What to Know About the History of Mortgage Interest Rates

Context To Better Understand the Current Mortgage Rates Across the Nation

A Summary of the Current Market & Interest Rates

With increasing interest rates, there has been a large number of conversations happening across the country discussing these rates and the housing industry as a whole. The reason for the increase in interest rates is to combat the inflation rate, which is currently at a decades-high level. But how do the current interest rates compare to the historical rates? Before we dive into the rates of previous decades, it's important to understand what exactly is affecting mortgage rates.

The Federal Funds rate is what is being referenced when you read something discussing the Fed increasing or decreasing rates. This rate does not actually have any direct impact on mortgage rates, as the Federal Funds benchmark interest rate actually affects other economic instruments more directly, like savings accounts, and credit card rates. The Federal Fund rate does impact your mortgage rate indirectly, however, as it impacts the banks that provide mortgage loans. The rate that most directly affects your mortgage rate is the 10-Year Treasury Yield. According to Forbes, "the 10-Year Treasury Yield is the current rate Treasury notes would pay investors if they bought them today." This yield has a direct correlation with the price of mortgages, meaning that when the yield goes up, so do mortgage rates. So how have these rates affected the nation's economy in the past?

Mortgage Interest Rates in the 1980s

Some people might remember the mortgage rates throughout the 1980s, and if you do, the rates today might seem like nothing worth worrying about. That's because at the start of the 80s, mortgage rates reached their peak, with the average rate reaching a staggering 16.63% in 1981. The reason for this huge increase in interest rates was to combat the "Great Inflation", which was brought on by an oil crisis in the late 70s and early 80s. Throughout the 80s rates would decrease as the Fed combated the oil crisis and the rise in unemployment that was brought on by the elevated inflation rate.

Interest Rates Somewhat Stabilize During the 90s

After the Great Inflation, Alan Greenspan became the chair of the Federal Reserve in 1987, a position he would hold for 18 years. During this period, the average 30-year rate would slowly decrease, ending up at 8.05% in 2000, with the lowest rate in the 90s being 6.94% in 1998. While there was certainly a fair amount of fluctuation in the average 30-year rate throughout the decade, it was far tamer than the decades before and after, as the Great Recession would soon follow.

The Great Recession and the Lead-Up to It

In 2000, the average 30-year rate was 8.05%, and by 2005 would average 5.87%. This average, however, would increase in the following year due to fears of inflation, and remain above 6% until the Great Recession took place. This increase in rates became extremely ill-timed, as the market began to slow down, the value of the homes soon became less than what the homeowner still owed on their loan. The graph below illustrates this inconveniently timed increase in rates.

Graph Courtesy of the Federal Reserve System / Business Insider

During this time, many people were unable to pay their mortgages, and afterward, mortgage rates fell to a yearly average of 4.69% in 2010 as the demand for housing rapidly fell off.

Recovery, and Buildup to Our Current Market

The Federal Reserve swiftly took action to combat the effects of the Great Recession, but it would take time to clear the aftermath. The Federal Fund rate remained at an incredibly low level until 2015, with the fed fund rate peaking at 2.5% in 2018. The average mortgage rates throughout 2010-2020 hovered anywhere between 3.6% - 4.7%, reflecting the still lingering effects of the recession. The biggest change during this time however was far and away the impact that the COVID-19 pandemic had on the economy. In July of 2020, the 30-year fixed rate fell below 3% and reached a record low of 2.65% in January 2021. This change would not last, however, as mortgage rates would spike during the first half of 2022, leaving us in our current market.

What This Means For You As A Homebuyer/Seller

With the current interest rates, it has never been more important to have representation when buying or selling a home. While the interest rates are not that high historically speaking, it's still important to have a real estate professional guiding you through the process and solving any potential problems before they happen. Having a Realtor Ⓡ by your side is crucial to ensure that you are getting the most money possible when selling your home, or getting your offer selected when attempting to buy a home. If you'd like to get in contact with me, you can fill out the contact form below, or give me a call at 404-576-8515.