The Unexpected Pitfalls Of Getting Exactly What You Want

Market psychology: the only mystery more elusive than Bigfoot

Insider

Contributing Writer

As a follow-up to my overcapacity discussion last month, I don’t know how many times I have heard the phrase “higher for longer” from market analysts in the past six months, but I can tell you that the number has exceeded single digits by plenty. Everyone is accepting the fact that it is going to be a long, cold winter in the mortgage and real estate business. Or is it? The Fed held rates steady at the start of November despite a steady stream of strong economic news, and a few days later, we had a “weaker” jobs report.

Interest rates reacted like the sun was shining, moving down approximately one-half of 1% in a matter of a few days. Was this:

• An overreaction to the Fed decision and the jobs report?

• A technical bounce-back since rates had moved up so quickly the previous weeks?

• The start of a turn for the better?

If I knew the answer to these questions, it would be easier to plan for 2024. In essence, all of these scenarios are plausible — at the same time. It was likely a technical bounce that stemmed from an overreaction, which still could be signaling a change in direction. Confused? I did not say that predicting the future was all that easy.

The point is that markets are all about psychology, and a change in psych can happen at any time for any reason. In reality, one moderate (it was not weak) jobs report does not make a trend. If we see two or three of these, that means the economy is finally slowing down. So, I would advise waiting a few more months before forming a conclusion. Certainly, Fed Chairman Powell was not giving up any ground in his fight against inflation as indicated by his speeches on the topic.

But even if the jobs market picks up again, that does not mean the psych has not changed. Certainly, there has been a sour mood hovering around the bond markets for months and it has gotten worse, not better over time. We need that sour mood to change for interest rates to come down. And as we have seen by the early November rally, the Fed does not have to lower rates for mortgage rates to come down. All they need to do is not sound so pessimistic.

Perhaps a slow and steady rate decline would be better.

On the other hand, be careful regarding what you wish for. If rates do bounce back down fairly quickly — let’s say in the high 5s or low 6s — there is a lot of latent homebuyer demand out there. If buyers pounce quickly and there is no pickup in inventory, housing prices could start rising quickly again. What does that cause? Inflation! Housing inflation is a big part of the inflation picture — much more important than energy prices. Think about it — how much of your budget goes toward rent/mortgage payments and how much to gas and electricity? If this spike were to happen, that could cause the Fed to sound pessimistic again and even raise short-term rates higher. Catch-22. Perhaps a slow and steady rate decline would be better.

Back to planning. Predicting for the future is tough. Together with my last month’s article on overcapacity, we can see how this uncertain future can make an owner or manager of a mortgage company skittish when rolling out their business plan for 2024. I have always favored three plans instead of one:

• The worst-case scenario

• The medium-case scenario

• The best-case scenario

This provides a range of possibilities. In other words, you need to be ready for anything that can happen in 2024. And based on my 40 years of experience, anything can happen!