great expectations
(2024-Feb-12)
Yesterday during the super-bowl party you were at, no doubt your heard, overheard, or even said it yourself that interest rates are coming down and housing prices will head higher again, in a couple of more months. At least within residential real-estate (where everyone is an expert of sorts) there is also good “reason” to think that as well: Few can afford housing prices at these rates.
The truth of the matter is that the super low rates of the last 10-15 years are not typical of longer history. The annual interest rate of, say, the 10-year note is by-and-large contained between 4%-8%. There is truth in the statement that real-estate is unaffordable at these rates, but only because real-estate has risen much faster than average inflation-rate, but perhaps sometimes the proverbial mountain will come to the prophet as the real-estate prices may have to recon with affordability; if only the central bank would let free markets sort things out. Who remembers in the 1980s when the price of real-estate in Tokyo was easiest quoted in mm2!
A market free of perpetual interference (up or down) by the central banks remains a tall-order. Regardless, beware of “expectations” of the crowd. The graph below (from an interesting article in The Economist) is both an excellent illustration and instructive.
Source: https://www.economist.com/finance-and-economics/2024/01/24/investors-may-be-getting-the-federal-reserve-wrong-again
