays out.


Radagast

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Re: Down payment investment - correlation with stocks and real estate
« Reply #9 on: August 07, 2017, 09:03:00 PM »
On an inflation-adjusted basis, the stock market took 15 years to recover from the 2000 high (http://www.multpl.com/inflation-adjusted-s-p-500) and at one point was down nearly 60%.

So you got to ask yourself: Do you feel lucky? Well, do ya? (https://youtu.be/8Xjr2hnOHiM?t=125)

Seriously, for a down payment I'd avoid risk. Others will feel differently, of course.

BTW, Is it easier to time the housing market than the stock market?
High quality bonds should be poorly or negatively correlated, but who knows what your local real estate market will do. 20% stocks 80% bonds should provide decent returns with very little risk. When I look to buy a house I'll probably be at about 40/60.

"should be"? That's traditional wisdom, but that was before the Central Banks pumped $20T into the markets, including a far amount even this year (one report said approximately $1T in 1Q17). In the "it's all a bubble" world, who knows? (Someone might, not me).
The question was about correlation, not safety. IIRC real estate did well in the 70's, which implies a negative correlation with stocks and bonds in an inflationary rising rate environment. Recently bonds have been poorly or negatively correlated to real estate, while stocks were negatively correlated in 2000ish and positively recently. If you are truly paranoid, there is the Permanent Portfolio, which will virtually always have something going the opposite direction.

That's a lot of fear, uncertainty, and doubt there.
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zoro

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Re: Down payment investment - correlation with stocks and real estate
« Reply #10 on: August 08, 2017, 05:44:34 AM »
I think if I was about to buy a house I would keep my deposit as cash.
Cash is an option on low prices in the future. The option will cost something - the inflation erosion of purchasing power over time.
The optionality comes from the ability to take advantage of crisis. the few percent you lose over a couple of years of holding cash would be made up many times over if it gives you the ability to be the only guy to show up at a foreclosure auction in the middle of a recession with the purchase price in cash.  This can apply to any asset including stocks.

zoro

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Hargrove

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Re: Down payment investment - correlation with stocks and real estate
« Reply #12 on: August 08, 2017, 06:51:32 AM »
It's probably not easy for Buffet to hold his cash because he has so much of it. Moving his liquid assets around is probably a very big deal, which enhances the reasoning for his holding in cash.

I'm not sure why anyone with a house down payment wouldn't at least hold it in a very highly-rated bond instead of accepting the loss in cash. Also, your "about to" buy is unclear - what does that mean to you? <2 yrs? <1 yr? <6 months?

Quote
I think this is a smart plan given your plans are flexible.  I wonder if there's a REIT you could invest in that attempts to match the residential real estate market.  I've seen a few smaller local REITs, but not many.

It's not really necessary to match the local market, but I did put some of the down payment savings into O Realty in a Roth IRA. Roth IRAs are the perfect way to save for the down on a house while tipping yourself whatever you earn later.

dios.del.sol

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Re: Down payment investment - correlation with stocks and real estate
« Reply #13 on: August 08, 2017, 11:11:33 AM »
Cash is an option on low prices in the future. The option will cost something - the inflation erosion of purchasing power over time.
The optionality comes from the ability to take advantage of crisis. the few percent you lose over a couple of years of holding cash would be made up many times over if it gives you the ability to be the only guy to show up at a foreclosure auction in the middle of a recession with the purchase price in cash.  This can apply to any asset including stocks.

this illustrates the point above http://www.businessinsider.com/cash-as-a-call-option-2012-9

OK, now this is making sense to me. As any other investment decision, a lot of it comes down to personal preferences. Mine are often to keep several options open at once. Less "efficient", I realize, but also more robust. Thanks for the feedback.

bender

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Re: Down payment investment - correlation with stocks and real estate
« Reply #14 on: August 09, 2017, 02:13:40 PM »
From the article:
Quote
This is a good insight.  Holding some cash is not necessarily a bad thing.  What’s bad is holding most of your money in the form of cash.  That is a nearly guaranteed losing strategy.

That's the key right there.  Buffet may be 95% invested and keeps a few billion in cash to scoop up opportunities.  I think for regular people putting a max limit on amount of cash to hold vs. invested assets may be a good idea.  Maybe 10%?

Cwadda

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Re: Down payment investment - correlation with stocks and real estate
« Reply #15 on: August 09, 2017, 02:16:21 PM »
it seems you are engaging in market timing of the real estate market.  Isn't that as bad as timing the stock market?  It could be worse if you're also putting off other life decisions such as having children while you wait for everything to leave me up perfectly.

No, it's worse. Real estate is a hell of a lot more difficult to liquidate, compared to stocks/bonds.

matchewed

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Re: Down payment investment - correlation with stocks and real estate
« Reply #16 on: August 09, 2017, 02:18:39 PM »
From the article:
Quote
This is a good insight.  Holding some cash is not necessarily a bad thing.  What’s bad is holding most of your money in the form of cash.  That is a nearly guaranteed losing strategy.

That's the key right there.  Buffet may be 95% invested and keeps a few billion in cash to scoop up opportunities.  I think for regular people putting a max limit on amount of cash to hold vs. invested assets may be a good idea.  Maybe 10%?

It depends where you are in your goals and life. If you're saving for FIRE let your soldiers work for you. If you're looking for an opportunity to purchase (like a downpayment on a house) cash is king. If you are FIRE and are looking to mitigate a downturn in the economy cash can help you ride out a crash.

Cash is just another tool for your finances.

MyronGaines

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Re: Down payment investment - correlation with stocks and real estate
« Reply #17 on: August 10, 2017, 08:05:32 AM »
I'm saving up for a house in San Diego which is a lot of fun. This is my strategy for saving the down payment:
Throw $10,500 into VBIAX and contribute $1800/month. In 5 years I'd have more than enough for a down payment at 0% return which tells me I should probably not risk losing money.
I think I have the stomach to ride out a loss, and hope that losses would be minimized by the Stock/Bond ratio of VBIAX.

What do you guys think?

Hargrove

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Re: Down payment investment - correlation with stocks and real estate
« Reply #18 on: August 10, 2017, 01:53:00 PM »
Sounds good.

I think VBIAX is way better than cash. Even Vanguard's Money Market (where they keep money you're not doing anything with yet) is .9% or something. Laddered 3-6 month CDs... anything is better than cash until you're spending the cash.

phil22

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Re: Down payment investment - correlation with stocks and real estate
« Reply #19 on: August 10, 2017, 06:50:57 PM »
it's up to personal preference but VBIAX seems too risky for saving for a down payment -- it lost almost 50% of its value during the '08 crash which is exactly when the housing market was on sale.

VSBSX (where i have some down payment money parked) or VBIRX seem more solid to me.

MyronGaines

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Re: Down payment investment - correlation with stocks and real estate
« Reply #20 on: August 11, 2017, 12:17:17 PM »
Sounds good.

I think VBIAX is way better than cash. Even Vanguard's Money Market (where they keep money you're not doing anything with yet) is .9% or something. Laddered 3-6 month CDs... anything is better than cash until you're spending the cash.

Thanks for the input.  That really is the bottom line.

it's up to personal preference but VBIAX seems too risky for saving for a down payment -- it lost almost 50% of its value during the '08 crash which is exactly when the housing market was on sale.

VSBSX (where i have some down payment money parked) or VBIRX seem more solid to me.

Thanks for the response! Regarding VSBSX, what drew you to go that route? It seems like I could get better returns in a high yield savings, no?  Also it fell less than %35 in the crash, and recovered way quicker than it took for the housing market to recover.  It's a chance I'll have to take.

StressLess

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Re: Down payment investment - correlation with stocks and real estate
« Reply #21 on: August 11, 2017, 12:22:18 PM »
Same boat here hcol, don't see opportunities for purchasing but want to stay liquid and get some return.

Ended up in cd ladder, check out ally or another online bank. You can get about 2% right now with a cd ladder. Early redemption fees are pretty minimal and you can also check out no risk cds from ally. Think they are paying 1.5

phil22

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Re: Down payment investment - correlation with stocks and real estate
« Reply #22 on: August 11, 2017, 05:14:45 PM »
Regarding VSBSX, what drew you to go that route? It seems like I could get better returns in a high yield savings, no?  Also it fell less than %35 in the crash, and recovered way quicker than it took for the housing market to recover.  It's a chance I'll have to take.

just eyeballing it from historic data from vanguard, it looks like VSBSX fell between 6-7% from 2003-2006, then gained that all back from 2006-2009.  so yeah perhaps high-yield savings or a CD ladder would be better suited for down payment savings.  i went with VSBSX mainly because i'll only need to park the money there for a couple years and i didn't want to mess with those other options. 

that 6-7% drop doesn't look so good but it did perform well when the stock and housing markets crashed, and those are my main concerns while waiting to buy a property.

mountainfamily

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Re: Down payment investment - correlation with stocks and real estate
« Reply #23 on: August 11, 2017, 10:31:27 PM »
Following.. We had cash liquidated for a Seattle house down payment. It was about 1/2 of our total assets. We got outbid on several houses that, in retrospect, would have been a bit disappointing anyway. It's hard to get anything nice in a walkable/bikeable part of our end of town for under $700-800k. Prices continue to skyrocket here. With a baby on the way, we're now re-thinking whether we even want to stay here, which means that renting is our best bet, even if a bigger rental than our current one is $3000k+. (ugh, right?)  After our final bidding war loss, I put 1/3 of the down payment back into an index fund but have been holding the remaining 2/3 as cash. I'm giving myself time to recover from the emotional toll of house hunting and the ensuing life indecision. Once the dust has settled a bit, I plan to start re-investing in phases (for my peace of mind/psychology, even though lump sum is technically "better") but keep $50k or so in some semi- liquid or cash form, knowing I am missing out on potential gains but also that we may want to buy if we move to a lower cost of living area.
« Last Edit: August 11, 2017, 10:33:12 PM by mountainfamily »