investing savings for home down payment


B

Bucky

The conventional advice for how to invest savings for a home down
payment in 1-2 years is to put in the least risky investment, such as
CDs. Definitely not stocks, because if they drop, you may not be able
to afford your home anymore.

What about putting 100% of the home down payment in an REIT fund? That
way, if real estate skyrockets, your down payment will also increase
proportionally. And if REITs crash, then so does real estate and
therefore the amount required for down payment. Does this seem like a
wise system, or is it foolish?
 
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D

Douglas Johnson

Bucky said:
What about putting 100% of the home down payment in an REIT fund? That
way, if real estate skyrockets, your down payment will also increase
proportionally. And if REITs crash, then so does real estate and
therefore the amount required for down payment. Does this seem like a
wise system, or is it foolish?
Do you think the price of the house you want to buy in your town is closely tied
to the price of the properties owned by REITS -- hotels, shopping centers, and
office buildings in some far-off city?

-- Doug
 
E

Elle Navorski

All REITs have something to do with real estate, but different REITs still
have different functions. Also, even one REIT will tend to be spread out
over a sizable geographical area. Take a collection of REITs, as in a
mutual fund, and all told they're spread over an even larger geographical
area.

I doubt a REIT mutual fund or even a single REIT will correlate very well
to a real estate crash in a particular geographical area.

Stick with CDs or the highest grade corporate bonds.
 
B

Bucky

Douglas said:
Do you think the price of the house you want to buy in your town is closely tied
to the price of the properties owned by REITS -- hotels, shopping centers, and
office buildings in some far-off city?
That's a fair question, I didn't actually research this beforehand. So
I took the data for my area (I could only get 7 years) and compared to
an REIT index, and they didn't correlate at all, I got a correlation
coefficient of .07.

But then I tried picking a single REIT that was purely residential, and
the closest match to my region. That correlatation was .76. Of course,
this is not exact, but it close enough?

year / my area / single REIT
-----------------------------
98 13 -1
99 12 4
00 31 50
01 0 7
02 4 7
03 1 13
04 14 27
 
D

Douglas Johnson

I took the data for my area (I could only get 7 years) and compared to
an REIT index, and they didn't correlate at all, I got a correlation
coefficient of .07.

But then I tried picking a single REIT that was purely residential, and
the closest match to my region. That correlatation was .76. Of course,
this is not exact, but it close enough?
Only you can say whether it is "close enough" for you. However, as you suggest,
7 years is not very long. You might also look into the holdings of the
residential REIT. Is it home builders? Apartments? I doubt that it's single
family houses.

Also, single family houses tend to be less volatile on the downside. Homeowners
are reluctant to accept lower prices so tend to defer sales or accept longer
times on the market. So you might find yourself with a declining REIT and
stable or slightly lower home prices.

Frankly, you should compare the likely upside (10%? 20%?) against the worst
downside (unable to buy a house). Doesn't seem like a good trade to me.

-- Doug
 
B

Bucky

Thanks for your inputs, Doug and Elle, definitely made some good points.
 
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T

Tad Borek

Bucky said:
The conventional advice for how to invest savings for a home down
payment in 1-2 years is to put in the least risky investment, such as
CDs. Definitely not stocks, because if they drop, you may not be able
to afford your home anymore.

What about putting 100% of the home down payment in an REIT fund? That
way, if real estate skyrockets, your down payment will also increase
proportionally. And if REITs crash, then so does real estate and
therefore the amount required for down payment. Does this seem like a
wise system, or is it foolish?
[repost - last didn't go thru - but doesn't add much to what the others
have said...]

Bucky,
That's pretty risky really. REITs are, fundamentally, just another type
of stock and are subject to price swings that could more than wipe out
the higher dividend yield you'd collect over a couple of years.

And unfortunately you could see REITs drop while home prices don't, or
don't drop as much. The trouble is that REITs and residential real
estate won't necessarily follow each other. They both are affected by
the level of interest rates but REITs (equity REITS anyway) mostly hold
commercial real estate that is under longer-term leases. So some
different factors can affect REIT profitability and pricing than affect
home prices.

For example some years ago all the REITs with large health-care holdings
(like hospital facilities) paid really high dividends because there were
big concerns over the health care companies themselves. This drove many
of the health care REITs down to the point where they yielded 13%, 14%,
that kind of thing. And when retail store sales took a dive a few years
ago the retail REITs took a dive as well. That's because in many
commercial leases for retail space, the rent is based in part on a cut
of sales. So when sales are bad, rents drop, the REIT earns less.

Anyway, there are a bunch of these examples and so you could see REITs
take a dip even if residential values didn't drop at the same time, or
as much. I generally group REITs closely with stocks, with respect to
their riskiness as a short-term investment.

-Tad
 
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E

Elle Navorski

Bucky,

Your little study below is interesting. But can you tell me exactly what
the numbers under the "my area" column represent, and from what source did
you get these? I have an idea but I want to be precise in my understanding.

Also, are you willing to say from which REIT stock your numbers below come?

I don't have anymore commentary on your proposal. Being a REIT owner
myself, I just like learning still more about them.
 

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