FREE copy of "The 4-hour Workweek"

My Money Blog has a post on how you can get a Free PDF of The 4-Hour Workweek by Tim Ferriss

The offer is good through Dec. 26th so act soon if you want a copy.

If Interest Rates go Up then Will House Prices Go Down?

Right now mortgage rates are very low.   30 year fixed mortgages are around 4.25% give or take.   This allows people to buy more house than they could if the mortgage interest were higher.   Lets say for example that you can afford a payment of $1200 a month.   At 4.25% rate you'd be able to finance a loan of about $244,000.   But if interest rates went up 1% to 5.25% then you'd only be able to get a $217,000.    So logically we could imagine that people are buying more and paying more for houses now than if the rates were higher.

If interest rates go up then we might assume that home prices may fall as a result.   Seems pretty logical.  

But is that what happens normally?   Has it happened in the past?   How much impact do mortgage interest rate changes actually have on home prices?

I figured I'd look at old data and compare the two numbers to see how they correlate.  The theory is that if interest rates go up then home prices will go down.   If that is true in reality then we should be able to see a direct and repeated inverse relationship between the two numbers.

The home values are using the S&P / Case Shiller index.  I got the mortgage rates from the Federal Reserve FRED database.   Here is a graph showing the home price index versus the 30 year fixed mortgage rate from 1987 to 2010:

I do not see any real relationship between those two lines.   The interest rates bounce up and down at times and the home price values don't change much and other times interest and home prices go up at the same time.   If there were a clear relationship between the interest and the prices then you should see a clear trend.

But lets zoom in to a few years and look at the numbers a little closer.  Here I show the trend between interest and home prices from 1992 to 1996. 

Now there seems to be more of a correlation.   But oddly they seem to be going in the same direction.   Interest rates go down and home prices go down too.  It is possible that this is simply a seasonal pattern, but I'm not sure.  

Bottom Line : I don't see any reliable or visible relationship between changes in the mortgage interest rates and home prices.

Roundup of Favorite Posts on Free By 50 for 2010

I took a look through all my articles this year and picked out a few that I like most.   These posts I consider interesting or noteworthy in various ways.  


Is it Worth It To Pick Up a Penny?
- Do you stop to pick up a penny?  

Living on a Cruise Ship :  Is it Practical?
- Living full time on a cruise ship is a novel way to retire.   But is it actually financially practical?

Why I Pay Over $100 a month for TV
- Many if not most personal finance bloggers seem to have 'cut cable' on their short list of financial advice.  There are plenty of great reasons to cut cable, #1 of which is if you don't watch much TV.  Personally though I feel paying for cable is worth it to us.

Don't Buy A Suit Like I Do
- This is my story of how I bought a suit the wrong way, shopping last minute without a plan.

Retiring In Luxury Overseas For Cheap - Bargain or Bogus?
- It seems that several times a year there will be some sort of article in the mass press about living cheaply overseas.   You have to wonder though, if it was that great then why doesn't everyone want to live there?

Money Can Buy You Happiness
- Yeah thats right.  I said it.

Social Security About to Go Bankrupt For 7th Decade
- A lot of people are convinced that Social Security is doomed.   In that respect nothing has changed in 75 years.

Safely Build Your Own Pension with Bonds and Annuities
- I like the guaranteed income of a fixed defined benefit pension.   But most employees do not have traditional pensions.  Its actually quite easy to create a fixed pension on your own.

DVR's Can Save You Lots Of Time
- I loooooooovve my DVR.

I Like DIY A Little Too Much
- My first inclination when something breaks is is to get out the toolbox.  Sometimes thats not the best choice.

Don't Waste Money On Overpriced Infrared Heaters
- These heaters are often advertised on TV.   I don't think they're nearly as good as they're made to sound.

How Well Did I Do With My 2010 Financial Goals?

Early this year I wrote up a list of my Key Financial Goals for 2010

To be totally honest I virtually forgot about that set of goals.    Oops.    One key element in meeting your goals is to actually remember that you have them.   Oh well.  Anyway, I figured why not go ahead and look at the goals and see how well I did.

Here is the list of goals for 2010 that I had in January:

1. Fully fund Roth IRAs by $10,000
2. Pay $20,000 towards Home Mortgage principal
3. Earn 10% return on 401k &  Roth IRA accounts
4. Keep Household Spending flat 
   
5. Cut Discretionary Spending by 5% 

This is how I did on each of the goals:
1. Fund Roth IRA's :  DONE.  My wife and I both fully funded Roth IRAs to the maximum.
2. Pay down house $20k :   Half done.   We made extra payments and cut our mortgage by 

3. Earn 10% on 401k & Roth :  DONE.    Between my 401k and Roth IRA my investments grew about 17% total which is fairly good.

4.  Keep spending flat.   FAIL    Overall our household spending on the 'needs' items increased from 2009 to 2010.   I figure it was up about 6%.
5.  Cut discretionary spending 5%.   DONE.   Actually our 'wants' spending was down 33% from 2009 to 2010.  That was basically due to a large bill for landscaping our yard in 2009.

If I gave myself 1 point for success then I'd count that up as 1 + 0.5 + 1 + 0 + 1 = 3.5 = 70%.    I don't think 70% is a bad grade for meeting goals.   If your goals are so easy you can hit 100% without much effort then the goals are too easy.  


1:  Easy success
It wasn't very hard to transfer $5000 into my IRA.  Having the $5000 in cash in the first place is the only hard part about it.

2: half done by choice
While we only got 'half done' on this one that was by choice.   We could easily put more cash into our house but we've recently decided to stop extra payments on the house for the time being.  So we decided to not reach for this goal on purpose.

3: good success
Getting >10% return on investments is a good goal and I hit well over that.   This one I'm actually happy with my performance.

4 & 5 : fail + success = success
If I combine the 'wants' and 'needs' categories then overall our household spending was down from 2009 to 2010.   So while I failed to keep 'needs' down having the 'wants' drop so much more than made up for it.   I call that a success overall.   Maybe thats a cop out.   I will look further at the increase in our spending in the 'needs' categories and see if we have any real problem areas or if it was essentially due to unavoidable inflation or one off expenses.

Overall I think we did OK.   We could have done a better job keeping household spending low.