People Stink at Predicting Interest Rates

Last summer we ran a poll that asked the question “When will interest rates first rise back above 6%?

Here are the results of that poll:

When will interest rates first rise back above 6%?

  • Before 2012 (6%, 7 Votes)
  • 1st Half of 2012 (13%, 16 Votes)
  • 2nd Half of 2012 (18%, 22 Votes)
  • 2013 (20%, 25 Votes)
  • 2014 or 2015 (27%, 34 Votes)
  • 2016 to 2021 (10%, 13 Votes)
  • Later than 2021 (6%, 8 Votes)

Total Voters: 125

With the rate for a 30-year fixed currently averaging 3.69%, it’s rather startling that 36% of you believed that interest rates would rise above six percent before the end of this year. That’s a pretty large portion of people with expectations that differ fairly dramatically from reality.

Here’s another look at rates going all the way back to 1971, to put today’s rates in context:

Weekly Conventional Mortgage Rates

I certainly agree that eventually rates will climb back up above six percent, but pretty much everybody has been using the “rates are going to climb any day now” line for the last three years (at least)—all while rates have continued to fall. At this point I wouldn’t be surprised if rates don’t go above six percent for at least another four years.

I’d love to hear from some of you who chose one of the first three options in the summer 2011 rates poll. What were you basing your expectation on, and have those expectations changed?

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    Scotsman says:

    “but pretty much everybody has been using the “rates are going to climb any day now”

    Except the Fed which has said several times that rates will be held down through at least 2014. And they have done a masterful job of putting the economy in suspended animation- not dead, but not really alive either. Can they continue to walk the razor’s edge, inflation on one side and depression on the other, until a meaningful political solution is found? My money is still betting they can’t, and will be knocked off by external events in our now global economy. We’ll see.

    Hope and change.

  2. 2
    Eastsider says:


    The 30-year fixed rate has gone above 4% accordingly to the Sunday’s Seattle Times.

  3. 3
    The Tim says:

    RE: Eastsider @ 2 – I assume you’re referring to this chart (pdf), which combines both conventional and jumbo loans (which carry higher rates).

    According to, last week’s average for a 30-year was 3.69%. Federal Reserve data (which is what’s charted in this post) shows 3.66%.

  4. 4

    By Scotsman @ 1:

    Can they continue to walk the razor’s edge, inflation on one side and depression on the other, until a meaningful political solution is found?

    I suspect President Obama would be happy with just 2.5 more months.

  5. 5
    ChrisM says:

    Wish I remembered how I voted. My prediction: interest rates will remain low until the market overrules the Fed. Not terribly insightful!

    Raw data here:

  6. 6
    Tyler says:

    You could probably change the title simply to, “people stink at predicting things”

    There’s a lot of factors to consider on this front: improvements on the US economic front could bring interest rates up slightly, however, continued macroeconomic risk abroad could also plow cash into US safe haven securities and drive rates lower, as could additional actions by the fed. One interesting factor is the wind-down of the GSEs and how this could move rates up as less and less new loans will carry the fannie/freddie guarantee.

  7. 7
    ARDELL says:

    My thoughts in the summer 2011 post comments were: “Personally I think it’s going to be a political tug of war, which makes it anyone’s guess.” That’s probably more true today than it was then, and possibly even more so. My thoughts have not changed in the last year.

    Without political interference I would put today’s rate at 5.5%. When Bernanke first entered the scene he pulled the political supports and that created chaos. Likewise I do not see the change in interest rates upward coming in gradual fashion. Someone will pull the plug on what is keeping them artificially low and the change will happen somewhat unpredictably as to when. One day they will be low…and all of a sudden…they will go to “market” rate uninfluenced by excessive political pressures.

    Everyone should move forward with the assumption that real rates today are 5.5% or so, and the under 4% reality is an artificial rate of temporary and unreliable certainty.

  8. 8
    Macro Investor says:

    I’ve always said US rates will stay low until the weaker dominoes fall — Europe, Japan, the UK. Since Greece has been an ongoing train wreck for 4 years, that could take a very long time. Once Europe is resolved, it will replace the US as a safe haven. Then it’s “timber” for US bonds.

    Eventually every debtor nation will “go Greece”. Our turn will come unless you think math can be suspended.

  9. 9
    Macro Investor says:

    By Scotsman @ 1:

    Can they continue to walk the razor’s edge, inflation on one side and depression on the other, until a meaningful political solution is found?

    No, because there is no political solution. There’s only election-year hot air. Nobody in power ever votes austerity on himself, because it guarantees losing the next election.

    This is one future we can all predict. Federal spending will increase every year… until it can’t. They’ve all learned that’s the trick to making GDP appear to grow on “their watch”.

  10. 10

    RE: Macro Investor @ 9 – The news today is that when California is curtailing spending per an order from the Governor, they still spend $423,000 on iPads.

  11. 11
    Matt the Engineer says:

    By Tyler @ 6:

    You could probably change the title simply to, “people stink at predicting things”

    Science actually strongly disagrees. Take a large group of people with any knowledge about a topic, and the average response is often better than the best response. Random guesses will all cancel each other out, and guesses based on real knowledge will push the average in the right direction. There’s a great demonstration of this – take a big jar full of jelly beans, and have a large group of people guess the number. The average value will be very, very close to the real answer.

    There were a few flaws in this post that make us especially bad at guessing the real answer – for example they’re unbalanced*, and the sample size was fairly small. But balance the poll and throw enough people at it, and you might get a very good estimate of when intrest rates will rise.

    *the first four dealing with just 2 years, the next one another 2 years, the next one 5 years, the next one an infinite number of years

  12. 12

    Yogi Berra said “Predictions are hard to make, especially about the future.”
    If you looked at financial publications a year ago, so called “experts” were predicting an imminent rise in interest rates, and rates have seemed to be too low for too long.
    So I don’t think that 38% who predicted the 6% interest rates were any more wrong than the experts. And, overall, considering the number of know nothing know it alls who post on here, our track record isn’t too bad.

  13. 13
    JWS says:

    In my opinion the primary reason rates are so low right now is the turmoil in Europe – and no one can predict how long it will take the EU central bankers/governing bodies to take the necessary steps to calm fears. If it takes them years, then rates will be low for a long time. If they get it resolved quickly and with little turmoil then the world economy can start recovering and rates will head higher.

    Trying to predict the timing of such events is incredibly difficult.

  14. 14
    BJ says:

    I would guess the majority of those who voted rates would be north of 6% are the RE related folks who have been using that scarcity tactic on and off since post 9/11.

    Thankfully, most seemed to have finally given up on that recently.

  15. 15
    StillRenting says:

    Does anybody have any predictions on how low interest rates will go? Have we already seen the bottom, or will they go even lower? I can’t imagine how they could go much lower, but I also never thought I’d see them hovering between 3-4%.

  16. 16
    Matt the Engineer says:

    RE: StillRenting @ 15 – Sounds like an idea for a poll!

  17. 17
    JWS says:

    RE: StillRenting @ 15 – Some economists predict 10 year treasury rates will drop to 1% in 2013 (they are at 1.65% now). That would potentially put a 30 year fixed mortgage in the ~2.75 to 3.00% range. This is assuming the correlation between treasuries and MBS stay intact.

    As far as I’ve seen, the low rate a few weeks ago was 3.375% for a 30 year fixed (it’s a bit higher right now).

    But as we know economists are often wrong so it’s anyone’s guess.

  18. 18
    Masaba says:

    Interests rates will rise when people start spending more and saving less. Currently, even with rates at such lows that they don’t even match inflation, people are still pouring money into US treasuries. When people and companies start spending instead of saving, rates will rise. I’m not saying they will go above 6% immediately, but you will see a change in their depressed level.

  19. 19
    StillRenting says:

    RE: JWS @ 17 – Given that relationship with the treasury rates, would 1.75% be a theoretical lower limit on 30-year mortgages? There has to be some lower limit at which the bank no longer makes a profit, even if the treasury rate went to 0%. Do you think we will reach that lower limit?

  20. 20
    JWS says:

    RE: StillRenting @ 19 – Considering that the vast majority of mortgages are packaged and sold to investors, the better question would be what’s the lowest rate that MBS investors would be willing to accept as return on their investment. If mid and long term treasuries are at 0% I suppose it’s possible that 1.75% (and lower) could be attractive in that scenario.

    But the chances of mid to long term treasuries reaching zero is slim to none in my opinion. There would have to be an incredible scare (worse than what we’ve seen in the last 5 years) and the U.S. would have to be perceived as the safe haven (questionable considering the deficit and debt).

  21. 21
    Chris says:

    RE: StillRenting @ 19
    Apparently Japan has residential interest rates below 2% now. I’m not sure what interest rate the homeowner walks out the door with or whether these are mostly adjustable like in parts of Europe but their interest rates have been in a downward trend for over 20 years (along with residential real estate values).

    Japan Interest Rate

    The benchmark interest rate in Japan was last reported at 0.00 percent. Historically, from 1972 until 2012, Japan Interest Rate averaged 3.3200 Percent reaching an all time high of 9.0000 Percent in January of 1975 and a record low of 0.0000 Percent in December of 2010.

  22. 22
    JWS says:

    RE: Chris @ 21 – The benchmark interest rate in Japan that is referred to in your post is short term. Japan actually has a normal yield curve right now with short term government rates at 0% and 30 year bonds around 2%.

    The short term rates aren’t correlated with long term mortgage bonds.

  23. 23
    Mel Torme says:

    I can’t speak for everyone who made a guess, but I’m pretty sure most of us arrived at our numbers via a modeling process known as rectal extraction – same as you, Tim.

    As a matter of fact, this same method, the pultrusion of real numbers out of one’s various caudal cavities, is the recommended econometric modeling method of 4 out of 5 economists “working” today. Honestly, the 5th economist cited is really an outlier, and shouldn’t even be counted, since she is a home economist and spends most of her time on canning and fruitcake recipes.

    Questions, comments?

  24. 24
    Chris says:

    RE: JWS @ 22
    Thanks – I wasn’t sure what a “benchmark interest rate” is. Do you happen to know what the conventional home loan rate is in Japan and whether the trends follow the bond rates there?

  25. 25
    Dave0 says:

    By Scotsman @ 1:

    Can [The Fed] continue to walk the razor’s edge, inflation on one side and depression on the other.

    You make it sound as if The Fed is gone off the deep end and isn’t capable of functioning anymore, but walking this fine line is exactly what The Fed was designed to do. Their primary purpose is to walk that line between a roaring economy with high inflation, and a depression with high unemployment. They have been doing a great job at walking that line for decades, are doing so presently, and I don’t see why they couldn’t continue to walk that fine well into the future. They know exactly what is going on with the economy and will make the right calculated decisions at the right time.

  26. 26
    Chris says:

    RE: StillRenting @ 15

    It took me a while to find this study regarding the WSJ bond rate predictions by economists. Bottom line, the economist are less accurate than chance. You are better off flipping a coin.

  27. 27
    ChrisM says:

    RE: Chris @ 26 – Excellent find. One of my beefs with The Economist magazine is their persistent use of graphs where they spend about 1/3 of the x-axis in “projections” where the first & second derivatives in their “projection” change wildly from the known data.

    I recently read _The Black Swan_ and greatly enjoyed his digs at economists (as well as bankers, financiers and others). He has a section in there where he looks at the accuracy of stock market talking heads, and not surprisingly finds the dart board works just as well, if not better.

  28. 28
    Chris says:

    RE: ChrisM @ 27
    I think the most interesting part of the study:

    We found evidence that economists who would be expected to gain the most from favorable publicity – those employed by firms named for them – make more extreme forecasts, whereas economists employed by other institutions tend to make more conservative, less extreme forecasts.

  29. 29
    Matthew says:


    Just a matter of when. 15.9 trillion and counting. We are long past the point of no return. The national debt is now greater than every dollar in the money supply. The dam has to break eventually, B-52 Ben just has his hand plugging the hole. It may happen tomorrow, it may happen 5 years from now but my guess is that it happens sooner rather than later. And when it does, rates are going to the moon.

  30. 30
    Mel Torme says:

    RE: Dave0 @ 25 – Aren’t you missing a /sarc tag, DaveO? Otherwise, I don’t what to say to that ……

  31. 31
    WestSideBilly says:

    RE: Dave0 @ 25 – Given that the fed doesn’t appear to care about high unemployment, I’m not sure I’d say they’re doing a great job walking the line anymore. They seem to be utterly terrified of inflation despite overwhelming evidence that there isn’t much.

    RE: Matthew @ 29 – The sky is falling, the sky is falling, we’re all going to diiiiiiiiiiiiiiiiiieeeeeeeeee. Oh, hmm, guess that hasn’t happened.

    As long as the tea party morons don’t try to shut our government down again, the US is and will be the safe haven for assets for the foreseeable future (5-10 years, at least). As long as we’re the safe haven and the global economy stinks, people will keep buying US treasuries at ridiculously low rates. In order for rates to go to the moon (which is what? 5%?) we would need an actual growing economy (domestically and globally), meaningful inflation, and low unemployment. Given the political scene here and in Europe, we’re probably batting 0 for 3 for the next 5 years… so, yeah.

  32. 32
    Macro Investor says:

    By WestSideBilly @ 31:

    In order for rates to go to the moon (which is what? 5%?) we would need an actual growing economy (domestically and globally), meaningful inflation, and low unemployment.

    You contradicted yourself with this sentence. Are rates low because of safe haven status, or because the economy is weak? Look to Europe for your answer… lots of weak economies with high rates. It has nothing to do with economic strength or weakness and everything to do with scared money. In normal times you’d be right.

    The US is toast when ever Europe is safe for investments again. Decades? Who knows? All I know is as soon as there is another safe haven, watch the US “go Greece”.

  33. 33
    Matthew says:

    West side,

    It’s called math, and it has nothing to do with politics. The interest we pay on the debt is going up and up. It’s going to hit a point to where we struggle just to pay the interest to the debt holders. It’s no different than someone who takes on a bunch of credit card debt to buy things they can’t afford and then start having problems making the payments. The debt is closing in on 16 trillion dollars and there are only 14 trillion US $ in the entire M3 money supply. People like the US debt right now because we can make the payments. Once that stops happening, rates will go up exponentially. There is a reason we were downgraded recently and if we dont do something to stop taking on these levels of debt, the dam will break.

    The numbers don’t lie. I’m not a tea party follower. I’m a socially left atheist that tends to believe in not spending what you don’t have. Some people call that common sense but it appears the people in Washington DC dont have muh of that these days.

  34. 34
    David Losh says:

    RE: Matthew @ 33

    I’m going to post the link to the debt clock again:

    Look at the personal debt, and also the mortgage debt which is very close behind.

    What I think is that the National Debt will really start to crumble when people, the consumers, stop paying on personal debt.

    In the world of can kicking I think the consumer is the weak link.

  35. 35
    Mel Torme says:

    RE: Matthew @ 33 – It’s funny you mention the 16,000,000,000,000.00 bucks today, as, if Tyler Durden’s bookkeeping is correct, the US Central government hit that number today. Yippeeee!

  36. 36
    WestSideBilly says:

    RE: Macro Investor @ 32
    RE: Matthew @ 33

    There’s no contradiction. My premise on interest rates going up to more typical levels involves the global and US economy improving. In other words, returning to normal times.

    The inflation spike theory that has been floating around for 4 years (and counting, and still wrong) is premised on the US losing its ability to make its interest payments, or being at risk of default like Spain, Ireland, Greece, et al. Neither one of those is going to happen in Matthew’s 5 year window unless the tea party crazies shut down our government and/or refuse to raise the debt ceiling in order to prove their dedication to the cause. Europe taking over as a safe haven will require an improved economy too, and many of the European nations have similar debt/GDP ratios as the US.

    And it is political more than math. Our net interest payments haven’t gone up in the last few years, they were/are lower in 2011 and 2012 than they were from 2006-2008. When your government can borrow at rates approaching 0, borrowing money isn’t that big of a deal. We’re replacing 5% bonds with 0% bonds to keep our government running. The CBO baseline projection is that our net interest will stay around 2% of GDP for the next decade, although that relies on some assumptions that might not play out (Bush tax cuts expiring, economic growth, etc). And our downgrade was absolutely political, it was a direct effect of the tea party whackos showing they didn’t care about the US paying its debts if that meant increasing taxes 1 cent.

    We do have long run issues. But those are political more than math, too. As long as starve-the-beast/no-compromise is the sole political goal of 1/2 of our ruling parties’ philosophy, it’s going to be tough to align revenues and spending in a manner that allows us to pay down our debt (relative to GDP).

  37. 37
    Matthew says:

    West Side,

    I’m not sure where you get your data but it is absolutely false. The interest on our debt hit a record level in 2011 of 454 billion dollars, that is approximately 5% of our budget. By 2012 this is anticipated to hit 840 billion.

    The U.S. doesn’t borrow money at 0%. The Fed loans money to banks at 0 percent, but the U.S. G has to raise that money by selling Treasuries, none of which have yields at 0%. You think the G borrows money from China for free? Keep dreaming friend. The yield on the 30 year is about 2.6.

    I don’t think you have a clear understanding of how the economic system works.

  38. 38
    WestSideBilly says:

    Interest data from CBO, rate data from US treasury. CBO doesn’t count intragovernment debt, since it’s the left hand paying the right hand. Net interest payments on publicly held debt were $230B in 2011, estimated $220B for 2012, projected $218B for 2013, $22B for 2014 (2013/2014 numbers are assuming Bush tax cuts aren’t extended). Note that 2008 the net payment was $256B… despite significantly lower debt loads.

    20/30 year treasuries are less than 10% of what’s sold. 5,7,10 year TIPS all have negative rates. The short term treasuries (not inflation protected) are 1.66% for 10 years, short term (13/26 week) are 0.14%. That’s as close to free borrowing as you could hope for.

  39. 39
    whatsmyname says:

    RE: Matthew @ 33RE: Matthew @ 37

    Do you know what the M3 is? It’s cash, or rather it is cash not counting money market funds, bank reserves or currency held at the banks. How many people (with assets) would be ecstatic if their total debt exceeded their cash (not including the money market) by a mere 15%?

    5% of the budget? Horrors. I wonder how many Americans spend less than 5% of their budget on interest? Not too many homeowners I would imagine. How many corporations? In this state you spend more than that on sales tax.

    Also, China doesn’t invest in treasuries. China gets paid in dollars it doesn’t want to spend. They want security, and it’s too big for mattress money, so the default is T’s. The alternative is for that money to go into our economy. Hardly a bad thing.

  40. 40
    Jonness says:

    By Mel Torme @ 23:

    I can’t speak for everyone who made a guess, but I’m pretty sure most of us arrived at our numbers via a modeling process known as rectal extraction – same as you, Tim.

    As a matter of fact, this same method, the pultrusion of real numbers out of one’s various caudal cavities, is the recommended econometric modeling method of 4 out of 5 economists “working” today. Honestly, the 5th economist cited is really an outlier, and shouldn’t even be counted, since she is a home economist and spends most of her time on canning and fruitcake recipes.

    Questions, comments?

    If true, then I expect the loudest and stinkiest economic forecasts are the most popular, because they invoke the most fear and demand the most attention, and this has somewhat of a detrimental effect on the real economy.

    Let’s hope Roubini, Schiff, and Harry Dent don’t mix beans and dark beer. Otherwise, the three powers could combine to bring down the entire U.S. economy.

  41. 41
    matthew says:

    Less than 6 billion dollars of the debt the Chinese currently hold is in short term debt. More short term debt is sold at auction because it expires quickly, however, that does not mean that the total outstanding debt is comprised of mostly short term T bills. In fact, the majority of the outstanding debt is in long term bills, and the Chinese have been dumping short term debt in favor of long term. The yield is not close to zero on these notes. Regardless of what the CBO tracks, the fact of the matter is that total debt payments in 2011 hit a record level.

    I will tell you who doesn’t pay 5% or so of their income on debt, the Chinese. The average Chinese household saves 30% of their income. U.S. household? -4%.

    Whatsmyname, you need to research what M3 is. Your definition is completely wrong. M3 is the total money supply, and the FED stopped tracking it in 2006. Coincidence? I think not. You are providing a definition of M0 or M1. M0 is the liquid money supply, i.e. cash + checking accounts.

  42. 42
    whatsmyname says:

    RE: matthew @ 41
    Total debt payments in $ hit a high in 2011. Debt as % of GDP was higher in WWII. This is a larger economy, not the apocalypse.

    RE the 5%: are you suggesting that you want to live in China? It is nice to find an example in the world where the 5% does not hold true, but it is still a beside the point argument. Most of our population, corporations and people in the developed world (at least who hold assets) easily spend 5% of their budget on interest, and have during the modern era. It is nothing to hyperventilate about.

    Yes, the FED stopped tracking M3 in 2006, but in the United States at least, it did not include commercial paper or bank reserves or physical money held in the banks. Those things are money. And again, not the point. The point is that US debt obligations vs US cash compare favorably to what most people have or would think is a healthy financial position,

  43. 43
    Macro Investor says:

    RE: WestSideBilly @ 36

    “Europe taking over as a safe haven will require an improved economy too, and many of the European nations have similar debt/GDP ratios as the US.”

    Billy, when I say Europe will take over as a safe haven it is because THEY WILL DEFAULT one by one. Like any bankruptcy, after a default they get to start over again debt free. That will allow them to comfortably cover their expenses and maintain AAA status. And that will make them THE PRIMO place to invest — cheap land, commodities, taxes and workers begging for any job at any pay. That will be their improved economy… from the ashes of a Greek or Spain like collapse.

    Look at the US. Every asset class is near record highs. Bonds, which should only be high in a weak economy. Stocks, commodities and the currency – which should only be high in a strong economy. It doesn’t matter. Debt to GDP ratios don’t matter. Everyone in the world is just stuffing into anything US because it’s the least stinky turd. So when Europe defaults and starts fresh, our turn to GO GREECE.

  44. 44
    matthew says:

    So if I made 100k a year, and had 120k in debt, and was paying 5% of my yearly budget to income I would be in a desirable position? Only in America! I guess I’m in the minority but I live debt free and have a good chunk of change in the bank.

    I wouldn’t mind living in parts of China, I’ve been to Hong Kong and Shanghai and both are very nice. What makes America great is not that fact that we have taken in a lot of debt in recent years. You make it sound like our high level of debt has somehow created a Shangri-La!

    The Great Depression taught Americans to be savers, the next depression is going to teach us the same lesson. Debt is slavery.

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