Mortgage Rates Are Rising - How Will This Affect Home Prices?

Check this out... back in 2002, the yield on the 10 year treasury was about 3.5%. Mortgage rates, which are based off of that rate, were in the neighborhood of 4.6%.

So your monthly payment if you took out a $200,000 mortgage in 2002 would have been something like $1025.29 per month.

Fast forward to today. The yield on the 10 year treasury is about 5% (bloomberg.com) and rising. Mortgage rates are about 6.1%. Your monthly payment for the same $200,000 mortgage would be $1,211.99 per month. $187 dollars more per month purely in interest. Thats $2,240 more every year, or $67,212 dollars over the life of the mortgage, just because of the change in interest rates.

Can you see why so many people bought so many houses back in 2002? The monthly payments were pretty darn cheap.

It's impossible to predict where rates will go but it is easier to see them going higher rather than lower over the next couple years. Rates are another factor that affects demand for buying houses.

As many of you know, I'm hoping to buy a house within the next few years. I'm also hoping that increases in interest rates hopefully lead to more housing price reductions, because fewer people will be able to afford those higher monthly payments.

Desktop Tower Defense

Desktop Tower Defense is a great, ultra-addictive game that I'm almost sorry to tell you about because I am sure if you're anything like me you'll waste some time on this.

Just had to pass it along.

Does Marriage Make You Richer?

Of course getting married won't make you rich in itself, but if you are married, and you grew up in a household with married parents, you're more likely to be in the upper end of the income spectrum. So says an article in The Economist, entitled "The frayed knot" in which the author argues that

"There is a widening gulf between how the best- and least-educated Americans approach marriage and child-rearing. Among the elite (excluding film stars), the nuclear family is holding up quite well. Only 4% of the children of mothers with college degrees are born out of wedlock. And the divorce rate among college-educated women has plummeted. Of those who first tied the knot between 1975 and 1979, 29% were divorced within ten years. Among those who first married between 1990 and 1994, only 16.5% were.

At the bottom of the education scale, the picture is reversed. Among high-school dropouts, the divorce rate rose from 38% for those who first married in 1975-79 to 46% for those who first married in 1990-94. Among those with a high school diploma but no college, it rose from 35% to 38%. And these figures are only part of the story. Many mothers avoid divorce by never marrying in the first place. The out-of-wedlock birth rate among women who drop out of high school is 15%. Among African-Americans, it is a staggering 67%."

So basically what they're saying is that lower-educated, poorer people are less likely to a) be products of two parent homes and b) create their own two-parent homes. This cycle continues with their own children.

I think the environment a person grows up in has a huge impact on how their life turns out. Rich or poor, loving families tend to create happy, well-adjusted children. These children probably go on to get better jobs and on average become more wealthy (emotionally and financially) than people who are products of broken homes.

I've written before about the gap between the rich and the poor, and this article speaks to some of the same issues. It's more food for thought than anything else, because I'm truly at a loss to suggest any good solutions to what seem to be some pretty big social problems.

Jordin Sparks Just Won American Idol

It's not official yet, but in my mind Jordin just won the competition with the way she performed in tonight's show. She's a great singer and an emotional performer (it was very touching how she cried at the end of her finale), and I wish her the best.

Sorry for the off-topic post, but I just had to throw that out there. To tell you the truth Jordin didn't really impress me until late in the competition, but at this point she's my favorite. I'm curious to see if she wins tomorrow.

Hedging a Home Purchase?

Using my play money in my play account, I recently purchased a few long-dated call options linked to D.R. Horton, America's biggest homebuilder. Call options are basically a leveraged bet that a stock is going to go up.

There wasn't a whole lot of news on the housing front in the past couple of weeks until today, when treasury secretary Henry Paulson went on CNBC and said that the housing slump is largely over.

As a result, DR Horton's stock (NYSE: DHI) was up about 4%. Being a leveraged bet, and due to a general lack of liquidity, the particular DHI options I own traded up about 25% today.

This got me to thinking... as a young couple looking to buy a house in the next few years, how could my wife and I protect ourselves from an increase in home prices? We have a chunk of money (approaching $100k) saved for a down payment, but how could we protect ourselves against an increase in prices? What if the housing slump doesn't last like we're hoping it does and prices jump next year or the year after?

One thing we could possibly do is to spend a portion of our savings (say $5-10k) buying call options on - you guessed it - homebuilder stocks. This way, if the housing market rebounds, the value of our options will increase, hopefully offsetting the increased prices of our target homes. If the prices on target homes go up by, say, $20,000, the value of our options would ideally be $20,000 or greater.

Of course, this is just a rough sketch of an idea that I haven't thought through fully, and homebuilder options in no way represent a perfect hedge on housing prices due to the fact that the homebuilder's stock price is not directly correlated to prices of homes in the areas we are targeting.

Anyway, that's just food for thought. It would be irresponsible for me not to insert another disclaimer here... that you should NEVER put the money you've saved for a house into an investment as risky as options unless you completely and fully understand each one of the myriad of risks that would be associated with such a strategy. I'm not going to actually do this, but I thought it was an interesting idea nonetheless.

Haynes Repair Manual

Over the past few years, I have become more interested in doing minor auto maintenance jobs myself, rather than paying my mechanic exorbitant amounts for parts and labor. Oil changes, air filter changes, tuneups, etc... are all pretty easy to do and can save you a few dollars both now when you don't pay a mechanic and down the road, when your car has fewer unnecessary breakdowns due to neglect.

Hoping to learn a little bit more about my car, I recently purchased the Haynes Repair Manual covering my specific model. The book arrived a few days ago and as I've gone through it, I've been very impressed with the level of detail and the quality of the writing.

As someone who works in finance, I don't get much time to fool around with my car, nor do I find it necessary to do so. I could very easily use up all of my free time tuning, fixing, and upgrading my car, but I would rather spend that time with my family. However, I think that not knowing anything about a car puts the average car owner at a serious disadvantage. A mechanic could easily bilk you out of hundreds, even thousands of dollars of unnecessary or shoddy repair work, and if you don't know an alternator from a radiator, you would never know the difference.

The Haynes manual is a great addition to your library if you have a car and any interest in learning more about how it works. The books are based on a complete disassembly (or "teardown," as Haynes calls it) and reassembly (rebuild) of your specific model of car. It gives you a few hundred pages of photographs, repair tips, testing advice, and suggested procedures to do everything from changing wiper blades to overhauling an engine.

I've read some of the more basic "Vehicle Repair for Dummies" type books, but the Haynes manual is vastly superior since it actually shows work being done on your specific car, and it walks you through some more complicated procedures, rather than telling you in general terms what you might need to do, but that it varies by manufacturer and model.

I don't plan on doing much more to my car than the steps it suggests in chapter 1 - "Tune-up and routine maintenance." This chapter lays out a tune-up and maintenance schedule, and includes a bunch of things I think I will be able to do by myself without much prior experience. They include things like fluid checks, battery tests, spark plug replacement, fuel filter replacement, an ignition timing check etc...

Anyway, I wanted to pass this along as yet another good way to "Watch Your Wallet."

Catching Up - New Century Bankruptcy, Gina on American Idol, and Homebuilder Stock Values?

I finally got some breathing room at work.

In non-finance news, I can't believe Gina got voted off American Idol! What a crock. I considered her one of my top 3.

Not the biggest shocker in the world here, but New Century filed for bankruptcy. I kind of had a feeling they would about a month ago. Hope you found that liquidation analysis pretty interesting.

I've recently become pretty interested in homebuilding stocks. Take a look at a company like DR Horton Inc. (NYSE: DHI). Selling at book value, a trailing P/E of 6.61, and sporting a 10% ROA and 17% ROE. These stats are enough to make any value investor salivate. However, the prospects for the company and the industry as a whole are currently extremely uncertain. Are rising subprime mortgage defaults a short-term problem? Is housing in for a major correction?

Anyway, I think there is some value there, but I haven't taken a hard enough look at any of these companies yet. I have gotten some copies of their 10-Ks and plan on working my way through them. The big question in my mind is... are these companies going out of business? If so, then they aren't worth buying. If not, and you have a long term outlook, you could be looking at some great bargains. As Warren Buffett would have you do... be greedy when others are fearful (but be greedy in a sensible way).

Finally, Sanjaya, you don't deserve Gina's spot on the show.