By Tony Veldkamp, 2022 President of the REALTOR® Association of Sarasota and Manatee
Senior Commercial Advisor, SVN Commercial Advisory Group
SARASOTA, Fla. (July 11, 2022) – Most of us would not plan on purchasing real estate with an all-cash offer, we would have to take out a mortgage loan. Therefore, we have to be aware of mortgage rates, which are ever-changing due to various factors. A fixed-rate mortgage is a home loan that has a set interest rate for the entire lifetime of the loan. Typically, you’ll see 30- or 15-year fixed mortgage loans, with 30-year loans being the most common type for about 90% of homebuyers.
Today we are seeing interest rates rising as the Federal Reserve Bank attempts to slow inflation. This is not a new strategy and we have seen it before. But to those younger than 40, this is definitely a shock. However, we have a long way to go before interest rates get to levels seen in the past. Historically speaking, with interest rates now in the 5-6% range, that is still a bargain as the historical average is around 8%.
Here is how we compare with years past.
For the 1970s, the average 30-year fixed mortgage rate over that decade was 9.03%. The “Great Inflation” was to blame for rising mortgage rates. There were many contributing factors including changes in central bank policy, market psychology, and the abandonment of the gold window during the Nixon administration, when it was decided the U.S. government would no longer redeem dollars for gold from foreign banks.
That decade led to some of the highest inflation rates seen in U.S. history. The stock market spiraled into a bear market, losing half of its valuation over a 20-month timeframe. Economic growth stalled with the combination of high inflation and spiking unemployment rates, causing a sharp decline in U.S. industries like automaking.
Then in the 1980s, the average 30-year fixed mortgage rate over that decade rose to 12.70%. An oil embargo worsened the inflation of the ’70s, pushing the U.S. into a recession. Prices of goods and services grew rapidly, which was an effect of severe inflation.
The Federal Reserve raised interest rates in an attempt to combat the effects of this hyperinflation which caused the cost of borrowing money to remain higher. The early 1980s saw some of the highest interest rates on record with mortgage rates jumping above a staggering 16% at one point.
Then in the 1990s, the average 30-year fixed mortgage rate over the decade was 8.12%. In comparison to the previous two decades, the 1990s allowed for a great moderation in interest rates accompanied by growth, as the baby boomers entered their peak earning years. Inflation declined from over 10% in 1990 to below 7% in 1998 which incidentally was the last year the federal government enjoyed a budget surplus.
In the latter half of the 1990s, information technology and the new internet drove productivity growth. Investments were made in newer technologies, such as laptop computers and cellphones. With the advent of the internet came increased e-commerce through future behemoths like Amazon, as well as the first telecommuters.
Then came the 2000s where the average 30-year fixed mortgage rate over the decade dropped again to 6.29%. Thirty-year fixed mortgage rates showed a continual decrease during the 2000s, going from above 10% to the 5% range in just the first three years. Despite this, the 2000s faced its fair share of economic challenges.
The 2003 invasion of Iraq drove up the price of oil. Then came the Great Recession from 2007 to 2009, now known historically as the most severe downturn since the Great Depression of the 1930s. This was all due to the housing bubble which led to the subprime crisis of 2007, when many borrowers could no longer afford their mortgages.
Lastly in the 2010s, the average 30-year fixed mortgage rate over the decade dropped to 4.08%. The year 2010 marked a slow recovery following the Great Recession. Over the last decade, there have been ups and downs, but nothing has rattled the economy like the 2020 coronavirus pandemic, and the Fed responded by resetting interest rates. The 2021 average 30-year fixed mortgage rate drastically fell to 2.96%, the lowest on record.
What’s important to realize in all of this history, is that homes are permanent while interest rates are temporary. While you may only live in a home for 5-10 years, you are building equity that will transfer to the next home. If you had to borrow money at 8-10% back in the ’90s, I’m sure you’ve refinanced and took advantage of the lower rates at some point. Or maybe you’re still in the same home and it’s now paid off.
If the time is right for you to purchase a home, and with the slightly higher interest rates the payment still fit into your budget, it is a great time to buy. Today’s interest rates are a bargain … historically speaking.
This article was originally published by the Herald-Tribune.