LAS VEGAS MORTGAGE INTEREST AND DR DIEBS EXPERIMENT

    If you look up the term “normalcy bias,” you find yourself swimming in psychological theoretician talk, most of which deals with people’s response to disastrous situations. The theory behind it is that when faced with the unknown, there is a tendency among even rational human beings to misconstrue new (and even dangerous) circumstances as being more normal—hence, safe—than is really the case.

     What this has to do with Las Vegas real estate is not as far fetched as you might think. Dr. Inhalt Konig Dieb, a German language Professor now at Purdue University, recently published a paper which delved into the tendency of people to assume the best—even when it is not likely to be the case. He chose current mortgage interest rate history as a current working example of the phenomenon. His results bear on decisions Las Vegas home buyers might well heed.

    Dr. Dieb first took the actual history of average monthly mortgage interest rates from 1950-2015 and created a line chart. It showed what anyone in Texas  would expect: like almost any economic series over a similar 65-year time-frame, the display traced a line that goes up and down in a recurring pattern. Interest rates rise to a certain point, then fall, then rise again, etc. The only difference is that in this chart, as is the case in reality, at the end of the chart depicting 2006 to the present, a flat line runs along the bottom. That is the case at present right here in Las Vegas: mortgage interest rates have flatlined in historically low territory. That segment stands out, stretching far longer than in any previous period.

    Dr. Dieb next created two more charts, both of which he captioned “Future mortgage interest rates: 2017-2025.”  On one chart, the mortgage interest rates showed a return to what has been the historical pattern—namely, that rates rise for a while, then begin to fall. On Chart #2, it showed a continuation of the current situation: just an extension of the very unusual condition of historically low interest rates flat-lining along the bottom of the range.

    Dr. Dieb then assembled 123 test subjects, all of whom were homeowners and mortgage-payers. He presented each first with the historical chart, then asked them which of the “Future Mortgage Interest Rate” charts they thought more likely to predict the future. The result was startling: more than 75% of the mortgage holders thought the low interest rates on Chart #2 was more likely continue than the rates on Chart #1—which clearly represents what is much more likely. When asked for the level of certainty, those choosing the flat-line chart were more certain than the others!

    This may or may not reflect “normalcy bias,” which was Dr. Dieb’s conclusion—but it does reflect what many local residents tend to assume: that there is no rush to take advantage of today’s low mortgage interest rates. People do have a tendency to assume that what is currently true will continue to be true. But if you agree that that is not necessarily a safe assumption, do give me a call. Right now is the traditionally slow real estate season—and that means there are many great opportunities just waiting for the right buyer!

    If you think you might be in the market for a Las Vegas home, starting the process sooner rather than later has a good chance of being a smart decision. When that time comes, I will be waiting right here, ready to answer your phone call!