Brand New National Energy Bill Signed

The national energy bill that President Bush signed into law last month was a disappointment.

While it allocates generous tax credits -- up to $3,400 -- for the purchase of hybrid and other alternative-fuel vehicles, it doesn't provide for similar windfalls for improvements around the house.

You can get a tax credit equal to 10% of the cost of energy-saving windows, doors, and insulation you buy and install over the next two years, up to $500, but no more than $200 of the credits can come from windows. If you're willing to go whole hog and install an expensive solar hot water system or electricity-generating solar panels on your roof, you could recoup 30% of the cost, up to $2,000 for each, for a total of $4,000 off your tax bill.

But if you're one of the 21% of taxpayers who will be subject to the alternative minimum tax next year, don't bother: You're not eligible for any of the conservation credits. BIGGEST BANG. Generally, it's the quick and easy, do-it-yourself fixes that have the fastest payback.

Big-ticket items like new windows and doors, or adding more insulation to your attic and walls, can cost thousands of dollars. Not only that, it'll take 15 or more years -- longer than most people own their homes -- to see much return from lower energy costs. And don't expect the next buyer to pay a premium for your efforts and investment.

You'll get the biggest bang for the buck simply by replacing incandescent light bulbs with compact fluorescent models. They're inexpensive and use about a quarter of the electricity. Better yet, they last up to 10 times as long, so they're also more convenient when you use them in hard-to-reach places, such as closets, ceilings, and fixtures that aren't easily dismantled.

Programmable thermostats, which automatically adjust room temperature settings, start at $30 and can save you $100 in heating and cooling costs every year. Wrapping your water heater with insulation blankets -- available at Lowe's (LOW ) or Home Depot (HD ) for anywhere from $5 to $15 -- will make a difference, especially for electric heaters or those in unheated areas of your house. THE RIGHT MOVES.

If you're appliance shopping, refrigerators, washers, and dishwashers that qualify for the government's Energy Star mark often cost less than $100 more than comparable models, and that difference could be paid off in three or four years.

The best way to get an idea where you can save a little money is to do an energy audit. In the past, you'd call up your local power company, which would send a technician to pinpoint changes you could make to conserve energy. Now, armed with your utility bills, you can do much the same thing yourself, using tools found on the Internet. At energystar.gov, use the Home Energy Analysis link to get recommendations based on a simple questionnaire about your house. For a more detailed audit, go to Lawrence Berkeley National Laboratory's Home Energy Saver.

If you have any concerns, please call me!!

Midwesterners hear me shout... we have NOTHING to worry about!

In May 2005, the national median price for existing single-family homes reached $183,600, according to the National Association of Realtors (NAR), even as mortgage rates had begun ticking higher. In May 2001, by comparison, the national median was $145,000.
Low interest rates have been the driving force behind real estate's unprecedented rise is not a point of debate among economists. Quite simply, lower rates mean buyers can afford higher home prices.

It stands to reason, then, that the opposite would be true. Yet, many economists have been arguing that higher rates won't hurt housing.

"The reason interest rates are higher is that we are in a growing economy," said NAR chief economist David Lereah in a recent release. The thinking is that rising salaries and stock market returns can create enough wealth to offset the negative effects of rising mortgage rates.
"People are feeling much more financially secure," said Freddie Mac chief economist Frank Nothaft. "Families who are more financially secure are much more likely to buy a big-ticket item, like a house."

Besides, mortgage rates are still near historic lows. "Even though we've seen [rates] rise since March, 6 percent is an incredibly cheap rate," Nothaft added. He expects the 30-year fixed rate mortgage to gradually increase to 6.5 percent by the end of the year and hold steady through 2005, even as the Federal Reserve Board increases short-term rates.
Others aren't nearly so optimistic.

"There has never been a run up in home prices like this," said Dean Baker, co-director of the Center for Economic and Policy Research.

Historically, rental prices and home prices have increased at about the same rate as inflation, he said. Over the past few years, though, home prices have been "hugely out of line with rental prices and the overall rate of inflation."

As with all bubbles, said Baker, buyers are ignoring fundamental values and buying simply because they think prices will continue to go up. The psychology is similar to that seen in the stock market in the late 1990s, he said, but that can change with higher rates.
In a recent report called The U.S. Housing Bubble -- The case for a home-brewed hangover, HSBC Securities U.S. economist Ian Morris also made the case that home prices are out of whack when compared to rental prices, income and other key indicators.
Home prices, he warned, could decline by 5 percent to 10 percent nationally over the next five years. "Expectations of future house price appreciation are spectacularly, and unrealistically, high," he said.

These effects may vary by region – California, Florida and the Northeastern Coast appreciation rates may be in danger while the Heartland of America (the Midwestern states) continue to play “catch-up” with the rest of the nation.

Ultimately, home prices reflect the overall economic strength of a market, said David Stiff, director of economic research for Fiserv Case Shiller Weiss, though there many other factors that can affect home prices. (See "Why some markets are hot.")

"I'd be most concerned in places where housing affordability is an issue because the effects of rising interest rates are even more pronounced," said Stiff.

In other words, higher rates may not mean as much to buyers in South Bend, Ind. as they do to buyers in San Francisco.

Median home prices in South Bend, Indiana were recently $82,000 according to the NAR, while the median household income was about $40,500 per year, according to 2002 U.S. Census Bureau estimates for St. Joseph County.

Assuming a buyer can put down 20 percent – or $16,500 – the monthly payment for principal and interest would be $392 at the current 6 percent rate.

If rates jump to 7 percent, the mortgage payment would increase by $43, or by about 1 percent of median income.

Median home prices in the San Francisco Bay Area were recently $597,300, while median household income was about $68,000 per year.

Assuming a buyer puts down 20 percent – or $120,000 – and qualifies for a 6-percent rate (though jumbo loans typically carry a higher rate), the monthly payment for principal and interest would be $2,859.

If rates go to 7 percent, that payment would increase by $314 a month, or about 5 percent of median income.

Of course, few buyers earning the median income could afford to pay for the median priced home, which is why San Francisco ranks among the least affordable areas in the country, according to the NAR.

The bottom line for buyers… Don't spend more than you can afford. If your mortgage payments leave you "house rich, cash poor" you'll have a tougher time waiting out a decline in home prices, if there is one.

Use home equity with care. Keep in mind that if you financed your down payment by taking out a home equity line of credit, your interest rate is not locked in. The Fed is expected to continue raising short-term rates, and that will have a direct impact on your home equity debt.