We quoted a refinance to a borrower last fall with a rate in the 5% range.
It was no cost, and it would have saved her thousands of dollars – but she insisted on waiting for rates to fall further because “the Fed is cutting rates.”
Needless to say, rates shot up 1% after we quoted the refinance – and that borrower has foregone thousands of dollars of savings.
If you type in “timing” on the search bar on The JVM Lending Website, you will see at least 10 blogs about this topic.
Why I Hit “Timing the Market” So Much!
I hit this topic so often because I see buyers and borrowers get burned so often – when they mistakenly believe they can time the market.
Here are some of the stories I repeat:
- A borrower in contract insisted that rates were going down in the near future, only to see them increase by 1/2%. She was then forced to take the higher rate because she had to close.
- Warren Buffett often tells us that he never tries to time the market.
- I have two close friends who bought when the market peaked in 1989. Neither did anything when their values corrected 30% – and both ended up with seven figures of equity 30 years later.
- We had a borrower making low-ball bids in the hottest market in the country (North Oakland, CA) in 2012 because “the market was going to correct…” Yeah, it didn’t. She was soon priced out of that market altogether, and the homes she was bidding on are now worth well over twice what she was offering.
- An extremely sophisticated hedge fund bet the farm on increasing oil prices, only to see them fall (causing the hedge fund to go belly up).
What Are the Variables That Move Markets?
Besides the numerous economic reports (GDP, Job Reports, Consumer Sentiment, Inflation, etc.) that can significantly move markets, there are all kinds of other events that nobody can account for.
COVID Anyone? COVID was supposed to crash the market, remember? But ultra-low rates and a shift to work-from-home policies sent values through the roof.
Elections? The consensus belief in 2016 was that Mr. Trump’s election would put the economy into a tailspin and cause rates to plummet. But rates shot way up instead. I have two friends who lost millions when they pulled their money out of the stock market because they were so certain that the economy would crash.
Fed Cuts? Sometimes Fed cuts result in lower rates, but sometimes they don’t. Last fall, Fed Cuts resulted in 1% higher rates.
Inflation? While inflation pushes rates higher, it can also push real estate values higher – like we’ve seen over the last few years. Hard assets like real estate typically increase in nominal value with inflation.
Liquidity Injections? This is an obsession of Michael Howell (of Cross Border Capital). When Central Banks inject cash into the financial system (like they almost always do in one form or another) asset prices (stocks and real estate) almost always rise – no matter what the economy is doing. This factor is huge.
Wars? The outbreak of wars usually pushes rates down, as nervous investors move to the safety of bonds. But if a war threatens major commodity supplies (oil, grain, minerals), bond traders might see the inflation risk as the bigger factor (pushing rates up).
Tariffs? Tariffs are supposed to slow down the economy – which would normally push rates lower. But Mr. Trump’s recent tariff announcements pushed rates way up instead because of perceived inflation risks and/or because overseas investors dumped dollar-based assets (like Treasuries) for a variety of reasons.
Media Reports? Media reports are often very wrong because they lag the market, they are politically biased, or they are too clickbait-oriented.
Final Point: Nobody has a clue which way home values or interest rates will go, as we’ve seen both go in the opposite direction that everyone predicted numerous times now.
If hedge funds with all their tech and data can so rarely predict the market, there is no way consumers ever can.
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