« February 2006 | Main | April 2006 »
Ask Uncle Bill will be out of pocket for a few days as we are heading to Florida to check out hurricane damage and take it easy.
Will be back in business next Friday.
Something is rotten in Holland, well, not really. Got some great comments from Henk in Holland but when I respond it comes bouncing back. Hey Henk, got another e-mail address?
Have a profitable week.
Wrote the following a ways back and time for an update. For a refresher, the upside down PE is the Forward Earning Yield which is 1 divided by the PE. Example: if a stock has a PE of 20 than 1 divided by 20 equals a Forward Earning Yield of .05. Or 5%. Just as a bond pays .o4, or 4%. The details are below in the previous post. This is an update.
The relevant question is Do Relative Valuations Remain Attractive?
The answer is Yes.
Here they are.
World US UK Japan France Germany
Forward Earnings Yield 7.19% 6.99 8.41 5.68 8.06 8.18
10 Year Gov't. Bond 3.88 4.63 4.52 1.68 3.72 3.71
Yield Spread 3.31 2.36 3.88 4.00 4.34 4.47
Source: Thomson One Analytics 9/30/2006
Given these spreads stocks are more attractive than bonds. The spread is about the same as at the market bottom of 2003 which indicates a healthy market for equities. The spread is even better for foreign markets.
Is this the only indicator? Obviously no but it's a pretty good one.
Previous Post
I spent one summer awhile back at the Stanford University Senior Executive Program, summer school for executives. Class in the morning, golf in the afternoon and casual dinners in the evening. 180 men and 15 women that made for some interesting interpersonal dynamics that we won't go into here.
There was a pretty good finance professor and he talked and talked about Mr. Market. Mr. Market sets the prices, knows everything, and is rational. At least most of the time he is rational. Every once in awhile there is a thing like the dot.com bubble but those evaporate after a bit. Well, what is Mr. Market then?
Mr. Market is the investment cash in the world looking for returns. Mr. Market can buy anything--stocks, bonds, CDs, pork bellies, wheat, corn, currencies, Persian rugs, real estate, gold, silver, classic cars or just bits and pieces of all these and more.
And what attracts Mr. Market? Return, pure and simple. And liquidity or the ability to quickly buy or sell an asset. Mr. Market is looking to make money on his investment and the ability to turn the asset into cash quickly.
So all these assets compete with each other for the attention of Mr. Market. And how does Mr. Market decide to buy or sell? Just like you do when you go to the grocery store. You look for the best value for best price and so does Mr. Market and so he compares prices.
What prices? For the sake of keeping it simple, let's compare stocks and bonds. Mr. Market is big on these because they are liquid, easy to get into and out of.
And bonds are easy. If a one year bond pays 4% that means you put down $1,000 and one year later you get (assuming the bond issuer doesn't go bankrupt) your $1,000 back and $40 in interest. But what do you get from the stock? You don't know. It may pay a dividend but may not. So how does Mr. Market value a stock?
He looks at the PE or price earnings ratio. If a stock has a price of $100 and makes $5, it has a PE of 20, or $100 divided by $5 equals 20. So you compare a bond yield of 4% and the PE of 20. Wait a minute, that doesn't work. That's right so Mr. Market reverses the math and divides 1 by 20 and gets a yield of 5%. And in this case the yield on the stock at 5% is higher than the bond yield of 4% so Mr. Market should buy stocks.
Will he? Maybe, maybe not. There are tons of other factors but when the inverse of the PE ratio is higher than the bond yield, stocks are a buy. Like now.
Because the forward PE ratio is about 6% and the 10 year bond yield is about 4.5% for a positive spread to stocks of 1.5%. Which is huge but this is in the United States. The spread is even bigger overseas at 3.25% in Japan and over 4% in France. France? Yes, France. I'm not recommending French equities right now but it does point to another rule of finance--the higher the perceived risk, the higher the required return.
Back to PE's and yields. So you should buy stocks when the PE inverse is above the bond yield. Not necessarily but it is a really positive sign for stocks.
Actually you should consider stocks even when the PE is BELOW the bond yield because stocks have potential, bonds don't if held to maturity. You plunk down $1,000 for a bond paying 4% you will get $1,040 in one year. If you buy a stock with a PE inverse ratio of 5% you are buying a piece of a company and if the company gets really good results that stock could really take off earning you way in excess of 5%. Bonds have return, stocks have potential.
And Mr. Market is in the market for potential.
If you'd like to subscribe to Ask Uncle Bill, a quick click on the link below allows you to do so. You can choose how to receive it, the reader of your choice (such as, into your Google main page), whatever you prefer.
http://feeds.feedburner.com/askunclebilltypepadcom
My investment manager (yes, for all my talk about index funds I confess I have an investment manager. You don't need one because you are young. I need one because I am not) was in town on Tuesday and made a state of the investment presentation. I'm not going into that but I will share his asset allocation model.
In the Q&A an investor asked for the optimal mix of bonds and equities--your basic asset allocation question. The managers answer was long because the questioner was fairly old. HIs answer for someone much younger, like you, was pretty short. Here it is, paraphrased of course,--
INVESTORS SHOULD BE IN EQUITIES, TOTALLY, UNTIL THEY ARE WITHIN FIFTEEN YEARS OF THEIR DEATH.
Wow. And talk about easy. Any money you have to invest, invest in equities, all of it. I am sure he would seperate money for short term needs like a car or downpayment for a home but for INVESTMENT money the place to be is the stock market BECAUSE---
THE STOCK MARKET HAS RETURNED AN AVERAGE OF 11% PER YEAR VERSUS 7% FOR BONDS AND 3% FOR CASH OVER THE LAST 100 YEARS.
The investment manager is saying don't buck the odds, especially if you are young. If you are young and have a premonition of an early death, go ahead and be in bonds but life has a way of stretching out so your real time to think about getting out of the market is in about thirty-five years. Mark your calendar for March 9th, 2041 to rebalance your portfolio.
What about wars and drought and global warming and nuclear bombs and chemical bombs and WMD's and recessions and commodity shortages and....and stuff? Yep, gonna happen and has happened and still the market has had an average return of 11% per year over the last 100 years or so.
So go worry about your job or your girl friend or boy friend or both or your car or your house BUT don't worry about your investments. Just remember that INVESTMENT money is long term money. Don't invest it if you need it in the short term. But if you are in it for the long term, invest in the market. And invest regularly so you get the bad times as well as the good time.
Baron de Rothschild said the best time to invest is when the blood is flowing in the streets. Rather a gruesome picture but true.
If you'd like to subscribe to Ask Uncle Bill, a quick click on the link below allows you to do so. You can choose how to receive it, the reader of your choice (such as, into your Google main page), whatever you prefer.
Oh, and it's free. I like that.
http://feeds.feedburner.com/askunclebilltypepadcom
Read another article about GM and their cost structure versus Toyota and noticed some interesting facts for the cheapskate in us all. Seems GM has been squealing recently about their high medical and pension costs due to prior management entering into stupid union contracts years ago. They point out that Toyota does not have these costs. So we are supposed to feel sorry for GM. As one financial analys pointed out this is nothing new--GM has been unsuccessful at going bankrupt for years.
But the article had two facts that caught my eye. Comparable GM models are cheaper new than Toyotas by an average of $1,500 AND GM resale values are less than Toyota by about 10%.
So comparable GM cars are cheaper new and cheaper to buy used. Hmmm. Perhaps an opportunity here for the cheapskate and people who want to be rich someday. Or at least less poor today.
So Uncle Bill did some homework until he got a headache and said enough is enough. Here are just some facts to get you started and then you take over.
First Toyota. An entry level Toyota Corolla, new, has a MSRP of $14,105-$17,880. A 2002 Corolla has a sales price in a private sale of $8, 925 -$10,050. On the site I used (which I can't remember right now. Just google used car prices and reliability) the 2002 model had a safety rating of A which is not like A in school but A like ok. The best rating is G which the Corolla got in 2003 and later years.
Then I went to GM and couldn't find much of anything because a lot of their models get discontinued which is another reason they are having trouble in the market place. But found an entry level car--the Aveo. Buy American. Not really, the Aveo is made in Korea but sold by GM and sold with a MSRP of $9,350-$13,050. Doing the math that is a discount off the Toyota of $4,755-$4,830. Put more simply the Aveo costs 34% LESS than the Corolla. That's a chunk.
What about used? I picked 2002 and 60,000 miles and you can pick up your basic Corolla for between $8,925 and $10,050. You can't pick up your basic Aveo for anything because they weren't around in 2002 but you can pick up a 2004 for between $7,900 and $9,475. So you get a car that is two years newer for a 12% discount.
But I wanted to compare apples with apples so went looking for a 2002 GM model and found the Prizm. Prizms were around in 2002 but they aren't now because they were, you guessed it, discontinued by GM. But you can pick up a 2002 Prizm for between $8,000 and $8,875.
Plus I found out that Prizms were made in the same plant that makes Corollas. And the plant is in California which is a long way from Japan.
Finally all the used cars had a owners reliability rating of 8.7 out of 10.
Should you buy an Aveo? Or a Prism? Or a Toyota? We haven't even talked about Hondas. I don't know and I don't care because I'm not buying a car but you may be and you should investigate before you pass up a one third discount.
Peter Lynch said that people should spend at least the same time researching a stock before buying as they do a refrigerator. The same goes for cars.
I read in Time that Larry Summers resigned from Harvard for shooting his mouth off about women in science, ROTC and probably just making a bunch of professors mad. Usually my sympathies would be with somebody like Larry as I think college professors can, in many instances, be the stupidest people on the planet. I do not believe the phrase, "Those that can, do. Those that can't, teach." applies to most elementary and high school teachers but would probably find a bigger target audience among college professors.
I said, in most cases, I would side with the likes of Larry except I've seen Larry in action. Sitting in my office I thought I had dodged a bullet by sending one of my managers to some finance meeting in Washington that I didn't want to attend. I equate Washington with taxes and thus have an aversion to the place. I also agree with Bismarck that there are two things one should not see being made--sausages and politics. And since we were gearing up for an takeover battle I didn't think the timing was right for a sidetrip to Washington. My boss thought differently and he, being the boss, prevailed and I was soon on my way.
Got to wherever I was supposed to be and the buzz was that Larry Summers (this is the Clinton administration and Larry was Treasury secretary) was going to give a talk to a select group. Figured no way I was in the select group but I had not figured on the pull of Big Oil and I was selected to be part of the select group. Sitting in the select group of twenty (which looked pretty ordinary to me) I chatted with my other selectees and waited. Prince Larry appeared fifteen minutes late, walked to the podium, leaned against it with his left elbow, ran his hand through his shaggish hair and started pontificating.
I have no memory of what he said or what he talked about but I do remember the way he talked. Off the cuff and rambling. Really rambling. Rambling enough to wonder if this guy was on drugs. Being part of the Clinton administration the thought did cross my mind. Naming names with a little gossip thrown in. All I thought was this guy does not have a filter.
He finished whatever he was talking about and took a few questions. High ranked public officals are like rock stars to some people but I was not impressed. Not that I'm smarter than Larry Summers but I worked harder because I was taught that when you present, you present it in a way and manner so the audience learns something. And you do your homework. I don't think Larry did his homework and believe the reason he got canned at Harvard was for speaking without a filter and not doing his homework.
In your career you will make presentations. I don't like presentations and I am not good at them naturally. But I learned to do them and I learned from one very senior officer. In my first year at Quaker Oats I was drafted to be a host for the annual meeting. Well, not a host really, more like a page, carrying around a microphone for shareholders to ask questions. But I was fairly close to the stage and the closest I had been in my short career to senior management, physically at least.
The president got up to give the state of the corporation and I was in awe. Standing there, totally relaxed, then gliding across the stage, never looking at the numbers on the screen behind, making small jokes and using wit, explaining each number so even the dumbest shareholder and analyst left feeling enlightened. Casual, off the cuff, perfect.
The following week I happened to be in the senior officers area, probably delivering some report, and I ran into the president's assistant. I gushed about the president's performance, his casualness, his wit, his spontaneity.
"He memorizes every word." I almost didn't hear it. What? Yes, the president memorized every word, every gesture and practiced every day for a week prior to the event. The assistant said, "Don't tell anyone." And I haven't. I will now because your job and your success is determined by your ability to present and convince your audience.
If you don't, if you don't take it seriously, if you don't practice and you don't do your homework, you will fail. If you don't think so, just ask Larry Summers.
Programming Note--the Carnival of Personal Finance is being hosted by Canadian Capitalist at canadiancapitalist.com. Check it ouut.
"Let me tell you how it will be
There's one for you, nineteen for me
Should five percent appear too small
Be thankful I don't take it all
Cause I'm the Taxman"
George Harrison
A huge road bump on the highway to wealth is taxes. And here's all you need to know--if you invest in index funds you are investing in the lowest cost and most tax effective funds on the planet. So if you are currently investing in index funds you can get quit reading and get back to work.
If not or you don't want to get back to work, keep reading. Tax efficient funds are noteworthy for three things--low fees, low transaction costs and low tax costs. Inefficient tax funds are noteworthy for just the opposite--high fees, high transaction costs and high tax costs.
What is the one element that differentiates the two funds? Turnover.
Remember that finance is simple and so is turnover. Turnover is the number of stocks the manager sells in any given period, usually one year. And turnover generates cost.
A brief look at the workings of two funds will highlight the differences.
But first a word on taxes and taxable events--the IRS only taxes you when you recieve income, ie. cash. There are some prissy exceptions but not germane here. If you buy a stock, it goes up 10% in one day and you sell it, you are taxed at your ordinary income tax rate that can be high as 36.5%, I think. If you hold the stock for one year and one day and then sell it, you are taxed at a max of 15%. If you buy a stock and it goes up 1,000% and you hold it, you are not taxed. You have to sell to have a taxable event. Back to our two fund managers.
Being a manager of an index fund, like a S&P index fund, must be the easiest and most boring job in the world. The S&P manager buys all the Standard and Poors 500 stocks in a ratio of their relative size to the index. Then he goes and plays golf. He is dragged off the golf course for only two events--cashing in a dividend or selling a stock when it merges or goes bankrupt. He plays golf at a municipal course because he can't afford a country club because he doesn't get paid very much. And the fund is tax efficient because it doesn't have a lot of turnover. The only two taxable events are the occasional dividend and perhaps when a company is sold or taken over.
The opposite manager is the manager of a managed fund. I went googling this morning and threw a dart and came up with the Fidelity Agressive Growth fund. Ok, I didn't throw a dart. I saw aggressive and that means managed to me so went there. This manager is a nervous wreck because he has to outperform the market to keep his job which means he has to hit a lot of home runs to cover his transaction fees (costs involved in buying and selling stocks) and the fee he charges to pay his huge salary. And he could care less about your tax problem.
So let's compare the two funds. The Vanguard S&P Index fund has a fee of .18% and a turnover ratio of 6.4%. This guy is probably a really good golfer because he only sells 6.4% of the portfolio every year. But he is also living in refrigerator box because his fee is only .18%.
The Fidelity Aggressive Growth Fund manager has a fee of .79%. That's not bad for a managed fund but over four times the fee for the index fund. Eats into your return over time. And the turnover ratio is 192%. WHAT? That's right, 192%. I was a little weak in statistics in grad school but this means to me that this manager buys and sells every stock in his portfolio twice a year. Whatever it means this guy is busy and a broker's dream because he is incurring transaction costs to buy and sell every stock at least twice last year.
And every one of those 192% transactions is a taxable event. A mess at tax time.
To be absolutely fair I went to Fidelity's glossary page and looked up turnover. Their definition is "A measure of a fund's trading activity calculated by dividing total purchases or sales of a portfolio's securities (whichever is lower) by the fund's net assets." Huh? All I know is that when I see the words "total purchases or sales" and a figure like 192% somebody is very busy with my cash.
Finally, let's look at results. For 1 year, 5 years, and 10 years the Vanguard S&P Index returned 8.27%, 2.24%, and 8.85%, respectively. The Fidelity Aggressive Growth manager knocked the cover off the ball last year with a return of 18.2% but for the five year period he LOST 8.89% and for the ten year period he made 3.43%.
This is not picking on this particular manager. I think the story would be about the same for any managed fund. But finance is easy and buying an index is easy. Easy plus time will make for superior returns.
HOLD IT! This from the back of the room. There is always one smart aleck that sees an opportunity and their point is I DON'T CARE ABOUT TURNOVER OR TAX COSTS BECAUSE MY MANAGED ACCOUNT IS IN A 401K, OR ROTH, OR IRA, AND SO TAX COSTS AND TURNOVER DON'T COUNT.
Partially right. There are no immediate taxable events but do you really want a guy holding a stock for no time at all, do you want to pay the higher expense ratio, do you want to incur the transaction costs involved with 192% turnover and do you want sub-par performance? Didn't think so.
Following up with the second part of the S question--
Dear Uncle Bill,
Great description of dollar cost averaging. I'd heard the term before but didn't really know what it meant. What do you do if...you have the emergency money, you have the 401k maxed out, the Roth IRA maxed out, you have no debt, and you have cash that is only making 4.25% in the bank?
How do I get the equivalent of the asset allocation and dollar cost averaging for non tax sheltered money? I don't know enough (or enjoy it enough) to pick stocks myself.
What are tax efficient funds?
I am 26.
Signed, S
I'll put in the discussion from Category 13--More On Investments and then go into a little more detail.
--If you have rented well, married well, insured well, eliminated credit card debt, funded your 401(k) and avoided buying a new car you now have cash to invest.
The allocation and mutual funds will be the same as for your 401(k) and IRA.
The Details
Your new lifestyle will generate cash, cash to used for investments that will grow and make you wealthy but, more importantly, independent. Invest in the same things as your pre-tax investments and reap the benefits of the ‘long run.
Check your allocation after ten years.----
Getting rich is like riding a bike--the first time you try is tough but once you learn you don't forget and it keeps getting easier unless you do something really stupid like run into the ditch.
Your after-tax investment allocation should mirror your retirement investment plans for the most part with a few tweaks. Obviously, your emergency fund should be in after-tax money and not retirement as you can't get to it, not easily anyway, in the case of an emergency. If you have the desire to generate some cash in the form of dividends or interest income that investment (except for the emergency fund) should be in retirement money because the dividends and income will not be taxed until withdrawal or not taxed at all as in the case of a Roth.
But overall your asset allocation should not change much for pre-tax or after-tax money. I set up my son in the government 401k, which is 401 something else but close enough, as 70% S&P Equity Index, 15% Small Cap Index and 15% International. Doing it again I would probably lean more toward international but I'm not trying to catch trends here so will keep it for now. When he maxed out the government plan I put him in the Vanguard funds that mirror the government funds. We are just building up the minimums now and that impacts the allocations but when finished his after-tax allocation will mirror the pre-tax set up.
My son also has another good trait, among others, and that is not reading the business pages or obsessing over finance web sites including this one. He is spending all his time getting B-52s up in the air and down on the ground to worry about finance. He leaves that to me and I only hear about it when I screw up.
If you do want to spend time obsessing over your allocation take a look at the work of Dr. William Bernstein, a real doctor that has made asset allocation a lucrative hobby. I just pulled the book out of the bookcase and noted I got halfway through it but that's because I'm fairly comfortable with my allocation. If you are not or want to learn more, check out his web site at www.efficientfrontier.com.
But don't spend too much time on it as I said yesterday, your ally in investing young is time and that is all you need because time, to quote Mick Jagger, is on your side.
Tax efficient funds on Monday.
Got a nice note from S who writes:
Dear Uncle Bill,
Great description of dollar cost averaging. I'd heard the term before but didn't really know what it meant. What do you do if...you have the emergency money, you have the 401k maxed out, the Roth IRA maxed out, you have no debt, and you have cash that is only making 4.25% in the bank?
How do I get the equivalent of the asset allocation and dollar cost averaging for non tax sheltered money? I don't know enough (or enjoy it enough) to pick stocks myself.
I am 26.
Signed, S
Dear S,
First you shouldn't be asking questions about personal finance, you should be answering them. S is the poster child for what each young professional should be doing. S prompted me to go back and look at the section on weighted average dollar cost investing, or whatever you want to call it, and it is pretty good, if I do say so myself, so I decided to reprint it here. The whole discussion can be found in Category 12-Investments--All You Need To Know.
--For the foreseeable future (I was going to say five to ten years but that is way too long for you to contemplate right now) you will do what is known in the finance game as weighted dollar cost averaging investing. Bear with me-this is easy and boring investing. It has three components-
-asset allocation,
-regular contributions,
-time.
By setting up your 401(k) at work or the regular contributions to your IRA at Vanguard you already have an asset allocation-70% S&P 500 Index, 15% Small Cap Index and 15% International Index. Done. The first component is in place.
You have, by now, figured out the investment form at work or the Vanguard form for the IRA and settled on your regular contribution. It should be the maximum amount allowed. If you don’t know the maximum, ask. Your HR rep will know this and most certainly the Vanguard representative will know it, so ask. Our goal is always to keep things simple. Set up the transaction so the money will go directly to your investments out of either your paycheck or your bank account. This being done the second component is in place.
Now for time. This the most important element and one of which you have plenty of right now. The amounts invested each paycheck won’t seem like much at the beginning and they aren’t but they do add up. As Samuel Bronfmann said, “The first billion was tough, the second billion was inevitable.” This philosophy applies also to tens, hundreds and thousands of dollars. And then…
The market drops 30% tomorrow, or worse, stays there for five years. Again, you don’t care because you are investing 1) small amounts 2) over time 3) on a regular basis.
Dollar averaging works because if you buy into a market that is going up, your investment goes up with it. Dollar averaging works when markets go down because your investment buys more of the product when the market goes down. A simple example.
Every month for a year you invest $100 in the Vanguard S&P 500 Index. In January the Index is priced at $100 so you get 1 share. The market drops 30% in February so the Index is now selling at $70 so you now have 1.43 share plus the original 1 share for a total of 2.43 shares (good news) but the shares (the bad news) are worth only $170.10 (2.43 shares x $70=$170.10). Your total investment of $200 is now worth only $170.10. You are under water and ready to abandon the whole thing because…
In March the market dives to $60. You are too late to stop your investment and the idiots at Vanguard take your $100 and buy 1.667 shares so you now have a total of 4.0967 shares worth $245.80. You are out $54.20. Ok, lets speed this up.
The market falls to $55 in April, $50 in May, stays there in June. After half a year you have invested $600 and your investment shares total 9.9138 worth $495.69. You quit reading your statements. The market does nothing in July, August, and September. Your investment is now $900 but your shares are worth only $795.69.
The market comes back to $65 in October, $90 in November and a Santa Claus rally takes the market up to $130 in December. On New Years Eve you pull out your statement and determine that you have 19.3326 shares worth, at $130 a share, $2,513.24.
You invested $1,200 but have $2,513.24. The wonders of dollar cost averaging.
Now, most markets won’t go down 50% in one year and then come back for a 30% gain in the same year but over time such ups and downs do happen but we don’t care because of regression to the mean.--
Do the numbers, it works. And you, S, and the other S's out there really need to jump on this because you have the one asset that nobody else has--time. If you start this at thirty five you are way too late. Forty, glad you finally woke up but forget it. Fifty--pick out your room at the kid's house. Started early, this simple investment strategy will make you rich.
But what about the economy? What about wars? What about unemployment? What about AIDS? What about terrorism? What about Katrina? What about Republicans? What about Democrats?
Yeah, what about them? We've had all of them and more in the last 100 years and the market has averaged an annual return of 11%. The market is one tough character.
And S is way ahead of the curve. The rest of you better get going and try to catch up to S.
Tomorrow we will take a look at after tax investments.
If you'd like to subscribe to Ask Uncle Bill, a quick click on the link below allows you to do so. You can choose how to receive it, the reader of your choice (such as, into your Google main page), whatever you prefer.
Oh, and it's free. I like that.
http://feeds.feedburner.com/askunclebilltypepadcom
Our 29 year old reader with a good job in IT and perfect credit also had a question about home buying.
Dear Uncle Bill,
I'm thinking about buying a house. Should I use my emergency money to fund my house purchase or should I save up a completely seperate set of funds for the house downpayment? Do banks still expect 20% down? Home values have gone through the roof over the last 6 years.
Signed,
Desperate Housebuyer
Dear Desperate,
As far as using emergency money for a home purchase my answer is a definitive maybe. I would put in place a parallel plan. You have an emergency fund already and that is great. Start saving money and earmark it for the downpayment. But start looking now if you are really serious or just want to learn about the market and IF you find a bargain; use your emergency fund, your credit cards, hold up a gas station and buy the bargain. You are probably moaning, "Hey stupid, there are no bargains." And my answer is there are always bargains but you have to learn how to find them and recognize one when you find it.
"Easy for you to say, old man." Not really as the good old days weren't all that good. Think unemployment at 10%, short term interest rates at 12%, mortgage rates at 10%, inflation at 8% and heading for 15%, and a huge Middle East crisis totally out of control. And I bought a house. A house that was falling down with my dad whispering in my ear "You're not really thinking about buying this, are you?" The whole sordid story is in Category 9-Buying A House for 30% Off.
I won't rehash the experience here but a bargain is defined as a house you can get for 20% to 30% or more off list price. 20% minimum. You may not want to go to the work of finding a bargain which is ok as you have the time and opportunity to look and learn the market while your downpayment account gets funded.
As far as the 20% downpayment, the short answer is no. My realtor says banks and brokers are lending to anything that is breathing and that scares me, a lot. Check out what the banks want but if you have 20% for the down, you are golden--no PMI and the best interest rate. Anything between 10% and 20% is good but 20% is great. This assumes you want to own the house someday. If you want to flip in six months, then go low downpayment but watch the fees. You say you may move around a lot so your profit, assuming there is one, will be chewed up by fees so study any deal carefully.
For more information on saving for the first house there was an excellent article this week in the Wall Street Journal Sunday edition (available in many local papers) called "How To Save For Your First Home" by Kelly Spors. The seven steps are:
1) Aim for 20% down.
2) Keep it seperate. (Don't agree totally here.)
3) Consider your time horizon.
4) Get extra help.
5) Clean up your finances.
6) Weigh mortgage tradeoffs.
7) Hands off retirement savings.
Also, check out the March issue of Money magazine for a very scary article about fees and shady ethics in the real estate market. Read this one carefully.
Finally, brokers. Don't use them. Go straight to the lending institution and get prequalified or at least find out what you have to do to get qualified. I should know--my deal to sell one of my houses just fell through because the 'broker' who said the buyer was prequalifiied suddenly stopped returning any phone calls.
And again, please read Category 9 about finding bargains--it really can be a lot of fun and lucrative. Good luck and good hunting.
Recent Comments