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In November 2018, the 30-year fixed mortgage rate hit a seven-and-a-half-year high of 4.86 percent. (In response to stock market volatility in recent weeks, the current average rate is slightly lower.)
Most experts believe mortgage rates will continue to rise, reaching 5 percent in 2019.
Let's evaluate this in context. While today's rates are higher than the 3.5% - 4% rates of 2016, they remain well below the historic average of 8 percent. Of course, housing prices and loan amounts are (mostly) higher now than they've ever been, which means interest rates have a bigger impact on housing payment.
How will the housing market respond to higher rates? What are the "experts" saying?
First, I take all "expert" opinions with some skepticism. I remember quite clearly attending a seminar in late 2006 hosted by Wells Fargo Mortgage with a well known industry expert - one who appears on CNBC quite regularly. This "expert" spoke for 30+ minutes about why the housing market was not in a bubble. Less than a year later the subprime mortgage market was collapsing, starting a domino effect, followed by the worst financial crisis since the Great Depression.
Instead of expert guesses, this article suggests the history of mortgage rates may provide some insight and perspective. They examined mortgage rates and economic history over the last four decades, and identified four distinct mortgage rate eras that may offer helpful context for today's home buyers. And for anyone interested in this stuff, like myself, it's just a fun read!
Here's a walk down memory lane:
The 1980s: The Federal Reserve's War on Inflation
It's almost unimaginable for today's buyers, but home buyers in 1981 were faced with 30-year, fixed-rate mortgages at over 18 percent. Rates declined from the 1981 high point, leveling to around 10 percent at the end of the decade.
At the time, the Federal Reserve, under Chairman Paul Volcker, was waging a war on inflation. In an effort to tame double-digit inflation, the Federal Reserve drove interest rates higher. The Fed raises rates in a strong economy to encourage sustainable economic growth, and cuts rates when the economy needs support.
Today, the economy is strong - unemployment is low, inflation is on target, consumer confidence is high, and wages are rising. To promote further sustainable economic growth, the Federal Reserve is increasing interest rates. UPDATE: The current Fed Chairman, Jerome Powell, announced on Friday that the Fed is taking a "wait and see" approach to further rate hikes. This helped calm a very nervous stock market. You can read the full article here.
1990s and Early 2000s: The Information Boom
In the 1990's, inflation calmed down. The 30-year, fixed mortgage rate averaged 8.4% through most of the 1990's, before dipping below 7 percent in 1998.
A major reason for the decline in inflation was strong economic growth due to the arrival of the internet and information technologies, which prompted corporate capital investment, enhanced productivity and spawned investment in new internet-based "Dot Com" businesses.
In the early 2000's, after the "Dot Com" stock market bubble burst which sparked a mild recession, the Fed lowered interest rates further. The 30-year, fixed-mortgage rate reached what was then a historic low point - below 6% in 2003.
2006-2008: Housing Bubble and Bust
House prices always went up, nationally, until they didn't.
The collapse of the housing bubble exposed the financial system's excessive leverage, contributing to the financial crisis and the Great Recession.
To combat the crisis, the Federal Reserve cut interest rates as much as possible and implemented an unprecedented monetary stimulus policy known as quantitative easing (increasing the money supply by buying government and mortgage bonds).
With that, a new era of cheap credit was upon us. As a result, mortgage rates fell below 5 percent in 2009, a level the housing market had not experienced in more than 50 years.
2010-Present: Recovery
Mortgage rates entered this decade at 4.7 percent. By 2012, they had fallen to about 3.5 percent. In 2013, rates increased to nearly 4 percent in response to the Fed's announcement that it would stop easing. Mortgage rates remained near or below 4 percent until 2016.
Since 2016, as the Fed slowly tightened monetary policy, and the economy expanded, the 30-year, fixed-rate mortgage followed suit and increased to 4.86 percent.
Today's Rates May Not be as Great, But They are Still Below Eight
What is the lesson from this trip through the "mortgage-rate" past? The recent period of mortgage rates between 3 and 4 percent is a historic anomaly, as challenging as it might be to believe so after experiencing it for 10 years.
Historically, the housing market has performed well when mortgage rates were considerably higher than today. Rates averaged 6 percent between 2001 and 2009. In 2000, they averaged 8.05 percent. In the decade between 1980 and 1990, they averaged a whopping 12.5 percent.
However, the key take-away is that people were still buying homes across all of these mortgage rate eras.
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