Should I invest my down payment in the stock market?

August 18th, 2015

Question emailed to me: Let’s say my good friend has $100K. He has approximately one year to make this money grow until he has to buy a house. $20K of that is already in stocks, but doesn’t exactly know what he’s doing.

What would your advice be to make the most out of this one year given his current finances?

Answer: Does your friend want to put 20% down on a house? Does he/she have any other liquid assets? Lastly, do they know the price range of the house they want to buy?

With 100k and a decent-paying job they’d qualify for a 500k house, 100k (20%) for the down payment and a 400k mortgage.

If 500k is above or close to the range they’re looking for the house then no need to make a cent, protect the money and keep it in cash.

If they NEED more money for a down payment, then don’t invest to do it because mortgage lenders scrutinize
finances very thoroughly these days and need to be able to trace every cent you have to decide to give people a loan or not. They will not loan money to someone if they need to rely on unpredictable investment income to pay the mortgage (down payment might be less strict, but the source of the money needs to be trace-able – I just bought a house and or mortgage guy said “no mattress money” which is a problem if you are saving a lot of cash (literal
cash – not in a bank).

Now to answer the question as best I can without knowing all the details of your friend’s situation, for people with a chunk of cash that will be used in 12 months or fewer for a down payment on a home, put it in a high interest savings account. I pulled all my money out of stocks and investments 4 months before I bought my house. I missed out on 5-10% rate of return over those months, but you can’t predict the future, especially such a short window of time as 1 year in the stock market.

For all we know (and any “experts”) the stocks could crash 20% the day before he wants to take his money out. No one truly predicts the stock market with great accuracy, and if they did they would be ridiculously rich and not handing out advice here.

Also, if your friend invests now and sells within a year, they will be paying short term capital gains which is a much higher tax than holding for a 1+ years. So while you may make some extra cash, I can’t see it being enough to take that big of a risk.

A forex primer and some good educational videos

July 29th, 2013

Since I lived in Korea for 12 years, and since those 12 years were pretty much my entire adult life, until recently all my personal wealth was in Korean won (KRW).

While in Korea, I saw the won fluctuate between 900 KRW per 1 US dollar to about 1300 KRW to 1 USD. Obviously if I could consistently buy 1300 won per dollar and then buy dollars for 900 won, I’d make some money. If you’re not quite sure how the Forex market works, these educational Forex videos will take you from the very basics like what is Forex (think exchanging your currency for a foreign one when going on vacation).

The hard part is knowing when to buy and sell. When we were leaving Korea we wanted to turn some won into dollars. The exchange rate was about 1150. We exchanged about 75% of our money into dollars. A few months later, the exchange rate was 1050. We could have had thousands of dollars more had we waited. Now the excahnge rate is 1145. There’s lots of fluctuation here – lots of chances to make money, but also lots of chances to see things go the wrong way.

Now my experience trading currencies has always been with money I have, but, like you can with stocks, you can also trade currencies on margin. There’s a video for that too, in the link above, which explains how trading on margin is similar to buying a home with a mortgage – you use more money than you have in your account. With Forex, that means you can lose more money than you have in your account but you can also increase profits by making bigger trades that you could have otherwise.

In conclusion, the volatility of the currency market means you can do well for yourself – change is opportunity. But the market could always go against you – for example, every time the crazies in North Korea start talking about nuclear missiles, the Korean won suffers and my stress level increases.

The Time Bernanke got it wrong

July 19th, 2013

Worship at the alter of Bernanke helped fuel the fiscal crisis. As the New York Times article chronicles, on of the sources of tinder for the massive upswing in risk-taking during the middle of the last decade was the theme being pushed by Bernanke in his writings and speeches as deputy Chairman of the Fed, entitled “The Great Moderation.” The basic idea was that, largely as a result of the brilliant economic management by Central Banks, the amplitude of swings in major economies had become muted.

What Bernanke ignored was that the combination of cheap money and nearly infinite access to derivatives (with his boss fighting hard to prevent better regulation) was encouraging banks (and others) to massively leverage up their balance sheets to take advantage of this perceived decline in economic volatility. The result was a wonderful lesson in chaos theory: how positive feedback loops in a nonlinear system can cause the entire system to go spinning out of control.

In simpler English, lower perceived economic swings = more leverage and risk-taking, and ultimately, vastly wider economic swings.

Atlanta real estate market

March 12th, 2011

Like the state of Georgia, Atlanta has an unemployment rate higher than the national average (about 10.4 percent compared to 9 percent). The real estate market, specifically the slow down of new construction is said to be the problem according to Mark Butler, the Labor Commissioner.

Butler says that the recession hit just as metro Atlanta and Georgia were in one of the state’s biggest growth cycles, led by flourishing residential, commercial and industrial real estate development. When the real estate market and the economy took a dive, the over-leveraged construction industry collapsed.

“Our recovery is going to lag behind the rest of the nation,” Butler said.

What does that mean for the Atlanta real estate market and for investors? Zillow CEO Spencer Rascoff says that, “Similarly, many would-be sellers in today’s housing market are considering whether to become landlords rather than sell at a loss.”

The question then becomes what about Apartments in Atlanta and the rental prices? Zillow, rates Atlanta’s rental market as “fair” which isn’t good but which is better than a lot of markets. Rental prices have been on the rise, along with occupancy.

Speaking about how things have changed in the past couple of years:

“There was so much out there, so much available to lease, that apartment complexes and homeowners, they were giving things away just to get people in there,” said leasing agent Krystal Wilbanks. “But now, there are so many people out there renting, that it’s easier just to get them into the property, cause if you don’t take the property, the next person that comes and looks at it, they will take the property.”

Part of that, of course, is that there aren’t that many new apartments being built. You have to wonder how far behind the nation Atlanta is expected to lag considering that higher rental prices could bring a recovery in the construction industry and that would help solve the unemployment problem. Of course, until things start selling the construction industry will be fairly stagnant but increasing rent might be a sign that apartments will start selling eventually.

Time for South Korea to fight inflation?

March 3rd, 2011

Interesting article here on the problem facing South Korea. They prefer a weaker won to drive exports but if they fight inflation at home the won gets stronger.

Is the currency war finally here?

October 15th, 2010

We’ve known this currency war is coming because it has to. An economy that depends on the whole world selling to US consumers, on credit, while taking America’s jobs and industries can not be sustained. Some people are trying to keep it propped up somehow but it can’t really work out that way, can it?

The way this plays out over the next couple of years is going to be pretty fascinating and will have a huge impact on our prosperity. Do you accept Martin Wolf’s assertion that the US will inevitably win the war by inflating internally through QE? If so at what price does this victory come and how do you invade inflation and high interest rates once the recovery comes?

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world

Tips for buying a Short Sale home

September 23rd, 2010

If a seller sells a house that they owe money on – more money than the house is worth – it is called a short sale. Since the bank is going to end up taking a loss, they need to approve the sale. Interestingly, often to buy a short sale home you have to be both patient and extremely fast. You might make an offer, wait for months, and then hear that you have 2 weeks to get all the paperwork done.

(1) Do your homework – check the land records in the town where the property is located. Is there a pending foreclosure? How many short payoffs will be required to obtain all necessary releases. If you are trying to do a short sale on a property that is already in foreclosure and you need to get a release of two mortgages and 7 judgments liens you may want to pass.

(2) Make sure the seller is completely on board. Have your agent consistently check up with them to see if they have an update. Frequently sellers become disinterested and ignore the bank’s request for updated financial information. The bank may be ready and you may be ready but you cant get far without the seller.

(3) Have all your ducks in a row regarding financing. If it is a property that needs work and you intend on getting an FHA insured loan you may lose your short sale approval during the time it takes to get your loan commitment. It is best to be preapproved and be ready immediately upon acceptance for appraisal, inspections, etc. A lender is loath to hold a short sale approval open for too long.

Still, the experience may not be smooth. One guy made an offer on a short sale property which the seller accepted. He had to put $3k down as earnest money. The seller’s real estate company said his was the only offer but what they didn’t tell me is that even though the house is pending approval the seller and/or the bank can accept other offers: “We never got more than a “keep waiting, it should be only a couple of more weeks.”

After about 3 months he wanted to pull the offer and start looking at other places, but they said he would have to eat the $3k if he did that. After 4 months they tell him the bank accepted another offer – he waited all that time for nothing.

You might be thinking that the bank treated this guy unfairly but keep this in mind. They are losing money on the sale – would you rush into a deal that was losing you money? So it’s not uncommon for short sale buyers to feel powerless or abused as they wait. Go into any short sale transaction with patience.

South Korean won strenghtening – Bank of Korea getting involved?

September 11th, 2010

I brought several tens of thousands of dollars and converted them to won (to get a new apartment) about 6 months ago. The exchange rate was about 1150.

Eventually that money is going back to the US and from Korean won back into greenbacks. It would be nice if the won was around 1100 or 1000 or lower. Several have predicted the BOK intervening because a stronger won makes things tougher for Korea’s export driven economy. I hope they stay out of it. At any rate, the general trend seems to be a strengthening won.

Failures leading the economy into this mess

April 10th, 2010

Get this sequence of logic:

Bernake: The coordinated response of the central banks saved the world from a financial meltdown
Bernake: Now government has to raise taxes and spend less

Ok, here is reality:

He, and his beleif system and many structural assumptions was a huge part of the latest financial meltdown

He did not see any need to be concerned about a sub prime bubble or exotic instruments as per the Open Market Meeting Notes of the time

Six months into the recession and in mid 2008 the Fed offically said their likely would not be a recession

Six months later they said the worst of the unemployment would be 6.1 % in early 2009 and full and rapid recovery would commence at that point

They just absorbed/created as much American debt in the last two years as was created in all the time from the time we started putting in electric lines in some cities until 1995

They did not save anything…they extended and pretended

Yet its time for us to pay higher taxes now that he saved the world from a problem he sponsored or “sheparded” into being and never saw and even after seeing it badly mis called its depth and nature.

Yet he is not challenged on any of this.

We forget that the Fed’s charter is not to help the nation or the citizens of the nation. It is to preserve the banks. That is its actual charter.

So who is in charge around here? And what are they doing?

Deflation for the US?

March 16th, 2010

Here’s an article on corporate debt and the risk that if leveraged companies cannot get access to credit, they default on their maturing bonds and go into bankruptcy. The act of defaulting is deflationary, all other factors held constant.

Fed monetizations are less than the decline in total credit outstanding for now but inflation could accelerate if the Fed panics later this year and starts monetizing at an increasing rate.