My 1st Million At 33 – yes, you can do it too

Given the housing market this high, what should the renters do, and what should the home owners do?  Don’t you wonder everyday in life, whether you should sell out to rent for homeowners, or whether you should bite the bullet and buy-in for renters?  Here is what I project for what’s to come in the housing/rental/mortgage market:

1. Near short term in this month or probably less than 30 days window, the 10 & 30 years treasury bond yields may make a temporarily low.  This is the time to refinance and cash-out if you own your house.  I contemplated exactly the same move last October when 10-year bond yields just cracked 4.5%.  I just couldn’t make the move because my cash position was about 25% of my cash+stock porfolio.  Since I didn’t know or didn’t want to invest more of my cash into stock market, I thought getting more cash out of my house will be simply paying useless interest money to banks.
2. Rents may be moving up just as the housing market cools.  This is showing up in yesterday’s CPI figure already.  The owner’s equivalent rent went up by 0.6%, much higher than the rest of the core rate of about 0.2%.  US government is paying for its past sins of tempering the CPI by using rents instead of housing price for calculating the inflation rate.  I project that the rents may be catching up and moving up by a total of some 20% or more in the following 5 years (including this year), averaging probably about 4% to 5% increase annually.  The increase may come at the face of stagnant wage and economic growth.  If you’re a renter, and if it’s possible, I would suggest you to find a place that you like, and lock in your rent for the next 3 to 4 years.  Why 3 to 4 years?  Because in 3 to 4 years, you will be buying your home.  95% of the ARM loans will be recast in 5 years.  Since starting 2003/2004, the ARM loans became popular, adding 5 years to it, gives you 2008/2009.  And that’s 2 to 3 years from now.  Give it 1 extra year for the housing market to fall, I arrived a timeframe of 3/4 years for locking your rent.  How about ARMs in 2005?  I think if those people did 3-year ARM, they will collide with 2003+5 people.  If they did option ARM, then they may “perish” before reaching 2008/2009 due to the rise in the interest rate, or burned by the affordability issues.
3. The big picture going forward is mortgage rates going up, rents going up, and housing prices going down.  The mortgage market is showing increase in the spread to the treasury market already, and further increase may be possible.  From this Washington Post’s article, growth in Fannie Mae and Freddie will be restrained.  What does that mean?  It means LESS money to chase mortgages.  Less demand equals lower price for mortgage bonds, and equals higher rates for mortgages.  I was surprised to see this spread widened so much on 10-year treasury.  Last October, 10-year was at 4.5%, and 15-year mortgage was at 5.125%.  Now 10-year is at 5.0%, but 15-year mortgage is at 6.0%.  I was going to go for 15-year mortgage in last October, but now I will opt 30-year, which is only 0.25% above 15-year mortgage.

So what would be the best moves if you’re a renter, or if you’re a homeowner?

1. For renters: lock in your rents, and save your money for 3 to 4 years later to buy a house.
2. For homeowners with repaying ability: refinance and cash-out your current mortgage into a fixed 30 year mortgage.  Park this cash at a safe place, and you can buy another house in 3 to 4 years using that amount of cash.  At that time, the rental market will catch up somehow.  Renting out your existing home will probably be cash flow breakeven or positive at that time, and the profits will increase along with inflation going forward for the next 26 to 27 years.  And then you can get another house for yourself at a lower price with your refinanced cash for down payment.  Assuming that you can at least breakeven on renting out your current home, you should be able to buy another house, either partially with that loan proceeds at 6.25% (instead of 7.5%?) or financed by your salary.  Got it?  The summary of this strategic move is to borrow NOW for another purchase that is 3 to 4 years later.
3. For other homeowners: Sit tight.  Don’t dream of becoming a millionaire (at today’s dollar) from your home, nor retire upon your piggy-bank house.  I don’t think it’s going to happen.  Just pay down your debts according to the amortization schedule.  And if you have an ARM, refinance it now.  If you can’t afford the refinanced payment, I suggest that you should sell NOW, or you may want to…I don’t really want to share this with you this secret since it’s you who drove up the home prices, but…you should refinance your ARM into another ARM (assuming no pre-payment penalty) which has another 5 years before it recasts.  That way, you won’t collide with the 2008/2009 dumping traffic.  You can postpone your reckoning day until 2006+5=2011.  Unfortunately, the interest rates will surely be higher at that time.  If your income situation doesn’t improve by that time, you will still be a deadbeat.

Of course, you can always sell your home which is the BEST and most simple way of taking advantage of the height of housing market.  But in case you don’t want to go through hassles of moving around, you could consider the above options.

Just my two cents.

P.S. I didn’t expect that when stock market turns around in the last two days, the bond market weakens simultaneously.  Now the interest rates on both 15/30 years mortgage are 1 notch or 1/8 % higher now.  I think 5% yield is probably as low as 10 year treasury bonds will go.