The Digest #109

Published on March 25, 2022

Trouble Ahead for Housing

Mortgage rates have been rising rapidly, as The Wall Street Journal reported this morning. The average 30-year fixed rate mortgage rate is now 4.42% which is up more than a full percentage point so far this year:

Low mortgage rates over the past few years have made it possible for consumers to make higher offers for homes while keeping monthly payments at levels that they could still afford. The majority of home buyers are shopping based on the monthly payment they are able to afford, not the actual price of the home

The monthly payment on a $500,000 thirty-year mortgage loan is $2,041.20 if the interest rate is 2.75%, but rises to $2,459.70 if the interest rate is 4.25%, a difference of $418.20. That’s a substantial difference for most people.

Looking at it from a different angle, if you have $2,000 to budget for a monthly mortgage payment, you can afford to take out a $490,000 loan if your interest rate is 2.75%. However, if the interest rate is 4.25%, your $2,000 budget is only enough to take out a $407,000 loan. 

Of course, interest rates have been far higher in the past. Another article in today’s Wall Street Journal included a chart showing the average thirty-year mortgage rate over the past half-century:

I have owned four homes over the past quarter century. My first mortgage in 1998 had an interest rate of 6.25%, which I thought was terrific since it represented a multi-decade low at the time. In 2000, I purchased a house using a mortgage that carried a 8.125% interest rate, which was uncomfortably high compared to my earlier mortgage, but still not historically unusual. In 2007, I purchased a condominium with a mortgage rate of 6.125%, which again seemed quite low.

In the fourth quarter of 2020, I decided to relocate and initially rented, but the lure of ultra-low rates motivated me to keep looking at real estate listings. Of course, the fact that mortgage rates were hovering around 3% meant that home prices were high, and sometimes ludicrously high. It took six months before I identified a home with a few cosmetic deficiencies that was being sold by an estate at an inflated asking price. The thirty-five year old carpet and worn out paint scared off most buyers and it sat on the market for a couple of months. I was able to negotiate a purchase of the home for what I consider a bargain price and I financed two-thirds of it with a thirty-year mortgage carrying an unbelievable 2.75% interest rate.

Whether my purchase price was truly a bargain is subjective and I could very well be biased. However, a thirty-year fixed rate mortgage at a 2.75% interest rate most certainly is a bargain in today’s rising inflationary environment. However, this benefit will only accrue to buyers who have a long-term time horizon. Those with a short-term outlook could be burned if they try to sell too soon.

I intend to own my current home for a very long time, but if I tried to sell it today, I would be marketing it to a buyer who would likely use a mortgage with an interest rate of 4.25% or 4.5%. That buyer might not be willing or able to offer a price that I would find acceptable. This would be even more true if mortgage rates rise to 6% which would hardly be surprising or historically unusual.

Home ownership can be a terrific leveraged investment for people who have a reasonable amount of certainty in their lives and expect to remain in the same place for a minimum of five to ten years. But buyers who were lured into making inflated offers on homes over the past couple of years merely because they had access to cheap mortgage rates could face serious trouble if they attempt to sell their homes as interest rates rise. 

New Book Review on The Rational Walk 

A Shot to Save the World, March 24, 2022. The underlying science that made Covid vaccines possible is the product of decades of research, described in A Shot to Save the World, a new book by Wall Street Journal reporter Gregory Zuckerman. While society has been let down by politicians during the pandemic, the scientists who were behind vaccine development were clearly on a mission and rose to the occasion. Reading this book was a cure for cynicism. We owe them a debt of gratitude. (The Rational Walk)


Carl Icahn describes how his style is different from that of fellow investing icon Warren Buffett by Kevin Stankiewicz, March 22, 2022. They are simply playing different games with different strategies: “I don’t know that we disagree completely. I think we’re to a certain extent in a different business with Warren. I’m an activist. I look for a company that’s, in my mind, way undervalued such as [Southwest Gas], and there’s something I can do about it. That’s what I enjoy doing. That’s why I come to work every day.” (CNBC)

Edward ‘Ned’ Johnson, Former Fidelity CEO, Dies by Justin Baer, March 24,2022. “Boston’s richest man lived for nearly half a century in the same Beacon Hill townhouse, located a short walk from Fidelity’s old offices on Devonshire Street. He gave to dozens of institutions that supported the arts and medical research, but there are no art museums, hospitals or libraries that bear his name.” (WSJ)

The Pendulum in International Affairs by Howard Marks, March 23, 2022. In his latest memo, Howard Marks looks at the dependence of Europe on Russian oil and gas and the long term trend toward offshoring in recent decades. “At first glance, these two items — Europe’s energy dependence and supply-chain disruption — may seem to have little in common other than the fact that they both involve international considerations. But I think juxtaposing them is informative … and worthy of a memo.” (Oaktree Capital)

How People Think by Morgan Housel, March 22, 2022. It’s well worth your time to read the entire article: “This article describes 17 of what I think are the most common and influential aspects of how people think. It’s a long post, but each point can be read individually. Skip the ones you don’t agree with and reread the ones you do – that itself is a common way people think.” (Collaborative Fund)

The Problem With Note-Taking By Lawrence Yeo, March 22, 2022. I have found that taking notes directly in books allows me to maintain a good state of flow. However, the cautionary note here is worth considering: “…note-taking is our attempt to transition the present moment to an imagined, future self. Whenever you take a note, you are giving yourself permission to let go of a piece of information so it could one day be accessible in the future. In other words, you’re trading the present moment for future utility.” (More to That)

Why Permanent Daylight-Saving Time Is Bad for Your Health, Sleep Scientists Say by Sumathi Reddy, March 23, 2022. “Our internal clocks are connected to the sun, which aligns more closely with permanent standard time, says Muhammad Adeel Rishi, a pulmonologist and sleep physician at Indiana University. When the clocks spring forward, our internal clocks don’t change but are forced to follow society’s clock rather than the sun. DST is like permanent social jet lag.” (WSJ)


Guy Spier Interviews David Sumpter, March 25, 2022. “David Sumpter is a professor of applied mathematics at the University of Uppsala, in Sweden, and the author of a wonderful book called The 10 equations that Rule the World. He talks to Guy Spier about the various applications of mathematics in practical areas of our day-to-day life, such as social media algorithms, graph theory, Bayes’ theorem, and even vaccinations.” (The Education of a Value Investor)

Steve Begleiter — Private Equity, Poker, and Military History, March 24, 2022. “Steven Begleiter is a Managing Director of Flexpoint Ford. Prior to joining Flexpoint Ford in 2008, Steve was a Senior Managing Director at Bear Stearns & Co. He is also a professional Poker player who claimed the 6th place in World Series of Poker 2009, winning $1.59M”(Infinite Loops)

Did Hitler Use Chemical Weapons?

The question seems absurd, doesn’t it?

Of course Adolf Hitler’s military used chemical weapons

Nazi Germany’s concentration camps were run by the Schutzstaffel, better known as the SS, a paramilitary organization integral to Adolf Hitler’s regime after he took power in the early 1930s and continuing through the entire Second World War. Heinrich Himmler, one of the most odious members of Hitler’s inner circle, was Reichsführer of the SS and one of the main architects of the Holocaust. Millions of people were put to death using chemical agents including the notorious Zyclon B

Perhaps Mr. Blankfein meant to say that Hitler did not use chemical weapons in combat? Well, that is false as well. German forces used chemical weapons on several occasions in battles near the Black Sea. 

Perhaps Mr. Blankfein meant that Hitler could have deployed chemical weapons more extensively than he did, which might be plausible. But that’s not what he said.

Perhaps Mr. Blankfein was constrained by Twitter’s 280 character limitation and could not expand his thoughts fully and in a more nuanced way? Sorry, no, his tweet consumed only 96 characters.

Earlier, Mr. Blankfein tweeted the following which consumed 278 of the 280 character limit. However, he should have stopped after the first 22 characters, “I’m not a military guy”.

I don’t think Ukraine should be taking advice from Lloyd Blankfein.

We live in an age when celebrities with expertise in one area suddenly believe that they are qualified to comment on everything under the sun. When you combine this with the immediacy of expressing some random thought on Twitter, the results are often absurd. And highly offensive.

The situation in Ukraine is horrendous and getting worse every day. The situation is not helped by spreading falsehoods about the even worse horrors of prior wars. I’ll give Mr. Blankfein the benefit of the doubt and conclude that he’s merely ignorant. Perhaps some intellectual humility will come in handy the next time he decides to opine on something he apparently knows nothing about, whether shoehorned into 280 characters on Twitter or speaking at the next World Economic Forum at Davos. 

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The Digest #109