Archive for February, 2012

Reasons to Stay Out of The Housing Market in 2012

Housing Market 2012The media has been fairly upbeat about housing market for the start of 2012, so is now a good time buy? I for one am optimistic that the housing market may stabilize a bit more in 2012, but I am not sold on a true housing recovery.

If you take a look at the S&P/Case-Shiller Home Price Index, both the Composite 10-city and Composite 20-city are both down considerably in December from the previous year. Honestly, no real indices or indicators are showing any housing recovery at all. So far it appears to be all speculation that the housing market is going to recover in 2012.

I for one am seeing some activity in my local real estate market, but it appears it is mainly people buying up cheaper homes and condos. Overall I would say things are bleak. Here are a few things to consider before buying your first home or real estate investment in the 2012 housing market.

1. Interest Rates

Interest rates are appealing because they make your payment smaller, but realize that if (and most likely when) interest rates go up, buying power goes down. If you buy a $200k home on a 30 year mortgage @ 4%, your payment will be  $954.83 a month for your mortgage. If interest increase to 6% and you go to sell your home, the buyer would have to get your home for a purchase price of around $159,200 to have the same payment that you had at 4%. That is a potential $40,800 loss on your home. This maybe mitigated by the fact that the economy is getting better (implied by rising interest rates), but there is a good chance you are taking an equity hit.

2. Brokerage Fees

You purchase your home for $200,000 and later decide you need to sell the home, be ready to pay 6-7% to get out of your home. If you got the same price that you paid, be ready to take a potential $12,000 to $14,000 cash loss.

3. Location

The “place to be” might quickly become the “place not to be”, especially in this economy riddled with foreclosures. Even nice neighborhoods can turn quickly.

4. Career

You might be locking yourself into a job or career path when you commit yourself to a home. Potential career opportunities may be missed simply because you aren’t able to relocate. If you are committing to a home for 5+years, you should also be committing to your job or the area for employment for that timeframe.

5. Neighbors

While renting you can easily pick up and leave, but with owning you are stuck unless willing to endure the potential pain of selling and moving away.

6. Hassle

Yard maintenance, redecorating, repair, and all of the hassles that come with a home are expensive and time consuming. Are you ready to give up weekends?

7. Taxes

You might be happy with your monthly payment until you realize that it will increase every single year, similar to rent. Local levies may pass and potentially cost you $100’s a year in additional taxes. You will also hear the expression “You don’t really own your home… stop paying your taxes and see if you own your home.” Even if you pay off your mortgage entirely,  sadly you will never be payment free.

8. Depreciation

Let’s not forget that many experts are estimating the housing market will continue to go down in 2012 and even beyond.

9. Inflation

If the housing market goes up 0.3% in 2012 and inflation was 3.3%, you effectively lost 3% that year. Your 200k home is now worth $200,600 but adjusted for inflation it is only $194,191. The housing market requires appreciation equal to inflation to make any sense investment wise.

10. Leverage

Owning a home is a highly leveraged position, especially for those who purchase with less than 20% down. A small % downturn can potentially put you underwater very quickly. With only 3.5% down on that 200k home, if the housing did decrease by another 8.5% you would be $10,000 underwater on your home. Leverage can destroy people, especially people very little cash reserves.

11. Equity

People tend to drastically overestimate how much they are building when it comes to equity. I personally earn about $168 a month or $2016  in equity on my $117k mortgage. The amount of each payment that goes towards principle will increase, but not as much as you might think (mine is increasing at about only $.60 a month!). In ten years I will owe $91,925.91 ($25,075 of equity built) if I make standard payments. That might sound like a lot, but realize that is over a decade of your life.

12. Opportunity Cost

If you make payments on your home for 30-years, you are locking your cash into equity into your home. If you would have taken that money instead and put it into another investment, there is a good chance you could have outperformed your mortgage. Remember that a 4% is approximately 3% effective rate if itemizing.


This isn’t to discourage you entirely from owning a home. People will argue that owning a home isn’t an investment, but it is important to  understand the real world financial consequences of getting involved with the housing market in 2012

 

No Interest Savings Account

No Interest Savings AccountWith interest being as low as it is, no interest savings accounts almost make sense. Think about it, if you have $2500 balance in your saving account and you are earning .8% on it, that’s only $20 a year. It might not even be worth the tax paperwork!

I however have a no interest savings account, but not my choice. A while back when I refinanced my house I had to open an account to view my mortgage online (the one downfall of my bank). I was kind of bummed about it, but the bank teller told me “If you open an account today, you get $50 free.” So I opened an account with a dollar.

My $51 savings account just received it’s first interest adjustment, which is at .146% a year or about .0122% percent monthly.  My interest earned in the last month was $.006222. That is right,I didn’t even earn a single penny! This account does have checking by the way, but it was advertised to me as a dual savings/checking. I’m well aware that I could be getting about about .8 to 1% on a good online savings account, but I have no interest in taking the time to set it up, because I keep my savings and checking accounts very lean.

I wonder if I can ask my bank not to mail me a paper print out and just deposit the postal into my account. Stamps are going for $.45 which would be about 10.59% a year if they would just deposited the postage money into my account (since apparently they send these monthly). I also have to believe you can factor another $.10 in paper, ink, envelope,  and someone physically handling this paper. That puts us up to 12.94% APY return.

Now I realize they would never actually do something as stupid as deposit the ink, paper, postage, and handling money into my account – but do you think I will earn $.01 next period since I earned $.006 that wasn’t realized this period? Do I even want to earn it? I am potentially look at about $.07 in interest for the year. I can’t believe this bank doesn’t have a policy to not issue statements for accounts under a certain amount. What a waste of resources.  It is possible they are forced to send out statements by other regulation, but that’s just as sad.

I would rather not earn interest on this account, keep your $.07! I don’t want to have another form to report on my taxes. Also, please stop the earth from making a sadface and save a few trees.

Aldi Shopping Store, Is It Cheaper Than Kroger?

Aldi shopping store is chain of stores first started in Southeastern Iowa in 1976. They claim their prices are the lowest around, but I was not entirely convinced. I did a quick shopping comparison to put Aldi Shopping Store prices versus Kroger Prices.

How was study was done? Un-scientifically, of course. I went in the stores and wrote on paper various randomly spotted items and their prices in the Aldi shopping store, and then I went to Kroger to match that item. Because the products were not necessarily the same unit size, I boiled the information down to price per unit in the spreadsheet found further below.

I also discounted Kroger’s prices by 4%, because you are able to use a credit card (that pays 2%) and if you utilize their gas perks, you get approximately 2% back.  At Aldi shopping stores you must pay in cash or debit, and Aldi shopping stores offer no perks.  The results are below. I am sorry they are hard to read, if you want the excel file click here.

 

aldi shopping stores

aldi shopping store

Aldi vs KrogerI then took the average of the product sizes from both stores and multiplied it by the price per unit (for example if Aldi’s sold a 10lb bag and Kroger sold an 8lb bag, I made it appear as if you were buying 9lbs of their products at their unit prices). This was to ask, if you were to purchase one of each item, how would it compare? Results to the right.

As you can see, Aldi’s was cheaper in this non-scientific sampling by $10.35, but I want to take a closer look at these results.

There are some questions you need to ask yourself.

Does Aldi shopping store have the quality and selection that you want? Are you going to end up traveling to another store for certain items?

Are you traveling a long distance to get to your Aldi shopping store? If yes, factor in the gas and wear and tear on your car.

How big are your families needs for basic staples? Aldi shopping store had some items that were clearly price winners like bread, milk, sugar, flour, potatoes, onions, and peppers. If you are a larger family your savings might be much more relevant.

Are you good at reading labels?
On another financial blog I read, the blogger stated that the one of the better finds he found in Aldi was the frozen chicken breast in bag. If you look closely at the bags in Aldi, the bags was 2.5lbs versus a 3.0lb Kroger bag that was actually cheaper per unit (Note: this item was on sale).

Are you good at capitalizing on sales?
Kroger and other major chains can be close to the same and even better deals, but usually only if you are able to stock up during deal times. For example fresh chicken during this sampling was considerably cheaper at Kroger, but only because it was on sale.

Does Your Grocery Store Give Coupons?
I get coupons from grocery via mail that are often very good deals. The last time I received coupons I got a coupon for free peanut butter and free frozen fruit along with coupons on items that I already purchase. I would guess that I get them about once per quarter and they net me anywhere from $5 to $15 each time.

 


 

Ultimately I would argue that Aldi shopping store really is not that much better than Kroger, for me. Yes you might have to wait on sales and stock up on certain items at Kroger, but Aldi Shopping Store simply does not have the selection that I want in my grocery store and my time is valuable to me.  I do not want to make two trips to two different grocery stores. I know that Aldi shopping stores usually have fairly decent selection, and that it has gotten much better in recent years, but it still is not enough.

If I was to utilize the best prices from both Kroger and Aldi shopping store, I think I could save roughly $30 a month, but it just is not worth the hassle to me. I also think I could probably save about half of that estimated $30 a month just by taking an very infrequent trip (once every 2-3 months) to Aldi’s  to stock up on some of the really competitively priced items (Tortellini, Milk, Plastic Wrap, and Foil particularly) but when it comes to the normal grocery store trip, I plan on sticking to my Kroger.

I do however see that for very large families, Aldi shopping store has much more appeal. It ultimately comes down to you running the numbers and assessing what you and your family like and dislike about each grocery store. Just do not assume anything and be sure to run the numbers. Also don’t forget to not shop hungry!

Option Straddles are when an investor takes both long and short positions on the same security via options. To a new investor, you might be confused on how taking both up and down would net any gains, but in reality the idea is very simple.

For this example, we will take a look at my favorite stock, Sprint Next Corporation (Symbol: S). The stock is currently trading at $2.47 (roughly $2.50) and the option changes are shown below for expiration Jan 13th, 2013. The “Buy Calls” are outlined in green and the “Buy Puts” are in orange (these are the prices you will have to pay to obtain the call and put options).

option straddles

Assuming we wanted to take a “straddle” position on Sprint Nextel Corporation, we would most likely take a position of “Buy Call” @ Strike Price $2.50 AND “Buy Put” @ Strike Price $2.50. The cost of our options are $.51 and $.54 cents respectively, totally $1.05.

I believe the best way to understand this concept is through examples.

What did you purchased with these options in simple terms?
You have paid $.54 for the right to claim ALL upward movement of the Sprint Nextel Corporation Stock.
You have paid $.51 for the right to claim ALL downward movement of the Sprint Nextel Corporation Stock.

Now time for some examples.


 

Example #1: Stock goes up or down $1.00

The stock appreciates $1 a share. Your “Call” Option is now worth $1.00 more because you can buy the stock for $1.00 less than current market prices. Your “Put” option is sadly now worthless because it entitles you the right to sell your stock for $2.50, but the market is currently paying $3.50 per share!

Overall net gain: $-1.05 (cost of options) + $1.00 appreciation of “call” option = –$.05 loss. This example would be the same for the stock going down, but it would be vice versa. Your “put” option would have appreciated $1.00 and your call would have depreciated to a worthless value.


 

Example #2: Stock Finishes on the Strike Price ($2.50, +$.03 overall)

If the stock price finishes on the strike price, both options have no value. You have the right to buy or sell the stock at the current market price, which is the same right everyone else can execute without an option. Your loss? The entire premium you paid for both options – $1.05 loss.



 

Example #3: The Stock Goes Up or Down $2.50+ a Share.

Suppose the stock completely tanks to $.00.  You own the right or option to sell (“put option”) this stock for $2.50. What is your overall gain going to be?
$2.50 selling price$1.05 premium = +$1.45 gain (or +138.09%)

The same overall net would occur if the stock went up $2.50 a share, but once again you would simply sell or execute the “call option,” instead of the “put option.”

Also it’s important to note that although the stock could only go down $2.50 a share, this stock could go up an infinite amount, which leaves your straddle the ability to generate infinite returns.


Ultimate a straddle comes down to this, you want EXTREMELY HIGH volatility. If you purchased a straddle today on Sprint Nextel Corporation, you would need the stock to move roughly $1.05 a share before breaking even. I even drew you a nifty picture.

straddles

So why would you want to use a straddle? Because you are utterly clueless to which way a stock is going to move, but you are fairly certain it is going to move.  Maybe you think earnings will be weak or strong for a company or that the macro economic factors will hurt or help the company. Of course there are multiple strategies and trading styles that use straddles, but the take home message is that with straddles, you need price movement.

You might think, why wouldn’t everyone just buy straddles for all of the crazy high volatility stocks? Because the higher the volatility, usually the higher it costs to hold a straddle. In the example with Sprint Nextel Corporation, you are paying $1.04 for the straddle, which is 40.78% of the stocks’ value! Remember if the stock doesn’t move, you could lose 100% of the premiums and walk with nothing.

The one research tool anyone going towards utilizing straddles may want to consider is using the Beta Factor of a stock. Beta Factors represents how the stock reacts to the market as a whole, Beta 1.0 being equal to the market. This factor is an estimate, but generally speaking the higher the beta the better for straddles.

Find Options Interesting? Let me know and check out some of my other articles reading to trading options.

Disclaimer: Nothing on this site should be used for making decisions of any kind. This site is for educational and entertainment purposes only. Always consult a professional financial advisor before making investments.

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