Recently, whenever I read articles about the financial markets or the real estate market, I often come across the words “ebullient” or “ebullience” to describe their current environment. In Japanese, these words would carry the nuance of being “frothy” or “crazed”. The stock markets are reaching new highs, while in the existing homes real estate market, the U.S. median home price has risen close to 14% year-over-year to punch through $300,000 for the first time in history. Of course, for the former, tons of funds awash in the monetary system created by the Federal Reserve’s extra easy monetary policies, looking for a home, are roaring into the share markets. For the latter, low mortgage interest rates at levels never seen in the past, compounded by low inventory, have pushed home prices higher and higher.
The experts are saying that what is at the root of all these phenomena is FOMO. So, what is FOMO? This word is an abbreviation of the first letters of the words in the phrase, “Fear Of Missing Out.” In other words, there is this sense of urgency among many people that, if they do not join the bandwagon, they will be left behind and, so, dive into the stock markets without doing much research. Or, if they do not purchase a home now, prices will continue to rise until it becomes unaffordable and, so, they take the plunge without really considering the high risk of buying at historically bubbly price levels right now.
What the experts worry about is what would happen to these people obsessed by FOMO if interest rates go up, if they lose their job, or the markets suffer another external shock, such as natural disasters. How will they absorb the losses when the markets suddenly turn south? As an example, just last Thursday the yield on the 10-year treasury bond spiked to the one-year high of 1.6% in response to increasing fear of inflation by the market participants. The stock, bond, and foreign exchange markets were all deeply affected. If this was not a temporary phenomenon but something that will continue, then it will certainly lead to higher mortgage interest rates, thereby reducing the number of eligible borrowers who want to buy a home. This will naturally have a knock-on effect of dampening home prices.
Due to Bank of Japan’s announcement that they will continue loose monetary policies, Japan is now similarly experiencing asset value gains that are entering the bubbly region. Therefore, it would be very wise to suppress this strong FOMO, and make asset purchases, including a home, in a much more deliberate and sound manner.