There’s A Strange Psychological Phenomenon That Causes You To Guess Wrong On Mortgage Rates

April 25, 2019 by Dan Green

The human brain is unreliable in a lot of ways, and when you’re buying a home, you’re especially vulnerable to #GrayMatterProblems.

One great example of how our brains can trick us is how home sales tend to spike whenever there’s an unexpected jump in interest rates. It’s as if buyers think it’s the last possible chance to buy houses on the cheap.

Except interest rates don’t work like that!

Just because interest rates rose today, that doesn’t they’ll also rise tomorrow. Interest rates move randomly — like stock prices. As human beings, though, we’re susceptible to the belief that today’s events are likely to re-occur tomorrow. 

This is known as the Gambler’s Fallacy, in psychological circles. It’s the belief that random events are falling into a predictable pattern.

A coin flip that lands “heads” six consecutive times is still a 50/50 shot to go “heads” the next time you flip it — just like the next day in mortgage rates has nothing to do with what happened previously.

Consumers don’t necessarily grasp this concept.

According to Fannie Mae, which talks with 1,000 people nationwide each month as part of its National Housing Survey, Americans are consistently terrible when it comes to the future of U.S. mortgage rates.

Consider that 12 months ago, 960 out of the 1,000 people surveyed said mortgage rates had bottomed out, and would not go any lower than where they were on that day.

960 out of 1,000!

And, then, mortgage rates did go lower.

Errors like this are pretty common with the Fannie Mae survey and it shows how our decision-making abilities are affected by subconscious bias; and, that bias affects our ability to make good financial decisions.

Don’t choose to buy a house (or not buy a house!) based on what interest rates are doing, then. Interest rates trick your brain. Buy a house when it fits your goals and aspiration.


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