Author Topic: Where should I save my house down payment?  (Read 9967 times)

ScottWA

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Where should I save my house down payment?
« on: June 30, 2013, 08:37:30 PM »
Hello all, I've enjoyed reading the blog and forum for a few months and I'm hoping to get some advice on what to do in my current situation.

I'm 24 years old, with a well paying job with good security and potential for advancement.  I expect that my salary will increase over the next few years, and even if the unthinkable were to happen, I don't think I would have much trouble finding a job at a comparable level of pay.  I currently live with my girlfriend of five years in an apartment, and I'm paying for all of our living expenses while she goes to medical school.  She just finished her first year, in three years she will graduate and get a job as a resident, and approximately three years after that she will be allowed to make a salary commensurate with her education level.  I fully expect that we will get married at some point in the next few years.

I'm currently maxing out my 401k and Roth accounts every year.  I've got $32,000 in a taxable brokerage account (VTSAX and VTIAX) and am adding to it every month.  GF and I will be renting for 3 more years while she is in med-school, at that point, if she is able to get a residency in our current location we will likely look to buy a house, if not we will rent in the new location for 3 years and then move back.  My job is flexible enough that I could keep it even if we have to move out of state for those years.  I currently have $10,000 saved for a house down payment in a savings account earning 1%.  I would like to invest this, but I want to be sure that the money will be there in 3 years.  CDs seem to be at lower interest rates than the savings account, and I feel that a bond index fund is subject to quite a bit of interest rate risk over the next 3 years.  Should I just invest the money into stocks, knowing that I'll need the money in 3 years, or are there other options that I haven't thought of?

Thanks in advance for the advice!

.22guy

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Re: Where should I save my house down payment?
« Reply #1 on: June 30, 2013, 10:39:17 PM »
I'm in the same boat, trying to save for a house downpayment.  I also have that money in a Barclays savings account earning 0.90% interest.

I hope you get some good responses. :)

Nothlit

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Re: Where should I save my house down payment?
« Reply #2 on: July 01, 2013, 07:22:23 AM »
I keep this kind of money in Series I Savings Bonds.

Prof Penny Pincher

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Re: Where should I save my house down payment?
« Reply #3 on: July 01, 2013, 10:52:47 AM »
Im saving for a down payment, with santanders 123 account, which gives me 3% on balances of up to 20,000.

I'm aiming to same this up within about 12-15 months. If I was looking at more like 2 years, probably lending club could be a good option.

Rebecca Stapler

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Re: Where should I save my house down payment?
« Reply #4 on: July 01, 2013, 12:17:19 PM »
I think a 3-year timeline is long enough to have it in an index fund. But, I would keep an eye on it and, in 2 years, I would diversify it to be a more conservative.

fiveoclockshadow

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Re: Where should I save my house down payment?
« Reply #5 on: July 01, 2013, 01:32:16 PM »
I think a 3-year timeline is long enough to have it in an index fund. But, I would keep an eye on it and, in 2 years, I would diversify it to be a more conservative.

I'm not so sure about this.  The two year rolling average return on the S&P from 1950-2013 has a worst case loss of -48% and the three year -39%.  That seems rather speculative and risky.  In general don't consider equity index funds for known expenses of periods less than ten years. 

Keep in mind that he is planing and using all of this account for his down payment at one time rather than a slow draw down as you would in a retirement account.  In the later case the assumption is that you draw a small amount (5% say) each year and thus you can do that as a re-balancing of your asset classes.  This allows you to mix a majority of equities with high risk/return with a minority of bonds with lower risk/return and still have low risk on draw down despite the high earnings/risk of the equities.  It is the fact you are drawing a small portion of the account and using that small draw down as part of your annual asset re-balancing that allows one to keep a high ratio of riskier assets safely.  In this case the OP can't do that without assuming the full ratio of risk in his chosen asset allocation because he will draw the entire savings at one time in the near future.  If he has an asset allocation dominated by equity index funds he will have very high risk on such a short period.  Not a desirable option at all for short term savings.

As to "keep and eye on it" that is really just a euphemism for "market timing" - something known not to work at all for anyone.

Now, the one option open is to leave it in equities and then defer buying a house if the equities are low in three years.  However, you may have to wait quite a long time (another three or even six years) for the assets to recover.  One might also consider this just a different form of market timing, which it is in a sense and therefore not a compelling investment strategy.

I'd recommend keeping it mostly inflation protected in secure investments if your time horizon is just three years.  I-bonds, various high rate savings accounts and the like.
« Last Edit: July 01, 2013, 01:37:09 PM by fiveoclockshadow »

BigRed

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Re: Where should I save my house down payment?
« Reply #6 on: July 01, 2013, 02:10:32 PM »
I'm in a similar boat, as I've posted before.  Housing prices are rising quick here in SoCal.  Since the money has a specific use in mind (buy a house) that might argue to try to hedge it against house prices.  Is there a reasonable way to do that?  Is that folly?


mpbaker22

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Re: Where should I save my house down payment?
« Reply #7 on: July 01, 2013, 02:50:43 PM »
I don't really agree with five o'clock shadow.  If you lose 48% are you willing to wait a few years to buy the house?

It's not just that, he assumes you are set on your plan and you have zero risk tolerance.  Sure, you could lose 50% and only have half the down payment, but you could just as easily gain 50% and have 1.5 times the downpayment.  It does depend on what these scenarios mean to you.

fiveoclockshadow

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Re: Where should I save my house down payment?
« Reply #8 on: July 01, 2013, 06:18:52 PM »
@mpbaker22 - My point was trading in an equity fund on short time scales is speculation, not investment. The scenarios you mention I did cover and indicated they are still speculative, waiting a year or two is speculative as it is a form of market timing. Hoping to get plus 50% in three years at the risk of minus 50% is clearly speculative (although those are of course extreme numbers).

This isn't so much my opinion but rather the accepted wisdom of all sound investment advisors, including all those MMM references in his reading list. Equities require long holding periods to get a steady return. If you want to draw on equities you need them to be part of a balanced asset allocation so that you draw on them when they are high and on another asset when low. The asset rebalancing that you apply does this for you automatically.

As you point out though, one could of course decide they want to roll the dice and they might do very well. Or horribly. But no one looking to maximize wealth over the long term would gamble an entire sum of money in equities for only a 3 to 5 year period.  It can be exciting and fun, but your return on average will be lower and your risk higher than using portfolio theory appropriately.

You are right that be willing to wait could make things better - certainly by extending your holding period you reduce volatility and he is probably saving more too. But it is still really market timing as while he waits for his investment to recover there is the opportunity cost of not being in real estate and also the timing of the bond market through the interest rate on his mortgage.

Anyway you slice it the result is equities held for a period so short that return is really speculation.


ScottWA

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Re: Where should I save my house down payment?
« Reply #9 on: July 01, 2013, 08:34:10 PM »
Thanks for the replies everyone, we seem to be hitting on the general theme that greater return means greater risk.  Glad to know I'm not the only one facing this decision. 

I see both the points that fiveoclockshadow and mpbaker are making.  I agree that putting it in equities would essentially just be taking a gamble, but deciding whether to make that choice depends on my ability to make it up if things tank against the rewards of having some extra money for the down payment or other things.

Thinking through everything again, I feel like while I could make up a loss without too much trouble just by waiting a year or so, I don't think the potential rewards are high enough for me to take the risk.  I believe I can meet my goal just through saving, if the market does go way up and I feel the need to increase the down payment I can always just use some of the gains in my taxable account, or wait an extra year anyways.

tl;dr: Potential Happiness if successful < disappointment if market turns downwards = probably going to play it safe for now.  Thanks for helping me think things over, I'll probably start leaning the other way again in a couple of weeks.

The idea of trying to hedge it against housing prices is intriguing. I'll look into some more bond options, thanks for those suggestions.

mpbaker22

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Re: Where should I save my house down payment?
« Reply #10 on: July 02, 2013, 07:55:53 AM »
I'm in a similar boat as you, but I don't have a timeline on when I want to buy.  So, in my situation, I actually plan on saving more than what I want for a down payment and letting any extra ride to retirement.  In that case, stocks are better than savings accounts, IMO.  And that's part of where I'm coming from.  If you're willing to be more flexible, I think stocks are the better option.

madmax

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Re: Where should I save my house down payment?
« Reply #11 on: July 03, 2013, 04:31:13 PM »
I would also do I Bonds right now. I asked a pretty similar question to yours on Bogleheads and Ibonds seemed to be the general consensus.

dmn

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Re: Where should I save my house down payment?
« Reply #12 on: July 04, 2013, 03:56:01 AM »
If it is important for you that you can access the money in three years, then I would also do savings accounts or bonds.

Personally, though, I do not see why saving for a down payment should have a fixed time horizon. If I invest in equities and the market goes down, I just rent for a few years longer. Maybe that is a cultural thing, or it is related to the American subsidies on mortgages, but I do not understand why everyone wants to own property. Either I pay money to own a flat, or I invest the money and use the dividends to pay my rent. To me, the two options look equivalent. (Last time I checked, the after-tax dividend yields were actually higher than the saved renting cost in my area).
« Last Edit: July 04, 2013, 03:57:53 AM by dmn »