Ben Bernanke’s Mortgage
“Fools rush in where angels fear to tread.”
–Proverb
“This side appears to be brown.”
–Joke about what a CPA will answer, when asked what color a horse standing 50 feet away in a pasture is.
When clients ask me where I think home prices are headed, my standard Realtor answer is, “in the long run, higher” (safe bet, that, especially if by “long run” you mean more than five years).
If someone presses, though, or wants a more immediate guess, my (only slightly) glib response is, “if you tell me what interest rates, employment, inflation, and U.S. and Minnesota gross domestic product are going to be, I can intelligently forecast short-term housing prices.”
The logic of such a (non)answer is simply this: housing prices are a dependent variable, influenced by a variety of inputs that are themselves quite complicated to forecast.
Like interest rates.
Dependent vs. Independent Variables
Which is why I got a chuckle out of “Forget About Market Timing,” Neil Irwin’s recent NYT piece about forecasting the short-term direction of interest rates.
Irwin’s familiar-sounding take:
“Many, many factors go into setting longer-term bond prices ” and hence mortgage rates ” beyond the outlook for Fed policy in the near future.
Among those factors, in no particular order: inflationary pressures now and in the future; long-term deficits (and hence debt issuance) by the United States government; future bond issuance by other governments and companies with excellent credit; long-term demand for safe assets; long-term economic growth in the United States and abroad; how the American government reforms (or doesn’t reform) the government-sponsored mortgage firms Fannie Mae and Freddie Mac; and, whew, the evolving role of the dollar as global reserve currency.”
You get the idea.
To underscore his point, Irwin offers the refinancing experience of “a guy whose insights into the Fed are better than almost anybody else’s,” who refinanced his 30 year mortgage at 4.25% instead of at 3.25%, the prevailing rate a year later.
The victim of such bad timing?
None other than then-Fed Reserve Chairman Ben Bernanke.
“This Side Appears to Be Brown”
So, if nothing conclusive can be said about the direction of interest rates, does that mean circumspect observers can only mutter, “this side appears to be brown?”
Not exactly.
It’s certainly possible to say at any given time where interest rates are historically.
So, when Paul Volcker was fighting inflation in the early ’80’s, long-term interest rates reached an historically unprecedented 14%.
Since The 2008 Financial Crash and the era of easy (free?) money it ushered in, rates have been historically anemic.
It’s also true that such variables, in the long run, regress towards the mean.
To paraphrase economist Herbert Stein, “whatever can’t continue forever . . will stop.”
But, when exactly that will occur — and what factor(s) will precipitate the reversion — are as difficult to predict as anything else.
As another economist, John Maynard Keynes, once deadpanned, “in the long, we’re all dead.”
