If you’re given a choice to either invest $1,000 in a two-year bank certificate of deposit or bury that money in your backyard, don’t spend too much time thinking about it, because for all practical purposes you’ll come out the same either way.
Researchers at the University of Alabama at Birmingham (UAB) say you’ll earn 83 cents more with the CD than burying your money, so the CD’s probably the better deal. But after you factor in the gas to get to the bank to buy your CD you’re probably better off going with the buried money and just taking advantage of inflation.
So, where should you put your money? Andreas Rauterkus, an assistant professor of finance at the UAB School of Business, says you should buy a house.
“First-time home-buyer rates are around 3.8 percent for a 30-year mortgage, so if you can afford a $1,000 mortgage payment monthly for 30 years then you can buy a $250,000 home right now,” says Rauterkus.
Lary Cowart, an assistant professor of real estate and finance at the school, says you don’t want to wait too long, though. Because once prices start moving, it won’t take long before price changes affect the advantage of today’s low rates.
“Holding out to try and find the lowest price is not a good strategy because if the house were to go down 10 percent but the interest rate goes up 1 percent you are not gaining anything,” says Cowart. “If rates go up 1 percent, say from 4 to 5 percent, that is a 25 percent increase in the interest rate; so the mortgage payment goes up by more than 10 percent and the amount of house that can be purchased goes down by more than 10 percent. People fail to realize that and it is another little thing that will cost them big over the 30-year life of the loan.”
Of course, whether you can buy at all depends on lenders’ willingness to make a loan today to anyone except those with the best credit profile and plenty of money for a downpayment, and that’s a big question today. It makes you wonder if the reason banks aren’t lending is because they don’t have any money available because it’s all buried in the bankers’ yards.
Read the UAB press release in which the researchers talk about buying a home today.
More on lenders’ tight lending policies.
More from NAR on why home ownership matters.