The commercial will be right one of these days. Whether “one of these days” is tomorrow, next week, next year, or next decade, we can’t say.
Lenders have warned repeatedly in print and radio ads over the past five years that higher interest rates will soon befall us. The rationale is predicated on historically low interest rates (which can’t last) and the Federal Reserve raising interest rates (which it has).
Here we are in 2017 and mortgage rates, though not at historical lows, are still low by historical standards. Rates have trended higher in recent weeks, but the trend is best measured in basis points (one basis point being 1/100 of a percentage point), not full percentage points.
Consumer price inflation continues to trend stubbornly low by Fed standards. The Fed is fixated on consumer price inflation continually rising 2% annually. Something it has yet to do. What’s more, few market participants expect a ramp-up in inflation. Rate remain low at the long end of the yield curve.
A quote of 4% on a 30-year fixed-rate mortgage is the prevalent quote across the country, according to Mortgage News Daily. Depending on the supply-demand paradigm, time of day, lender incentives, alignment of the stars, and what not, 3.875% will materialize. If recent past is prologue, 3.875% (and lower) could materialize more often.
We’ve mentioned more than a few times that this lending market has been characterized by a repetitive cycle. The market has oscillated between peaks and valleys every few weeks or so: The December peak gave way to the January valley. Rates rose from the January valley to the March peak, which gave way to an April valley. Rates rose from the April valley to the May peak, which gave way…. You get the picture.
The latest valley occurred in early September. The latest peak was last week. Rates have eased since.
Does another valley loom?
We’ll give our best answer, as equivocating as it may be, it could: The stock market has been lackadaisical of late. Third-quarter earnings exceptions have ratcheted lower. Gold and silver prices have trended higher. (The opportunity cost of holding gold and silver falls when market participants expect falling interest rates.)
The real question is to float or lock? We’re not alone in noticing the peak-and-valley cycles that have occurred this year. Borrowers who have anticipated another valley by floating have been disappointed not to see a robust bond-market rally, which would lead rates lower.
This isn’t to say that locking is the default position. All it takes is one slice of bad news — an earnings miss by a major corporation, a downgrade in GDP growth, another North Korea dust-up, a political scandal — and we could get that bond market rally that drops us into another valley. It’s not like it hasn’t happened before.
Buy Low, Sell High (Easier Said Than Done)
It sounds so simple: buy when others are selling, sell when others are buying. So simple, yet so few can do it. Contrarianism is contrary to most people’s nature.
But it’s not contrary to everyone’s nature. Bloomberg ran a story this past week on investors buying flood-damaged Houston homes for forty cents on the dollar. Bloomberg goes on to tell us that such a contrarian strategy has paid off in the past. Buyers were able to take ownership of New York co-ops and office towers at a deep discount when the city was on the verge of bankruptcy in the mid-1970s.
More recently, contrarian investors snapped up residential properties on the cheap after the 2008 financial crisis. We remember those days. Though despair filled the air, we continually implored people to focus on the full half of the glass. This, too, will pass, we reasoned, and so will the opportunity to buy real estate so cheaply. The housing market today has proved us right.
The takeaway from Bloomberg’s Houston story is to venture into areas where other people are afraid to venture. Instinctively, most of us want to remain with the herd and adhere to the trend. But if we can see things the way they could be and not as they are and act accordingly, a lot of money can be made. We expect a lot of money will be made by Houston’s intrepid real estate investors.