A different, and more drastic example will help to further illustrate the point, courtesy of Nassim Taleb.

In his book Antifragile, Taleb uses the example of the First Gulf War to highlight the dangers of falsely attributing causal links in markets.

As with any war or instance of geopolitical unrest in the Middle East, oil gets caught up in the middle of it, and the First Gulf War was no exception. Taleb recounts, through the character Fat Tony, how the analyst community and financial media were predicting a rise in oil prices should war break out.

Consequently, resources were devoted to studying and trying to ascertain the probability of the US taking military action, and how quickly such action could last.

In other words, they were focusing on the possible event of war, to the exclusion of the oil market itself.

The war here, in the minds of these folks was the primary phenomenon, and the effect on oil prices the secondary one.

In their minds, if war broke out, it would cause oil prices to rise. This is after all, a notion that is both simple and very “common-sense”.

Unfortunately, the opposite turned out to be true.

War did break out, but when it did oil prices tumbled by almost half.

Which also meant that everyone who correctly predicted that war would break out and went long oil ended up losing a lot of money. Ultimately, the oil market had been building up inventory in anticipation of war breaking out, which created too much of a supply overhang.

In the words of Fat Tony himself:

“Kuwait and oil are not the same ting [thing]”

Nassim Taleb, Antifragile

In  the context of the US housing market, house prices are the primary phenomenon, and interest rates the secondary one.

Focus on what housing prices and rising mortgage rates are telling you, that demand is currently outstripping supply for homes. This imbalance is driving a bull market in housing that is dragging mortgage rates higher in its wake, not the other way around.

Which also means that when house prices and mortgage rates turn, and start to fall together, it won’t be because the Fed raised rates by too much.

Instead, it will be because supply and demand in the housing market have come into some sort of balance, or driven to the opposite extreme of imbalance (supply outstripping demand).

Channeling Taleb’s Fat Tony: Mortgage rates and house prices are not the same thing!

To be continued…