TOO HOT TO HANDLE IF YOU CAN'T AFFORD YOUR DREAM HOME NOW, STASH YOUR DOWN PAYMENT IN A SAFE INVESTMENT.

Byline: Evan Pondel Staff Writer

Wishing you had bought that modest three-bedroom house in the hip neighborhood when you had the chance four years ago?

Today, you can't afford a cramped two-bedroom in the suburbs an hour's commute from work. So you've resolved to wait out the hot real estate market until prices come down or at least cool off.

But you still have a healthy down payment sitting around that was set aside for that dream home.

Even if you hope to use it within a few years, the lump sum should be locked away in a short-term investment rather than let inflation get the best of it in a standard savings account, financial advisers say.

Besides, home prices may still rise, and you'll want that down payment to grow as much as it can while you wait for the right home to hit the market at the right price.

``Many people in this situation have encountered the perfect storm,'' said Phillip Cook, a certified financial planner with Cook and Associates in Torrance. ``Low interest rates mean their cash isn't able to grow in safe places quickly. And high housing costs require more of a down payment. My first suggestion is to ignore the advice of your uncle and neighbor and avoid equities.''

Cook recommends less risky, fixed-income products. They include preferred stocks, which pay fixed dividends; Real Estate Investment Trusts, which tend to pay high dividends; and agency bonds that mature in five years or less.

``Fixed-income types of investments will juice your return more than what you could get at a bank,'' Cook said, noting that even these investments contain a degree of risk. ``With all of these investments, you have to remember there is no guarantee of principal.''

Jen Zankan recently sold her home in West Los Angeles and moved in with her boyfriend at his Sherman Oaks condominium. They would like to buy a single-family house together, but prices are too high to afford their dream abode.

``They are so inflated that we haven't seen anything we want to move into for under $1.4 million,'' said Zankan, 30, a former attorney-turned-entrepreneur.

In the meantime, Zankan has entrusted her stock broker with handling the money she made from the sale of her previous home. And some of that money is now invested in short-term, tax-free bonds.

Craig Burger, a senior portfolio manager at Bingham Legg Advisors in Los Angeles, argues that in this housing market, patience should rule the day.

``As mortgage rates move up, the market is going to soften. So I tell people to be patient,'' Burger said. ``This is not a market you want to chase. Let the market come to you.''

Perhaps that will happen sooner than previously anticipated. In November, sales of previously owned homes fell an annual 11.2 percent in California. And for the first time in 47 months, the median price of homes in two Santa Barbara County markets declined between 2 percent and 7 percent.

Of course, Santa Barbara has among the highest-priced homes in California. And in Los Angeles and San Bernardino counties, the median price of homes continues to steadily climb. San Bernardino saw a 20.7 percent increase in the median price of a home on an annual basis in November, and Los Angeles recorded a 21.1 percent increase.

``I don't think this bubble is going to collapse. But I do think there is an awful lot of froth and speculation,'' Burger said. ``If anything, I think things will sort of rust.''

Burger advises to stay away from the stock market if you plan to buy a home in three to five years. ``You won't have the ability to bounce back as fast,'' he said.

Also, advisers warn buyers to be realistic about what they can afford. Mike Fitzhugh, a wealth management consultant in San Francisco, said people shouldn't gamble with their hard-earned down payment money, hoping it will get them into a nicer home.

``Because all you are doing is spinning the roulette wheel. Perhaps, you are better off waiting and buying something a little more humble,'' he said.

To pass the time, Fitzhugh recommends a fixed-income fund of short to medium duration, such as the kind offered by Vanguard. The yield on bonds is also a lot more attractive now than it was two years ago.

``But remember, you are not trying to make a lot of money in the short run because a lot of wicked, ugly stuff can happen,'' he said. ``And hitting the market at just the right moment is never going to feel right. It's mostly dumb luck.''

The bottom line for many experts is: Keep your investment as liquid as possible. And that can be done by sprinkling in some short-term CDs, according to Greg McBride, a senior financial analyst at Bankrate.com.

At the beginning of this month, a six-month CD was yielding 3.78 percent, while a one-year CD was yielding 4.12 percent.

Despite decent yields, Perrie Mundy, a real estate broker with RE/MAX Advantage in Redlands, is all too familiar with high-flying real estate markets. And while waiting for the right price can be prudent, she is often an advocate of buying whenever possible.

``Today, money is running in the streets. It is so cheap (to borrow) and so doable, you can do it with no down (payment),'' Mundy said. ``And if the only thing that is going to drive the market down is higher interest rates, it's either pay (less for a house) now, or pay (more) later.''

Evan Pondel, [phone]

evan.pondel(at)dailynews.com

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(color) TOO HOT TO HANDLE

Warren Huskey/Staff Artist