08/23/2023
Here are two real estate news headlines from The New York Times:
Mortgage Rates Too High? (Blame the Fed, Wall Street and Your Neighbor.)
With Rates This Low, Where’s the Boom?
Before you read the next sentence, try to guess the 30-year fixed mortgage rate at the time each article was published.
The first story appeared last fall, when rates surged to 6.95%. The second story, however, is from 1993, when rates were so “low,” they dropped all the way to… 7.10%.
What’s going on here? These headlines illustrate the power of perspective. Our brains rely on mental shortcuts to make judgments and solve problems. But sometimes, those shortcuts lead us to inconsistencies and flawed conclusions based on incomplete information.
How recency bias affects expectations
The big idea: Recency bias occurs when we give greater value to newer information and undervalue older information. As a result, people expect patterns to form based on recent trends even when there’s no evidence to support them.
For example, potential homebuyers may believe 3% mortgage rates are normal just because they hovered there during the pandemic. Or they might anticipate that home values will keep skyrocketing because they’ve continued to increase lately.
What the data shows: It’s hard to completely escape recency bias, but research suggests it impacts people differently. A 2019 study on investing found that sudden stock market changes influenced younger people more than older people. It also impacted individuals with lower incomes more than those with higher incomes.
Interestingly, people who worked with a professional advisor stayed more consistent with their approach during market turmoil. This could apply to real estate agents as well – setting clear goals and providing education can help clients stay the course.
Remember that current market conditions won’t last forever. Past performance is no guarantee of future results, and eventually, we will acclimate to a new status quo.
In the 1980s, the 30-year fixed mortgage rate never dipped below 9%, and for most of the decade, it stayed above 12%. By comparison, today’s rates don’t look so high anymore.
