$60k in a savings to buy a house next summer, now we have an inflation panic.

[zing12]

I have been biding my time through the pandemic socking away cash in a "high-yield" savings account to buy my first house. Things got so crazy with the pandemic and the housing market has been so crazy, I figured I'd just bide my time, keep saving up cash, and aim to buy in the summer of 2022. I have an affordable apartment in a great location so I wasn't in a huge rush to buy. And I just re-signed my apartment lease so I'm now locked in for a year.

I have about $60k in a savings account and should be able to get that to $80k or $90k in time for next summer when I wanted to buy. I figured this stash could either be used to put 20% down on something, or to make a lower down payment, get a fixer upper, do some rehabbing and get some immediate sweat equity.

Anyways, all of a sudden the past month we have inflation panic spreading through the news media and it's got me worrying about my choices. I've gone all in on the asset which could go down in value (cash) and I have none of the the asset that will protect against inflation (leveraged real estate). Yikes.

I didn't even plan to buy until '22 anyways so I'm sure most would say it's unwise to bump up my personal schedule to try to time the market. But I almost wonder if I should try to look this summer and potentially try to break my lease if I get something. Then again, my house-hunting friends are all losing bidding wars left and right so that's probably out of reach. Maybe I could start talking to a realtor and see what happens but I don't want them to rush me.

The other, more plausible option is to get at least some of this down payment fund out of the savings account and take on a little risk in exchange for inflation protection, be that stocks, commodity ETFs, REITs, crypto, or any mix thereof.

What would you do to prepare over the next year if you were in my situation?

PS - I live in a medium COL rust-belt metro area, but our housing prices are going up like everywhere is. I haven't read a lot about finance or investing for a few years as I've mostly been on autopilot, my 401(k) contributions just go to index funds, I pay rent and have no debt.

[englishteacheralex]

We're in the exact same situation, except we own a condo and are in a VHCOL area. We have a whole pile of cash socked away in a money market account because we thought we might want to try to upgrade and buy a house in two years or so. When I look at real estate right now I just shake my head and decide we may never upgrade out of the condo. So now I'm wondering if we should put that cash into our retirement accounts instead and give up on the SFH dream.

Mostly posting to follow. My philosophy about home buying is generally not to time the market but instead to buy when it makes sense for your personal financial and personal situation and never violate the percentage rules that would put you into an income vs mortgage ratio that would make you house poor. So for us, though we're very stable and would be in a good position to buy a SFH, the prices just don't work mathematically and inflation or no, we're holding off.

[Wrenchturner]

I wouldn't be in a hurry to extrapolate housing gains as a reason to jump in with debt.  I think you're asking a macro-economic question that everyone would love to hear the answer to.  Unfortunately no one has a crystal ball.  If your current arrangement is producing $20k a year in savings, I would say just keep your current investing strategy.  You can always buy REITs or other stock if you want real estate exposure.  Ultimately, buying a house is not a short term decision so you should temper your short term sentiments.

My personal opinion is that housing gains are clearly not sustainable if a person in your situation can't keep up.  How far out on the tail can we go w/r/t marginal buyers?

[Metalcat]

I'm going to go even further and say that 60K isn't going to make or break your retirement either way, so don't stress it.

The benefit of waiting until next year isn't necessarily to time the market price wise, but to wait until there's more inventory to be able to find the right house, and not as easily lose out on it in a vicious bidding war.

The dollars and cents on what to do with 60K for one year is nothing compared to being able to find the right home for your needs.

Basically, don't worry about it. If you know you want to own and know that it's financially worth it for you, then buy when it makes sense, and buy a home that makes sense, that you want to stay in long enough to make buying worthwhile.

Again, we're not talking about what to do with 600K, we're talking about 60K. In your lifetime, what you do with that for the next year is virtually irrelevant. How you choose to style your hair will have more lifetime impact on your finances.

Don't make something from nothing.

[ChpBstrd]

If I were concerned about inflation (I'm not) and long term housing prices running away without me, I would put the 60k into a diverse portfolio of residential or healthcare REITs. 60k in Realty Income Corp. (symbol O) for example, would pay you about $2550 per year in dividends, which just might be more than the equity you would build up in the first year of a 30y mortgage, and definitely less than a new bathroom floor or HVAC. Plus, REITs have a decent history as inflation hedges:

https://www.reit.com/news/blog/market-commentary/inflation-protection-from-reits-dont-jump-out-of-the-frying-pan-into-the-fire

Then I would offer to let my friends be my roommates if they cover 60% of my rent on a month-to-month basis while they participate in bidding wars for the suddenly-coveted single-family-home. This alone would earn me thousands.

Then, I would bide my time, save up a fat portfolio, and wait. I assure you, if inflation goes surprisingly up to the 3-4% range, and mortgages suddenly run 5-6%, those high house prices will not hold. Do the maths in a mortgage calculator - affordability goes way down when rates rise. When buyers can't afford the payments, the price has to go down for anything to clear the market. So just like prices went up in response to low, low mortgage rates, they will go down in response to high, high mortgage rates. The payments will stay roughly the same, that is, as much as people can afford when they buy too much house.

I would rather pay a low price in a future high-rate environment than pay a high price in a low-rate environment like today. If you keep up the good work saving and investing, you could be buying that future house for cash at a future time when nobody is excited about housing any more, millions of people are underwater, and foreclosures are sitting around everywhere unsold. The cycles come and go. Follow them and you get hurt; go against the trend and you make a killing.

[Simpleton]

I called a housing bubble from 2009 until 2020 in Canada (and particular our big cities like Toronto and Vancouver). 2021 and the market is even higher. Every year the market looked unaffordable to the average Canadian and every year the market went higher. Next year they are projecting the average Canadian home to be north of $700,000.

The market could tank like 50% now and I would still have been wrong. Very wrong.

I think it is anyone's guess now with respect to where home prices will be in 2022.

Personally i have changed my tune. It has taken me a decade but I truly do believe that governments are behaving in a different way now. I do not think we will see interest rates north of 3% in the next 30+ years. I think we will see a lot of inflation and these numbers may look like bargains in a decade.

I am not saying buy a house because that decision is much more in-depth than simple inflation expectations; but I also don't think keeping it in cash is ideal. I don't really have a great suggestion for you though - No one really knows is the best answer I think.

[zing12]

I called a housing bubble from 2009 until 2020 in Canada (and particular our big cities like Toronto and Vancouver). 2021 and the market is even higher. Every year the market looked unaffordable to the average Canadian and every year the market went higher. Next year they are projecting the average Canadian home to be north of $700,000.

The market could tank like 50% now and I would still have been wrong. Very wrong.

I think it is anyone's guess now with respect to where home prices will be in 2022.

A big part of this is that there is an honest-to-goodness housing shortage particularly in major cities, particularly due to outdated zoning codes.

[zing12]

Thanks to all for the perspective and advice. I think what I'm going to do is leave most of what's in savings now where it's at, move some of it to, and start investing new savings in, a standard index fund and some items that track residential real estate, such as REITs and perhaps lumber and homebuilding ETFs. I think I'd rather dollar-cost average over the next several months rather than just buy a whole bunch now at the peak.

[PDXTabs]

I have thought about this a lot as I'm about to be in the same situation.

I, personally, think that I would put it all in mutual funds and cross my fingers that it works out. The alternative of having inflation erode the value of your dollars as housing prices continue to climb would make me more worried that leaving it all in mutual funds.

[jeromedawg]

I'm wondering about this too. Normally I would just dump everything into index funds but don't most people (including mostly Bogleheads) say that you should only invest that money in funds if you intend to hold long term (e.g. longer than 5 years MINIMUM)? If not, and if you intend to buy soon like within the next couple years, holding cash is better no? Are you guys, suggesting investing in REITS, mutual funds, etc, saying so because of the current rate of inflation though?

[Telecaster]

Everyone has their own risk tolerance.  But the reality is that if you need the money in about a year to 18 months then it might not all be there when you need it.  If inflation is a concern and you need the money, you could buy I-bonds.  Otherwise you need a Plan B in case Plan A doesn't work. 

[PDXTabs]

Everyone has their own risk tolerance.  But the reality is that if you need the money in about a year to 18 months then it might not all be there when you need it.  If inflation is a concern and you need the money, you could buy I-bonds.  Otherwise you need a Plan B in case Plan A doesn't work.

Yup. It really depends on what risks you are the most worried about and how to sleep at night.

[ChpBstrd]

This is a metaphor for the people buying into the housing bubble right now.

[yachi]

A month or so back, there were articles warning that upcoming inflation numbers were going to be overly pessimistic.  There was a huge dip in the Consumer Price Index at the beginning of the the pandemic (March 2020), and that established a low starting point for the yearly update values in March 2021.  If you look at a CPI graph, it dips right around March 2020, and goes right back up to where it was before the dip.  So to the extent that some of the year-on-year data is using temporarily-depressed starting points for comparison, they can and should be ignored when looking at what level of inflation to expect for the upcoming year.
Those warnings seem to have gone unheard by authors of today's articles.

[Telecaster]

A month or so back, there were articles warning that upcoming inflation numbers were going to be overly pessimistic.  There was a huge dip in the Consumer Price Index at the beginning of the the pandemic (March 2020), and that established a low starting point for the yearly update values in March 2021.  If you look at a CPI graph, it dips right around March 2020, and goes right back up to where it was before the dip.  So to the extent that some of the year-on-year data is using temporarily-depressed starting points for comparison, they can and should be ignored when looking at what level of inflation to expect for the upcoming year.
Those warnings seem to have gone unheard by authors of today's articles.

Yes!  Thank you.   

[zing12]

A month or so back, there were articles warning that upcoming inflation numbers were going to be overly pessimistic.  There was a huge dip in the Consumer Price Index at the beginning of the the pandemic (March 2020), and that established a low starting point for the yearly update values in March 2021.  If you look at a CPI graph, it dips right around March 2020, and goes right back up to where it was before the dip.  So to the extent that some of the year-on-year data is using temporarily-depressed starting points for comparison, they can and should be ignored when looking at what level of inflation to expect for the upcoming year.
Those warnings seem to have gone unheard by authors of today's articles.

Yeah, that's the thing. The news cycle is so ridiculous these days, the "inflation panic" is likely just another two-week story.

[Morning Glory]

I'm following because also looking for suggestions for a higher yield savings account. (Not dog money).

But yes, I think this inflation panic is temporary. Its turned into a bit of a spiral because people are panic buying which creates shortages and drives up prices even more. It will pass. It's not much different than when stocks drop and people panic sell. Go for a walk or something. The housing market always cools off after school starts.

[ice_beard]

Having an inexpensive place to live right now, that you like, is worth a lot right now.  I would hold tight.  I would not want to be a buyer in this market.  The housing market is in a mania phase right now and I suspect there is going to be a lot of buyers remorse once rates tick up a percent or two.  This is US specific, cannot comment on Canada or really anywhere else. 

I personally would not want that much cash earning essentially nothing.  The REIT idea is a good one.  QYLD might net you 10% too and is selling at a bit of a discount right now with the NASDAQ in a bit of a lull and some believe is a strong hedge in down markets. 

[ChpBstrd]

Having an inexpensive place to live right now, that you like, is worth a lot right now.  I would hold tight.  I would not want to be a buyer in this market.  The housing market is in a mania phase right now and I suspect there is going to be a lot of buyers remorse once rates tick up a percent or two.

^YES.

As a general rule, flee from any investment everyone is talking about. Remember the cannabis stocks everybody was talking about in February and posting about - even in this forum? Yea… TLRY, CGC, and ACB are all down 40-50% since then. Today’s housing boosterism is very reminiscent of 2005-2008 when people were talking about using HELOCs on their primary residences to make the down payment on rent houses before prices rose even more.

[jeromedawg]

Those of you suggesting investing home down payment funds in REITs, wouldn't you be exposing yourself to inefficient tax placement? I guess if this is short-term (no more than 2-3 years), it's OK?

https://www.bogleheads.org/forum/viewtopic.php?t=306257


Per the original post, we're in a similar situation. We are in SoCal in a HCOL area and just put an offer in on a place $25k over asking with a $5k escalation clause and strong financial position (where we *could* pay all cash) but opted for a large down payment (over 50%) and loan. We were beat out by a "strong cash offer" without any other details. The offer was over our asking price and the seller went with that offer despite the $5k escalation. Cash is king. And apparently a lot of other people have millions of dollars of cash just laying around that they're willing to throw into a house (my realtor confirmed he has seen multiple all-cash offers on homes that are $1.6mm!!!).
Anyway, at this point we'll be renting but are considering upsizing to a bigger place. The bigger place (4/3 house) is $1300 more than what we're paying now but we're in a tiny 2/1 apartment and could use the space.
In the back of my mind, I'm kind of wondering if we should just extend our lease on the current smaller place (since it's so much cheaper and we could just suck it up for a while) and look more aggressively for a home in Q3/Q4... if we find something by then, breaking the lease is just one month's rent/deposit and it'll be cheaper and less hassle vs upsizing now and going through the same thing with an extra move and more $$$ in between. My realtor reminded that the moratoriums, as of now, are ending 6/30 and COVID-specific unemployment benefits are drying up shortly after (I think Sept), at least here in California. So Q3 and Q4 may bring some opportunities at least where I am. Not holding my breathe though; there are so many buyers lined up it's ridiculous.

[ChpBstrd]

Those of you suggesting investing home down payment funds in REITs, wouldn't you be exposing yourself to inefficient tax placement? I guess if this is short-term (no more than 2-3 years), it's OK?

https://www.bogleheads.org/forum/viewtopic.php?t=306257

Yes, short-term is what I’m thinking. Really there’s no good argument for not simply following one’s retirement AA when saving for a house or earmarking particular assets in a taxable account for the house purchase, but the fear is “what if RE prices run away from me while I wait?” So the dividend illustration helps one deal with that fear, but the diversified portfolio would deal with it just as well (and probably better) through buybacks, organic reinvestment and growth, etc.

[jeromedawg]

Those of you suggesting investing home down payment funds in REITs, wouldn't you be exposing yourself to inefficient tax placement? I guess if this is short-term (no more than 2-3 years), it's OK?

https://www.bogleheads.org/forum/viewtopic.php?t=306257

Yes, short-term is what I’m thinking. Really there’s no good argument for not simply following one’s retirement AA when saving for a house or earmarking particular assets in a taxable account for the house purchase, but the fear is “what if RE prices run away from me while I wait?” So the dividend illustration helps one deal with that fear, but the diversified portfolio would deal with it just as well (and probably better) through buybacks, organic reinvestment and growth, etc.

I see... so it's sort of the 'trade-off' of hedging inflation and RE appreciation (to an extent) at the expense of eating ordinary taxes. Definitely not a long-term strategy but a 'creative alternative' short-term strategy versus putting a bunch of money in a ".05% high yield savings account" lol

On a separate note, a couple of ideas for higher yield savings accounts I've come across thus far:
1) HMBradley you can get 3% on up to $100k. But there's some ramp up time and you have to time it carefully so as to not miss the windows - each quarter is when the tiers change (you'll be at 0% until you get direct deposit setup and as long as you're not doing a bunch of withdrawals) so it seems best to commit and put the full amount in immediately if you want to see the 3% realized asap. You also have to setup monthly deposits to keep the 3% earning tier, which isn't a big deal. https://www.hmbradley.com/blog/savings-tiers-explained
2) Tmobile Money - if you're a Tmobile customer you can get 4% up to $3k and 1% on everything after WITH a qualified plan (basically contract customer). But I found a little 'workaround' to get the 1% - I have these free 200mb data plans from years ago when I bought these LG tablets via a deal on Slickdeals, which happens to qualify me as a customer (just not a contract customer). You basically need a phone number and to be able to receive texts from TMO, which the plan provisions. So I was able to sign up for an account and qualify for the 1%.

[zing12]

Here's an ETF that tracks the housing industry: https://www.thehousingetf.com/

It holds not only several residential rental REITs, but also homebuilders, home improvement stores, furniture, realty companies, mortgage companies, building materials, etc. I did put a miniscule amount of the cash into it but after thinking about this for a week, idk if I'm comfortable to put the significant amounts in there. If the housing market drops, I want all my cash to get a deal on a house! I guess I'm just risk averse at heart, my friend thinks I'm nuts to hold that much in cash.

[talltexan]

You want some upside, but don't want to lose out on a Real estate opportunity? How about you put 25% of it in stocks ($VTI would be fine), and keep the other 75% of it in something super safe. Then try to make cuts in other parts of your life to replace that 25% over the next year?

[Kevin Aster Tin Obin]

If you want to grow cash while waiting to buy a house, wouldn't you NOT want to be in a housing ETF that is presumed high priced right now? 

In a situation where a house seller is getting a lump of cash (few hundred K) this month from the sale, and working on building a house in the next year, any suggestions where to invest the profits while trying to wait to pay less for building materials in 2022?

[talltexan]

Vanguard Wellesley

[SuperSecretName]

2021 is not 2007 when it comes to housing.  Underwriting standards are higher, ARMs are less popular, there is low supply of new and old, and there are real societal changes.

Also, a lot of areas are now just passing where they were in the 2007 bubble.  I have a property that I bought at the top of the market in 2007 for 320.  Went down to 240ish and has been climbing back up.  Only last year did it finally pass 320 again, and is now 360.  So, year over year might seem like a lot, but if you take it back to 2007, it's not so far-fetched.

It might be a tough pill to swallow, but don't automatically assume the RE market will crash anytime soon.  I'm not saying the appreciation will continue either - it could flatline for a few years.

If you *need* somewhere new to live and you will stay there 5+ years, then buying and putting down < 20% isn't the worst thing.

[FINate]

I don't envy those attempting to navigate this housing market. Nothing but empathy for you all, it's crazy and it sucks.

IMO, like most things, there's no one-size-fits-all strategy.

If you're reasonably certain you're going to put down roots for a long time (10-ish years) AND you have a good down saved AND you have a reasonably stable career/job AND you really can't stand apartment living/need more space/really want the suburban dream of a yard and dog and such, then make the leap. And don't look back, stop looking at real estate and get on with life making the most of your new abode. You're making the best decision with the available information in a difficult situation.  No point obsessing over past decisions, it's a sunk cost. You'll have to make more compromises than usual, so be super clear on needs vs. wants and be flexible, then make peace with it.

On the other hand, if any of these conditions aren't met than hang in there! Keep renting and saving. If you're pretty sure you'll buy in 1-5 years put the money in something conservative (savings, CDs, short-term bonds, etc.). Keep watching your target markets and be ready to jump in if/when a good opportunity comes along.

About 3 years ago we sold our primary residence in anticipation of a long distance move. We knew we would tap the proceeds from this sale in ~2 years, so the amount we budgeted for the new house was put in a short-term bond fund, with the rest going into a REIT fund. A split strategy of sorts. If RE crashed, we would tap the bond fund. If the opposite happened, the REIT fund should help offset the higher purchase price. As we got more serious about house hunting (2020Q1) it became apparent that prices had increased and we needed to increase our budget, so we cashed out our REIT fund, which was an incredible stroke of luck as this happened mere weeks before the market crashed.

One caveat I should add: A lot of this depends on whether or not President Biden gets his way w.r.t. increasing taxes on capital gains. The devil is in details yet to be finalized on how these cap gains will affect AGI and vice versa. So although it only applies to income over $1M [actually, looks more like $500k, which would snare a lot more people], with regular income plus gains on large investments, it's pretty easy to get pushed up over this limit. With 40% at the federal level and 13% state (e.g. CA) you could be looking at >50% tax on some of the gains. Depending on your personal tax situation, this may or may not be a big problem.

[chemistk]

@FINate You've got some really great advice here, this should be shared more broadly, except one point I'll take exception with:

Keep watching your target markets and be ready to jump in if/when a good opportunity comes along.

I don't know what the next few years looks like but if they're anything like this year, there's absolutely no way someone can just 'jump in' if the right house comes along (ignore all of this if you're referring to a general life opportunity and not a specific house). Most houses are spending less than 3-5 days on the active market before they're gone, and some are less than a weekend. Hard to put paperwork together in that short of a window unless you've got a real estate agent on retainer and can get prequalification documents together in the course of a workday.

[FINate]

@FINate You've got some really great advice here, this should be shared more broadly, except one point I'll take exception with:

Keep watching your target markets and be ready to jump in if/when a good opportunity comes along.

I don't know what the next few years looks like but if they're anything like this year, there's absolutely no way someone can just 'jump in' if the right house comes along (ignore all of this if you're referring to a general life opportunity and not a specific house). Most houses are spending less than 3-5 days on the active market before they're gone, and some are less than a weekend. Hard to put paperwork together in that short of a window unless you've got a real estate agent on retainer and can get prequalification documents together in the course of a workday.

Like you, I don't claim to know the future. But at some point supply will start to catch up with demand* and some will move back to compact cities either for the draw of city life or career reasons. Markets will stabilize and you'll have more inventory to choose from and more time and bargaining power. Maybe not this year, maybe not next, but eventually. If possible, bide your time and save save save. Even if we don't get a crash (e.g. a long period of leveling off) you'll be in a much better position to buy that house that you really want (that lots of other people also really want) if you start setting yourself up now.

*This only applies to places with sane growth/zoning/permitting policies. If you're in no-growth NIMBY-land then either be willing to move somewhere else, or take the risk being overly exposed in a super expensive substandard house and hope housing never truly becomes affordable (e.g. the state forcing a lot more housing, which decreases the value of your house).

[Rockies]

Purchasing anything due to panic or FOMO (Fear of Missing Out) is rarely a good idea. It might work out for you, but it increases your chances of buyers regret. I'd take your time - if you do find a place you like at a price you can afford go for it. Definately dont overextend yourself to buy. Its easy to use mental tricks on yourself to tweak the math and then you have to live with higher mortgage that you can actually afford.

Also its quite easy to underestimate the extra costs (utilities, repairs, etc) that go along with home ownership. If you dont properly account for this you can really put your cash flow situation in jeopardy which will cause you much stress and suffering. Once you own a house that you cant afford you will feel like you've locked yourself into a financial nighmare as your chequings and savings accounts steadily tick downwards month by month.

You might want to reframe the advantages of renting in your head before you move forward with something irrational.

[Fuzz]

You don't have good options. Sorry.

[celerystalks]

In view of inflation, I think the bigger problem could be rising interest rates instead of protecting the real value of your downpayment for a year.  Interest rates on a 30 year mortgage are still near 3.0% for creditworthy borrowers.  But, as inflation sets in for the long-haul bond investors will require higher and higher interest rates on long-dated fixed income to compensate for the inflation risk.

If you are at all ready to buy this summer, perhaps check out getting pre-approved and see what you would be able to afford with your current down payment and mortgage. 

[Hawaiian]

I am in a relatable situation with wanting to buy a rental property. I planned to save up a 20% down payment but I feel like it's too risky right now so I've decided to just throw that money in index funds and hope it grows until I feel more comfortable buying a property. I hate seeing my money sit in a savings account earning 0.0001% interest. But, even though I'm not buying anytime I am still checking listings to keep up with the market. I'm curious to know what you decide to do...

[evme]

I am in a relatable situation with wanting to buy a rental property. I planned to save up a 20% down payment but I feel like it's too risky right now so I've decided to just throw that money in index funds and hope it grows until I feel more comfortable buying a property. I hate seeing my money sit in a savings account earning 0.0001% interest. But, even though I'm not buying anytime I am still checking listings to keep up with the market. I'm curious to know what you decide to do...

Hawaiian, just curious, but what island are you looking at buying a rental property on? I assume it's somewhere in Hawaii based on your username...

[Hawaiian]

Hawaiian, just curious, but what island are you looking at buying a rental property on? I assume it's somewhere in Hawaii based on your username...

I'm actually looking at buying mainly in the South Eastern states and possibly partner with my siblings to buy on Oahu or the Big Island.