Pay cash for home with these new mortgage rates?

[Retireby45ish]

Unfortunately we have been going through the process of trying to buy a home. We sold ours a year ago and I’ve had the 600k proceeds in cash as we look for another.

For homes in that range I can swing the “all cash” offer which will help us compete in this insane market.

Side note: I would never wish house hunting in 2021/2022 on anyone. It’s been awful to see people pay crazy prices for homes. But it is what it is.

My question is: is it worth tapping some of my bonds to pay cash for a 950k house? Here are the details.

We are about 60/40 now with a NW of 4M (including the 600k in cash I am holding). My bonds (BND) have taken enough of a beating that we were actually going to do some tax loss harvesting with them anyways, so no tax issues.

I figure selling the bonds to pay for the house is best because they will yield about 2.5-3% or so vs mortgages which are now ~5.1% (insane change in the last 60 days from 3.1%)!

I can replenish the bonds I sell over the next year or so. We earn about 500k yearly and save about 250k.

I’m fine going heavier in equities for that time and taking me to, say, 70/30 before I move back to my 60/40 target.

Anything I’m missing? Thoughts? Thanks!!
Let’s see if this offer actually wins…sigh.

 

[RobbieB]

Yeah, use the bonds to buy the house.

 

[Another Reader]

Unfortunately we have been going through the process of trying to buy a home. We sold ours a year ago and I’ve had the 600k proceeds in cash as we look for another.

For homes in that range I can swing the “all cash” offer which will help us compete in this insane market.

Side note: I would never wish house hunting in 2021/2022 on anyone. It’s been awful to see people pay crazy prices for homes. But it is what it is.

My question is: is it worth tapping some of my bonds to pay cash for a 950k house? Here are the details.

We are about 60/40 now with a NW of 4M (including the 600k in cash I am holding). My bonds (BND) have taken enough of a beating that we were actually going to do some tax loss harvesting with them anyways, so no tax issues.

I figure selling the bonds to pay for the house is best because they will yield about 2.5-3% or so vs mortgages which are now ~5.1% (insane change in the last 60 days from 3.1%)!

I can replenish the bonds I sell over the next year or so. We earn about 500k yearly and save about 250k.

I’m fine going heavier in equities for that time and taking me to, say, 70/30 before I move back to my 60/40 target.

Anything I’m missing? Thoughts? Thanks!!
Let’s see if this offer actually wins…sigh.

I'm seeing resistance at current price levels. Buyers don't have the benefit of low mortgage rates now. If you can wait another year, competition and prices may drop substantially. I would not want to be left holding the bag by buying now and then losing a lot of money.

 

[copyright1997reloaded]

Housing affordability is getting a double whammy - increasing prices and higher rates.

Having said that, sometimes a market can go much higher than what seems reasonable. It is only in hindsight that most people realize if/when it was a bubble. Also, perhaps prices don't keep racing higher but at the same time don't crash. Part of my hesitation on the house front is if inflation is here to stay, that will tend to inflate housing prices over time.

On the bond front, I wouldn't be surprised to see a short term reversal, i.e. lower rates for a bit. We've had quite the run up (in rates, lower prices) YTD, so a short-term reversal of that trend would be commonplace. But I would see that as an opportunity to get out of long bond positions, as longer term bond rates have to rise substantially to reflect inflation. Unless, of course, it (inflation) is "transitory". Disclaimer: I have essentially no long term non-inflation adjusted bonds (so I am talking my book here).

If I had 250K in savings per year, I would make sure a part of that goes to inflation hedges, including precious metals. I've been doing that myself -without that nice savings rate- by slowly converting maturing CDs partially to PM's.

 

[Aerides]

I'm seeing resistance at current price levels. Buyers don't have the benefit of low mortgage rates now. If you can wait another year, competition and prices may drop substantially. I would not want to be left holding the bag by buying now and then losing a lot of money.

I would also not want to be one who gambles on waiting, rents for a year, and then the same houses are the same, or 100k+ more. - both of those outcomes, I think are far more likely than prices coming down.

 

[Retireby45ish]

Housing affordability is getting a double whammy - increasing prices and higher rates.

Having said that, sometimes a market can go much higher than what seems reasonable. It is only in hindsight that most people realize if/when it was a bubble. Also, perhaps prices don't keep racing higher but at the same time don't crash. Part of my hesitation on the house front is if inflation is here to stay, that will tend to inflate housing prices over time.

.

Thanks for your thoughts. I don’t think anyone has a crystal ball on where house prices go. I thought selling when they were up 25% YoY in 2021 was fine and they wouldn’t rise another 10-15% before I could find a home. Here I am a year later watching them continue to go up. I do think these rate increases will deter some folks. But I also continue to compete on houses with 10+ offers in 2 days (this is not a hot a MCOL area). I will continue to bid what I think seems fair-ish and not get caught up in the histeria.

Besides, I’m going to buy this as a primary residence for 10-15 years at least so a temporary dip or continued increases or zig zags don’t mean much.

My main question is mortgage vs cash.

 

[RobbieB]

The last crash was fueled by lending dough to anyone breathing. That's not happening anymore.

 

[MC Rider]

The last crash was fueled by lending dough to anyone breathing. That's not happening anymore.

True. A lot of things have changed since then.
But the fan spins on and stuff still hits it at times.

 

[RobbieB]

Agree. But supply is still low while interest rates are rising. Sorta 50-50.

 

[FlaGator]

The last crash was fueled by lending dough to anyone breathing. That's not happening anymore.

Yes, big part of it, and that factor was visible to attentive people before the final blow off. If the end of this price run up ends in a crash, it will be for a different reason(s).

In my FL Panhandle area, I see a few factors now that could ultimately be plausible explanations for a decline or flat-lining of prices for several years.

 

[jurgs01]

Agree. But supply is still low while interest rates are rising. Sorta 50-50.

Not for long...

Wait a year to buy.

 

[mrfeh]

Unfortunately we have been going through the process of trying to buy a home. We sold ours a year ago and I’ve had the 600k proceeds in cash as we look for another.

For homes in that range I can swing the “all cash” offer which will help us compete in this insane market.

Side note: I would never wish house hunting in 2021/2022 on anyone. It’s been awful to see people pay crazy prices for homes. But it is what it is.

My question is: is it worth tapping some of my bonds to pay cash for a 950k house? Here are the details.

We are about 60/40 now with a NW of 4M (including the 600k in cash I am holding). My bonds (BND) have taken enough of a beating that we were actually going to do some tax loss harvesting with them anyways, so no tax issues.

I figure selling the bonds to pay for the house is best because they will yield about 2.5-3% or so vs mortgages which are now ~5.1% (insane change in the last 60 days from 3.1%)!

I can replenish the bonds I sell over the next year or so. We earn about 500k yearly and save about 250k.

I’m fine going heavier in equities for that time and taking me to, say, 70/30 before I move back to my 60/40 target.

Anything I’m missing? Thoughts? Thanks!!
Let’s see if this offer actually wins…sigh.

We are an in incredibly similar situation to you - sitting on cash, looking to buy a home. Given you are still working and have much disposable income, I would not hesitate to use a couple hundred $K from your investments to purchase a house.

I'm seeing resistance at current price levels. Buyers don't have the benefit of low mortgage rates now. If you can wait another year, competition and prices may drop substantially. I would not want to be left holding the bag by buying now and then losing a lot of money.

This is now our plan...with mortgage rates rising, I think there's a good chance the market will cool off. We'll probably wait until spring of 2023 to buy.

 

[Magus]

I would also not want to be one who gambles on waiting, rents for a year, and then the same houses are the same, or 100k+ more. - both of those outcomes, I think are far more likely than prices coming down.

+1 - people have been saying housing prices will drop a lot since over a year ago, yet here we are - and bidding doesn't seem to be slowing down at all around here. The inventory of housing is insanely small still and replacement costs are much higher than existing prices, among many other positive factors for housing. Worst - in the next year, housing could go up another 15% AND rents go up 15% so you get the double whammy.

To OP - Yes, use the bonds. A mortgage is effectively a negative bond for you, so converting a 2.5% into a 5% effectively is a good deal.

 

[Magus]

This is now our plan...with mortgage rates rising, I think there's a good chance the market will cool off. We'll probably wait until spring of 2023 to buy.

Cooling off doesn't mean a big pull back, it could simply mean climbing at a slower rate....but it may not stop climbing quickly as well. I think its worth noting that housing prices in the US doubled when mortgage rates went from 5% to 18%. I think most people forget most supply is coming from a buyer putting their home on the market, so if a buyer sits on the sidelines it reduces supply, which puts upward pressure on pricing as well. Throw in institutional investors buying who don't care much about mortgage rates and rising rents...

 

[Magus]

True. A lot of things have changed since then.
But the fan spins on and stuff still hits it at times.

Very, very different situation this time. Usually bubbles pop when the last buyer has finished. In 2004-2007, that was subprime and ALT-A loans - folks with 580-640 credit score with little to nothing down and no skin in the game. Those folks aren't even making it to the table this time for bidding consideration. The middle buyer today is a 720 credit score with 20% down with limited ability to pay more than 20% if the appraisal comes up a bit short (which in normal times would be a very good buyer) - the lower credit score guy isn't even making the negotiating table. The typical buyer today is either 1) all cash or 2) 780+ credit score (median score the last 2 years) putting 30%+ down. Additionally, income and asset documentation is 1000% better than 2004-2007.

Here is what I'm watching to see when housing price increases may slowdown/stop/reverse

1) Is supply increasing quickly / reverting back to historical levels - NOPE - Near record low supply currently
2) Is it economical for builders to flood the market with supply to take advantage of low supply - NOPE - New build cost is significantly higher than existing stock and their input costs are rising rapidly
3) Is the quality of the buyer dropping back down to historical levels - NOPE - Median score is well above historical and a huge % of buyers are all cash
3a) Is the quality of the buyer dropping below historical like 2004-2007? See 3 comment
4) Have Rent prices stopped rising (rising rents make next best alternative - buying - more attractive and makes it more likely for institutional investors to buy) - NOPE - rents are going up 15-20% and still climbing
5) Has household formation started to retreat (ie people moving back in with family or friends) - NOPE - household formation is strong + record levels of folks coming across the border = a lot of new demand for lodging
6) Has the AIRBNB/VRBO trend reversed (taking stock out of traveling and back into residential)- NOPE - Its as strong as its ever been!

Until at least 1 of these 6 turn from NOPE to YES I see no slowdown in price increases nationally. Until 3 of these 6 turn from NOPE to YES, I see zero risk of outright declines in pricing and unless 5 of these 6 turn to YES I see limited risk of a significant decline in values from the current levels.

 

[ShokWaveRider]

Canada has been like this for as long as I can remember, they never had a real crash as we know it. AND they do not get their interest payments subsidized like here in the USA. Same in the UK as far as I can remember.

I noticed YouTube is full of RE naysayers predicting a big crash, but I think they are just trying to get more clicks and subscribers. What I think will happen as things cool off (No real experience other than age and wisdom) is homes in less desirable areas will stabilize and maybe cool a little, whereas homes in desirable areas will settle.

 

[Another Reader]

I talk to agents I know and I follow a few that are in my markets. All are reporting fewer buyers and a lot of price resistance. Builders are reporting lower traffic. The effect does not show up in sales numbers and prices for several months.

Your market may be different, but interest rates will weed out buyers everywhere.

 

[Alan]

Canada has been like this for as long as I can remember, they never had a real crash as we know it. AND they do not get their interest payments subsidized like here in the USA. Same in the UK as far as I can remember.

I agree, and confirm that there are no tax deductions for mortgage interest payments in the UK.

 

[Magus]

I talk to agents I know and I follow a few that are in my markets. All are reporting fewer buyers and a lot of price resistance. Builders are reporting lower traffic. The effect does not show up in sales numbers and prices for several months.

Your market may be different, but interest rates will weed out buyers everywhere.

This is not the case nationally with existing homes, here in Charlotte (and I know several other cities with same) its hotter right now than it has ever been from what I'm seeing myself (very active buyer the last year) and from my realtor who has never been busier and never having so many clients lose so many bids way over asking. By my estimation, Charlotte is on track to see a 3+% appreciation for April alone (vs 1.5-2% we've been averaging. And the effect on existing supply - the overwhelming bulk of sales - does not take several months - its basically a month or less. New homes does have a longer lead time to show up, but if builders pull back on adding inventory because they are concerned about demand, that will only support price.

Interest rates will temporarily weed out some buyers but that also means a nearly equally fewer homes coming on the market, keeping things in equilibrium to where they are now. I think as soon as buyers realize prices aren't dropping from higher rates and that prices are indeed still rising, they'll simply accept it and jump back in, especially with rents skyrocketing.

As someone purely focused on cash yields on my rentals, I would absolutely love prices to come down so I can buy more with higher yields and retire sooner than March 2025, but I see no signs of that happening. The "prices are going to fall" crowd have been saying this for over a year and have been dead wrong.

 

[Another Reader]

This is not the case nationally with existing homes, here in Charlotte (and I know several other cities with same) its hotter right now than it has ever been from what I'm seeing myself (very active buyer the last year) and from my realtor who has never been busier and never having so many clients lose so many bids way over asking. By my estimation, Charlotte is on track to see a 3+% appreciation for April alone (vs 1.5-2% we've been averaging. And the effect on existing supply - the overwhelming bulk of sales - does not take several months - its basically a month or less. New homes does have a longer lead time to show up, but if builders pull back on adding inventory because they are concerned about demand, that will only support price.

Interest rates will temporarily weed out some buyers but that also means a nearly equally fewer homes coming on the market, keeping things in equilibrium to where they are now. I think as soon as buyers realize prices aren't dropping from higher rates and that prices are indeed still rising, they'll simply accept it and jump back in, especially with rents skyrocketing.

As someone purely focused on cash yields on my rentals, I would absolutely love prices to come down so I can buy more with higher yields and retire sooner than March 2025, but I see no signs of that happening. The "prices are going to fall" crowd have been saying this for over a year and have been dead wrong.

A year ago I would have been in complete agreement. I look at California and Arizona and they are starting to crack. How much and how long will this continue? We shall see.

 

[pb4uski]

Unfortunately we have been going through the process of trying to buy a home. We sold ours a year ago and I’ve had the 600k proceeds in cash as we look for another.

For homes in that range I can swing the “all cash” offer which will help us compete in this insane market.

Side note: I would never wish house hunting in 2021/2022 on anyone. It’s been awful to see people pay crazy prices for homes. But it is what it is.

My question is: is it worth tapping some of my bonds to pay cash for a 950k house? Here are the details.

We are about 60/40 now with a NW of 4M (including the 600k in cash I am holding). My bonds (BND) have taken enough of a beating that we were actually going to do some tax loss harvesting with them anyways, so no tax issues.

I figure selling the bonds to pay for the house is best because they will yield about 2.5-3% or so vs mortgages which are now ~5.1% (insane change in the last 60 days from 3.1%)!

I can replenish the bonds I sell over the next year or so. We earn about 500k yearly and save about 250k.

I’m fine going heavier in equities for that time and taking me to, say, 70/30 before I move back to my 60/40 target.

Anything I’m missing? Thoughts? Thanks!!
Let’s see if this offer actually wins…sigh.

They are really two separate questions. Should I continue to hold bonds? Should I buy a $950k house?

On the first part, I think it is inevitable that bonds and bond funds and ETFs will continue to decline in value as the Fed increases interest rates to try to slow the economy and reduce inflation. As a result, my prefererence today is to hold individual short term bonds. I know that in the near term that I will get my principal back and the interest rate difference vs medium or long term bonds isn't compelling to me at all. While I'm usually bullish on BND I would avoid it today... the interest rate sensitivity is too high for my liking.

On the second part, I think it is likely that at some point in the future that the real estate bubble will burst and values will decline in many parts of the country.

Not a lot of good options available these days.

 

[copyright1997reloaded]

Thanks for your thoughts. I don’t think anyone has a crystal ball on where house prices go. I thought selling when they were up 25% YoY in 2021 was fine and they wouldn’t rise another 10-15% before I could find a home. Here I am a year later watching them continue to go up. I do think these rate increases will deter some folks. But I also continue to compete on houses with 10+ offers in 2 days (this is not a hot a MCOL area). I will continue to bid what I think seems fair-ish and not get caught up in the histeria.

Besides, I’m going to buy this as a primary residence for 10-15 years at least so a temporary dip or continued increases or zig zags don’t mean much.

My main question is mortgage vs cash.

If you think inflation isn't transitory (i.e. will not quickly recede to 2-3% annually) - Mortgage all you can.

If you think inflation has/is close to peaking and will drop off sharply - use cash.

In terms of holding lots of LT bonds - well opposite the above.

The market is pricing in an expectation of 3.3% inflation as measured by the TIPS BEI (Breakeven Inflation Rate):
https://ycharts.com/indicators/5_year_tipstreasury_breakeven_rate

As for me: I have financed TWO new vehicle purchases w/i the last 6 months because Ford offered me 0% 36 month financing (and because as of now I can sell the vehicles for more than I paid).

 

[Magus]

I think you "housing prices are going to tank" folks need to look at housing price charts in the rest of the developed world over the last 50 years and compare income to ownership. We are the exception, not the rule. Even with this increase, we're still the most affordable (and largest places) by a HUGE amount. And the buyers the last 2 years are the strongest buyers in history with a very large % in all cash. With rents rising, I expect institutional demand to be very high for rentals in the SFM to continuing buying and scoop up any weakness. Plus with a 2 year foreign buyer ban in Canada, that $ will likely shift to the US.

In order to see a huge price decline, you typically need to see a ton of forclosures because people don't tend to sell if they aren't at all time highs. Who exactly is going to be foreclosing with 30 year fixed mortgages with 30% down or zero mortgages (~97% of mortgages issued)? People are very weird about selling their homes - they consciously won't sell if the price drops - they wait because it feels like a loss, even if it was just on paper. Foreclosures are a different animal and what drove most of the declines in 2008-2010, but there is almost zero chance of a big or even medium size foreclosure wave. In fact, I expect foreclosures to be way below average the next few years because of the quality of the buyer has never been higher.
https://www.statista.com/statistics...usa/?msclkid=5a619e5cbe6811eca600e5d6ea013b91

Even if you do see any slight weakness here, it is still far more likely all that means is prices will rise more slowly than the last 2 years. But that does not mean you will see outright declines. Incomes are up, credit scores are up, assets are up - the consumer balance sheet in the US in general is outstanding vs train wreck in 2007.

 

[copyright1997reloaded]

I remember work trips circa late2006/early 2007 with someone who was heavily into real estate, and talking about all the money he was making buying houses/condo's/etc. Also talking about how well the stock market was doing, and that there was no end in sight.

It was at that moment, on that trip, that I decided to start trimming holdings in the market. Yes, I was early.

As posters have pointed out regarding the housing market, "This time it is different". And indeed it is.

I am truly conflicted on this. Do I think housing prices are getting out of touch with reality? Yes they are. A couple years ago when I was preaching here to many who "had it made" and thus should be all fixed (get out of the market game) - that they might be solving the market risk aspect, they were not solving the inflation risk aspect...and that it (inflation risk) was the MAJOR worry of mine in terms of retirement. Here we are, and inflation has roared in the past year or so. If it stays/continues, then that should help support real asset prices - such as housing.

So far, with a single meaningless rate hike and a LOT of talking, the Fed has moved rates up in things like the mortgage market significantly. But with producer prices increasing at almost 1% per month, a 5% annual mortgage still has a vastly negative real rate.

I'm afraid the only real answer to inflation is significant demand destruction, i.e. recession, and with that people losing jobs, and with that a reduction in housing demand (particularly in terms of second homes).

But I do enjoy/appreciate others thoughts -well articulated, including those who think housing appreciation is far from over.

 

[Magus]

I remember work trips circa late2006/early 2007 with someone who was heavily into real estate, and talking about all the money he was making buying houses/condo's/etc. Also talking about how well the stock market was doing, and that there was no end in sight.

This is another major difference today than 2005-2007. Many of the purchases back then, if not a majority, were outright speculative buys. Almost no one today is speculatively buying, if anything its the opposite (apprehensively buying). The institutional buyers are buying long term investments and nearly all the rest of the buyers are professional class buyers for their primary here (or all cash). There is no classic signs today of a bubble (in fact, the opposite is true in many cases) besides rising prices, which isn't surprising in this inflationary environment where the money supply is up 40% in the last 2.25 years, incomes are rising, the balance sheets outstanding and people value their home now more than in a very long time thanks to the pandemic.

I really would love to be wrong here and see a pullback in prices as it would make my retirement strategy significantly easier but I just don't see it at all.