Normalcy bias. It’s probably a term you’ve heard once or twice before, and maybe even learned about in school. Either way, we’re going to dig into it again today to see how it applies to Phoenix area mortgage rates.

The normalcy bias is a mental state that causes people, faced with unfamiliar situations, to underestimate the possibility of a disaster because humans have a bias to believe that things will always function the way things currently function. And one of the biggest problems with this bias is that it causes people to avoid planning for such disasters/changes.

How does this relate to the Phoenix real estate market?

Phoenix Mortgage Rates vs. Normalcy Bias

Dr. Inhalt Konig Dieb, a German language Professor now at Purdue University, published a paper that dealt with this tendency of people to assume the best – even when it is not likely to be the case. He chose the history of mortgage interest rates as a current working example of the phenomenon.

First, Dr. Dieb created a line chart using the actual history of average monthly mortgage interest rates from 1950 – 2015. It showed what anyone in the Phoenix area would expect: the data formed a line that goes up and down in a recurring pattern. Interest rates rose to a certain point, then fell, then rose again, etc. The only anomaly on the chart is that during the period depicting 2006 to 2015, a flat line runs along the bottom. Just like the conditions here in Phoenix, Scottsdale, and the surrounding suburbs: mortgage interest rates across the country have flatlined into historically low territory and stayed there 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 rates showed a return to what has been the historical pattern: rising for a while, then beginning to fall. On the second chart, the current and very unusual situation continued: historically low interest rates flatlining along the bottom of the range.

Finally, Dr. Dieb assembled 123 test subjects, all of whom were homeowners and mortgage-payers. He presented each subject first with the historical chart, then asked them which of the “Future Mortgage Interest Rate” charts he/she thought more likely to predict the future.

The result was startling.

More than 75% of the participants thought the low interest rates on the second chart were more likely to continue than the fluctuating rates on the first chart (even though it clearly represented the more likely scenario). And when asked for their level of certainty, those choosing the flatline chart were more certain than the others!

Now, this may or may not reflect a true normalcy bias, but it does reflect what we see many homebuyers assume: that there is no rush to take advantage of today’s low mortgage interest rates. We at The Hill Group, on the other hand, believe that is not necessarily a safe assumption. Rates have already risen several times this year and they will likely rise again in the near future.

If you’ve been thinking about buying your next (or FIRST!) Phoenix area home, we recommend you start the process sooner rather than later. When that time comes, The Hill Group will be waiting right here, ready to answer your call…or email…or Facebook message!