Should I buy a house or invest in the stock market?
I am 28 years old, single, and make $90,000 annually. I have $70,000 in my savings account and I don't have any loans. I am planning to get married and have a family in the next two years, so I was thinking to buy a house and prepare for my family. However, this time of year, the interest is high and house prices are also high in the Washington, DC metro area, where I live.
Should I invest all my money in the stock market and start to save for a down payment for next year? If I do, will house prices be higher next year?
It sounds like you are an aggressive saver if you feel as though you could save another $70,000 over the next two years if you put "all" your money in the stock market now. This does not need to be an either/or decision. I suggest continuing to save for a home and begin to invest. Both have risk, but there is risk in doing nothing as well, opportunity risk and inflation risk. You don't mention where you are in your relationship and whether your future spouse would participate in the selection of a home at this time. I strongly suggest that be the case. And as you further develop your long range plans, you may find that your needs and/or preferences are different from what you now think. It would not be prudent to buy now, then sell in two years because the house or location is no longer desirable, for whatever reason.
I would say, invest half and continue to save, dividing savings between house fund and investments until you are ready to begin your new married life and do it together. The fact that you are willing to literally start over with the house fund tells me you are not really there yet and maybe feeling pressure regarding what you "should" do or overly influenced by local economics. Also, put yourself in your future spouse's position of prospectively being told something like, "I just bought this place and can't sell it so soon. This is where you will live."
Before answering your question, it is worth taking a step back and considering the longer-term trends. After steadily declining for about 36 years, interest rates are now steadily rising. It is my view that we are now at the beginning of a long-term trend of rising interest rates. Given this, interest rates are likely to be higher next year. I am not intimately familiar with the Washington D.C. housing market, but, broadly speaking, the supply of houses for first-time homebuyers (entry level price range) in the U.S. is low and the economy is robust which means housing prices are likely to continue rising. The cost of materials, such as lumber, is rising so this will also put upward pressure on prices. The U.S. government is running a huge budget deficit which means they will have to borrow more and more to finance the government. This is likely to continue to put upward pressure on U.S. government bond interest rates which is very relevant to your situation because fixed-rate mortgages are priced off of the 10-year U.S. government bond. In other words, as the U.S. government is forced to pay more to borrow (higher government bond rates), the interest rate of fixed-rate mortgages will continue to increase. Between interest rates and housing prices, the change in interest rates is likely to have a greater impact on your mortgage payment. On a $300,000 30-year fixed rate mortgage, your initial annual interest expense would increase by $3,000 ($250 per month) if interest rates were to rise by 1% over the next 12 months—a scenario that I view as quite likely.
All in all, I think you should start shopping for a house now. At the very least, with time on your side, you can bid lower prices to try to get a better deal on a house you like. By pricing houses now, you can also begin to project how the amount of you put down and the house price will ultimately impact your monthly payment and budget. With time on your side, you are less likely to have buyers remorse. Use it to your advantage.
What you absolutely do not want to do is put money in the stock market that you intend to use toward the house. If you have an employer-provided retirement plan (e.g., 401k or 403b), make sure you are contributing at least the amount that your employer matches. If you do have such a retirement plan, you can allocate the investment options in it to stocks. By making sure you utilize this you can reduce income taxes (contributions are tax-deductible) and invest in the stock market to support your longer-term goals.
I hope you found this helpful!
Joshua Hall, ChFC
If you have a goal to purchase a home to start a new family, I would not personally invest the money to the stock market for the down payment as you never know how the market performs in the future. What I would have done is to start shopping and learn about the locations (such as where the good schools are since you mentioned “starting a family soon,”) and have an idea how much is the price range you’re comfortable with. Then, calculate how much 20% down payment is from your highest price to the lowest, and save towards that goal.
What I would further suggest is to look up online CD rates as the local bank may offer a very paltry yield and split that $70k and more savings in a 3-month and 6-month CD. Hopefully, every time your CD matures at the end of the 3-month or 6-month, it will lock into the next higher rate. Meanwhile, when you do find the house you love and get the price you find attractive, you can take all the CDs out and pay a minimum penalty (if there’s any) for the mortgage.
Lastly, if you want to own your home free and clear fast, get a 15-year mortgage, instead of 30. Sounds good to you?
Listen, the only thing anyone truly knows about home prices is that they will go up over time. Now that doesn't mean that they won't go down before they go back up and interest rates are still historically very low for buying a home.
What will help you is to spend the time investment to search out what home you can afford by putting 20 % down and use a mortgage calculator to figure in taxes, insurance, and any possible HOA's. The mortgage should be any higher that 34-37% of your income.
Some people hate to hear this, but a house is NOT an investment. Yes, the value is likely to go up over time and a lot of people like to talk about how much more their homes are worth now, however they don't factor in taxes, upkeep, insurance etc. Your buying a home to build a life, try not to view it as an investment.
Also, you need to have an emergency account of at least 6 months living expenses in a money market savings account making 2% and growing for the "emergency".
I hope this can be helpful. You can reach out to me if you would like to discuss in further detail.
I would advise against investing all your money in equities if you plan on using those funds to buy a home within the next year. The stock market is unpredictable in the short-term and it'd be unfortunate if you ultimately had less money than what you had started with a year from now. If it's your goal to use those funds for a downpayment, your best bet is probably just stashing the cash in a high-yield savings account with FDIC insurance. Investing the funds with such a short-term time horizon wields a lot of risk, with potentially not a lot of return.
If you and your soon to be spouse wish to buy a house in the near future, you should commit to that goal of buying a house. You shouldn't view it necessarily from an investment perspective, although, you obviously want to be smart with your purchase, as far as not overleveraging or avoiding PMI if you're able to.
A home purchase though should be made if you know that's where you want to build a life and start a family. The sentimental value of owning a home is far greater than the investment returns you might receive. In short, go for it if you know that's where you and your family want to be!