Investing Question -- What to do with home equity while renting?

[porsche4life]

I see lots of mentions of what happens if housing outpaces the investment market, which it is doing pretty easily here in AZ. But nobody has mentioned the other edge of the sword, which is, what happens to your buying power once interest starts going up? It could put a big dent in things pretty quickly if you wait.




* disclaimer. I didn't sleep in a holiday inn last night, but I am licensed Realtor in Arizona.

[djmcmath]

True enough. In my current situation, I'm looking at, say 450-500K for a house. If rates go to, say, 5%, I'm looking at 400-450K houses all of a sudden. Certainly less attractive, sure, but ... as a listener of Freakonomics, I've got to ask about second-order impacts.

So let's say that rates go up a percent or so. A market that's been at least partially fueled by a discussion of "rates will go up soon, better buy now!" may stumble. There'll be a lot of people who, like me, are suddenly looking for slightly less expensive homes. People who were thinking about buying to rent will reconsider, wait to buy, or not buy at all. It'll take at least a few months before guys like me really re-adjust to the new reality, that we can't afford a 500K house and will have to settle for a 450K house. It will probably take longer for buyers to adjust their prices down, realizing that they've lost the great seller's market they had. So my guess is that a spike in interest rates will produce an almost immediate slowdown in the pace of sales with a corresponding decrease in prices over the next year or so.

Or in other words, it seems to me that the long term buying power of the money isn't really impacted nearly as much as the infographic depicts.

Dan

*I also did not stay at a Holiday Inn last night, nor do I have any actual education in how markets behave.

[McLovin]

First, interest rates will not go anywhere near 6% in the next 2-3 years (much less the 7-8% shown in that graph above).

That's impossible because our fundamentally weak and artificially propped up economy would absolutely crater if that happened.

Second, 1-3 years is too short of a time to put it anywhere with any risk. Whether you make 1% or 3% or 5% over the next 1-3 years isn't really very significant. If you are going to try to make 8% or more, you will be in too risky of a situation.

[KFC911]

Originally Posted by McLovin

First, interest rates will not go anywhere near 6% in the next 2-3 years (much less the 7-8% shown in that graph above).

That's impossible because our fundamentally weak and artificially propped up economy would absolutely crater if that happened.

Second, 1-3 years is too short of a time to put it anywhere with any risk. Whether you make 1% or 3% or 5% over the next 1-3 years isn't really very significant. If you are going to try to make 8% or more, you will be in too risky of a situation.

All true, but I think we could easily see rates above 5% within a year or so....but who really knows how fast? One thing is for sure (at least around here), when the interest rates lifted slightly off the bottom two summers ago, it triggered a buying frenzy that agents with 30 yrs experience had never seen before. But PLEASE don't do like my niece and hubby....go for an ARM . Fortunately, she's making enough that being fiscally astute isn't necessary... lots of ways to skin a dawg

[Cajundaddy]

In your situation I would probably just sit tight and hang on for the right house 10 minutes from work. Commuting long distance robs us of a precious resource we can never get back. Time.

If willing to trade a little risk for possible higher return maybe put 50% into a stock index fund like Vanguard to spread your risk widely with the possibility of doubling your return over a 2 year period. Not a great plan but better than nothing and your risk of big losses is approaching zero over 5 years.

[look 171]

Originally Posted by Cajundaddy

Buy an air cooled 911 and sell at 50x it's current value in 2 years. What could possibly go wrong?

I just had this conversation with one of my kids and I suggested she stay in the RE market even if it is not where she will ultimately end up. Interest rates are still extremely low and the market is rising rapidly. Hard to find a better place to park funds with so much leverage working for you and a tax write off for interest.

She found a nice condo 1 block from the beach with an ocean view. Smart kid.

You tell her to hang on to that. We don't have enough nice places to live in socal (assuming it socal). Its only going to go up and when the times comes to buy her second, get some cash out and rent that puppy for $$$$$ and they will more then happy to pay it.

[look 171]

Originally Posted by djmcmath

True enough. In my current situation, I'm looking at, say 450-500K for a house. If rates go to, say, 5%, I'm looking at 400-450K houses all of a sudden. Certainly less attractive, sure, but ... as a listener of Freakonomics, I've got to ask about second-order impacts.

So let's say that rates go up a percent or so. A market that's been at least partially fueled by a discussion of "rates will go up soon, better buy now!" may stumble. There'll be a lot of people who, like me, are suddenly looking for slightly less expensive homes. People who were thinking about buying to rent will reconsider, wait to buy, or not buy at all. It'll take at least a few months before guys like me really re-adjust to the new reality, that we can't afford a 500K house and will have to settle for a 450K house. It will probably take longer for buyers to adjust their prices down, realizing that they've lost the great seller's market they had. So my guess is that a spike in interest rates will produce an almost immediate slowdown in the pace of sales with a corresponding decrease in prices over the next year or so.

Or in other words, it seems to me that the long term buying power of the money isn't really impacted nearly as much as the infographic depicts.

Dan

*I also did not stay at a Holiday Inn last night, nor do I have any actual education in how markets behave.

...or some of those buyers who has been over bidding like crazy and are not getting anything will start to panic and buy with emotion and fight even harder knowing interest rate will go up and price them out of the market. Depending on the area, it will be a feeding frenzy before the calm. Ones that are serious are going to buy their home once interest rate creeps up.

[sc_rufctr]

Buy the best "Long Hood" you can find and sit on it. I bet they go up at least another 10% over the next two years in the USA.

[JacobS911]

Look into income stocks/MF's..Theoretically they are lower risk, Pull in a nice monthly dividend and re-invest. PMF comes to mind.. Muni income fund which is also has tax benefits. Not saying buy PMF, but you get the idea. But watch interest rates as if they go up then they can fall for muni investments. Historically buying in Oct. and selling in May has done well and the the summer is starting to turn, that may line it up nicely for that.. just ignore the market crash a 6 years back

I remember watching a show on hgtv awhile back and a couple had dumped about 75k or so into stocks all at once thinking they would make some money before they bought a house within a year and it had dropped significantly. So don't buy all at once!! Do a nice monthly amount that you're comfortable with.

If you plan on using the entire amount of that you received from your sale to put down on your next house I would go conservative just because of your time horizon and I would hate to have less monday than I started out with when the time comes to buy and have to sell at a loss.

As a former financial advisor I would say stay away from them Unless you want a shiny new life insurance policy to go with that bank acct.

If anything use the replies on the thread to help get you started on research and make the best possible decision that makes sense for your situation after so.

Good luck!