Red Pill / Blue Pill: Change Your Investing Perspectives Now

Would you like to see the financial system for what it really is, or what the financial media and textbooks tell you it is supposed to be?

From the iconic scene in the Movie, The Matrix, the choice of which pill to take offers very different outcomes. One, a life lived in harsh reality but where the individual can think and act independently; and the other, a computer simulation of a comfortable life, but bereft of the ability to think and act of one’s own volition.

The same choice is offered here. Would you like to see the financial system for what it really is, as opposed to what the financial media and textbooks tell you it is supposed to be?

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Is The Value Of Your Home Going To Fall As Rates Rise? 6

will higher interest rates reduce the value of your home? Probably not

Let’s conclude our discussion on mortgage rates, house prices and epiphenomena with the Fed’s role in the housing market.

As explained in Parts 3 and 4, higher mortgage rates are primarily a function of a bullish housing market, not Fed hawkishness.

By extension, the Fed doesn’t really have that much control over the US housing market, at least not through the interest rate channel.

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Is The Value Of Your Home Going To Fall As Rates Rise? 5

will higher interest rates reduce the value of your home? Probably not

Mistaking mortgage rates for the real estate market is what is technically termed an epiphenomenon.

The word simply refers to a secondary phenomenon that occurs alongside a primary one.

Since they occur together, people mistakenly attribute a causal relationship to both, even though this often isn’t the case.

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Is The Value Of Your Home Going To Fall As Rates Rise? 4

will higher interest rates reduce the value of your home? Probably not

Now that you have a better understanding of how the interest rate fallacy applies to the housing market, let’s take a look at another often misinterpreted chart.

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Is The Value Of Your Home Going To Fall As Rates Rise? 3

will higher interest rates reduce the value of your home? Probably not

In order to see why this is the case, let’s go back to our example of her selling her home into a bullish market.

In all likelihood, she will also be selling during a period where mortgage rates are high.

Why?

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Is The Value Of Your Home Going To Fall As Rates Rise? 2

will higher interest rates reduce the value of your home? Probably not

Another way to observe that home prices (in the US, and most likely everywhere else) don’t react in the same mechanical way to changes in interest rates as bonds do, is by looking at their correlation.

Bonds and rates have an inverse relationship. This means a correlation of -1. When one variable goes up, the other goes down.

If this were true for houses and rates, we would see a correlation that, at the very least, remains negative most of the time.

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Get a different perspective on all things trading & investing every week!

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Get a different perspective on all things trading & investing every week!