The new CPI report came out today. at a .43% monthly increase. This means I-bonds starting November first will only yield 6.472%

October 28th is the last day to purchase I-bonds at a 9.62% APY. Here are some things you need to know.

Yield

The 9.62% yield is only for the next 6-months. I-bonds get reassessed every 6-months. Therefore, to establish what your annual yield will be here is the simple math:

Yield until the end of October – 9.62%

Plus the yield starting in November – 6.472%

equals 8.05% for the next year.

More Complicated Yield

There are a couple of things to know about I-bonds.

If you cash out at exactly 1-year

You lose 3-months of interest if you cash out before 5 years. So your effective yield will be 8.05% minus 3.236% divided by 2 (only half the year) then divided by 2 again to get the 3-month yield equals 1.618%. Making your effective yield if you cashed out in 1-year 6.432%

More complicated formula

I-bonds actually compound semi-annually. So your first 6-month yield will be 9.62%. Let’s say you invest $10,000 (the maximum). After 6-months you will have $10,481. So the second half of the year you’re actually earning 6.472% on $10,481 not your original base of $10,000. So the second 6-moths you would net $339.17 + $10,481 ( your initial investment plus the first 6-months interest) This gives you an effective return of 8.2%, not the initially calculated 8.05% from our first formula.

Even more complicated

There is something else to keep in mind about I-bonds. They don’t actually need to be purchased until the second to last business day of the month. This means you essentially get a free month of earned interest! Even if you buy an I-bond on October 28th it is technically just an October I-bond. The date is not relevant. So it will actually mature on October 1st of the following year. Not the original date of purchase.

So the math for calculating this is just our original 8.2% divided by 12 to get our monthly yield of .68%. You can then multiply this by 12 and divide by 11 to determine the actual yield after 12 months given that you only invested for 11 months. This works out to be 8.95%

Can’t you only purchase $10,000 in I Bonds per year?

Yes, but no. Most people believe that you can only purchase $10,000 in I Bonds per year. This is in fact true. However, most people also do not realize or take advantage of the fact that LLCs can own and purchase $10,000 of I bonds per year. There are multiple references to I-Bonds being owned by LLCs on their website. In Arizona, it takes 5 minutes and $50 to set up an LLC.

Questions and Answers about Series I Savings Bonds

Treasury Direct entity accounts

As I look over the real estate numbers in Arizona this week, I noticed that people are asking on average about 15% more than what houses sell for. In fact, we had 4,427 price cuts last week alone. This is 23% of the 19,225 houses available for sale.

You can see from the average sales price houses are selling for $277.51 they peaked in May at $305.96. So they are currently 9.3% off from their high.

Now here goes the issue. The average price people are listing their house for sale for is $325.15 or about 14.7% too high.

So what do they do? They slash prices. 23% of house prices were cut last week alone. This leads to the next problem. Buyers now know the sellers are “desperate” or at least willing to reduce their price. So they no longer want to pay the asking price. They know they can offer less. This is why we will continue to see prices going down and inventory going up. So there is the main driver of low prices, the FED raising rates, and the secondary driver, psychology.

To confirm you can see the listing success rate is plummeting. It is now back to levels we have not seen since 2010.

The real estate market continues to get wrecked by the FED rate increases. From a valuation perspective. But most people I would argue don’t care about the price of a house as much as they do about the monthly payment. This is a combination of price and interest rate. So I wanted to create a dataset that shows the average house price with the median sales price. This will tell you what the average person’s monthly mortgage payment is.

So here goes. The current average 30-year mortgage rate is 6.29% as of September 22, 2022.

We can take that and use Google Sheet’s formula to determine the monthly payment. It looks like this.

=-PMT(INT RATE/12,30*12,SALES PRICE)

I’m assuming zero down payment simply to hold this variable constant. What you can see here is the monthly payment currently is $2,728. This actually tops June’s monthly payment of $2,714. This means monthly mortgage payments adjusted for increased interest rates have not actually fallen at all. They are at their highest level ever.

This data is for Arizona specifically.

So while house prices are actually down 20% from their $480,000 median peak. Mortgages are actually higher.

The entire dataset, worksheet, and formulas can be found here.

So where do I think prices go from here?

If you look at the current 1-year average in mortgage payments the amount is $2,353. If we reverse the equation we used above with current rates then houses would need to be $381,00 just to revert back to the 1-year mean. This would mean we would need a 13.6% drop from this month’s current median sales price of $441,125 or a 20% drop from the peak price of $480,000 in May. Remember this is simply to get back to the 1-year average mortgage payment price. Market’s oversell and overshoot to the downside. The psychology of sellers with over 4,000 price cuts a week could mean things will get brutal.

Price cuts last week just went to their highest level in years. This is a horrible sign for things to come in Arizona. But it gets worse…

Active weekly listings are also at their highest level in years. In 2019 there were 18,562 houses for sale. We now exceeded that with 18,605 last week. Meaning there is a huge supply.

We are now 8% off the peak average sales price of $305.97/sq ft. Last week’s average sales price sat at $282.41/sq ft

What I think is more interesting is the average weekly list price is down 20% off its peak. Currently, it sits at $324.73/sq ft with the peak hitting $401.47. With the average sales price per sq ft at $282/sq ft and the average list price at $324/ sq ft there is a huge disconnect between people listing their houses for sale and what they are actually selling for. The average seller has to reduce their price by 13%. This is sure to get worse once the FED’s latest rate increases from last week take hold.

The listing success rate hasn’t been this low since 2014. Two more percentage points and we’re back to 2011 levels.

It appears a lot of sellers who “don’t need to sell” have just given up trying.