When I first began practicing law – yes, in the Dark Ages – interest rates for a 30-year mortgage were 7.44%. By January 1980, they had climbed to 12.88%. Two years later, in 1982, they reached 17.48%. Despite some outliers, for the next four years, rates slowly declined to 10% range, and finally, in October, 1986, they fell below 10.00% for a few months, only to finish the decade alternating between 9% and 11%. During the decade of the ‘90s rates bounced between 7% and 8%, with brief flirtations in the 6% range.[1]
Before the era of computers, we had amortization books to tell us what the monthly P&I would be for 30-year loans at a given rate. My book started at 9.00% and went up from there.
Until the Great Recession, circa 2007 – 2009, rates hovered between 5% and 6%. Then, thanks to the government stimulus known as “Quantitative Easing”, rates dropped into the 3% range. Since 2017, the Fed has discontinued QE, and is resuming occasional .25% interest rate increases. As the Fed gauges the strength of the economy and inflation rates, it can be expected to continue incrementally increasing interest rates.
All of this is to say that for those folks looking to purchase a home, don’t be a Mugwump![2] There is no better time to purchase a home. The era of super-low rates is behind us. The more the economy heats up, the more seriously the Fed will look at raising rates.
In a May 19, 2018 Wall Street Journal article (Mortgage Rates Hit Seven-Year High as Ultracheap Era Ends), the authors reported the following:
Mortgage rates this week jumped to their highest level since 2011, signaling a shift from a period of ultracheap loans to a higher-rate environment that could slow home price appreciation and squeeze first-time buyers.
The average rate for a 30-year fixed-rate mortgage rose to 4.61% this week from 4.55% last week, according to data released Thursday by mortgage-finance giant Freddie Mac .
Although the article is worth reading, so are the comments. Many come from boomers, who, like me, remember rates in the 9.00% range which were generally regarded as “attractive”. And when they went stratospheric, i.e. into the teens, people got innovative, e.g. buying homes with existing mortgages below 10% on contract, and leaving the underlying loan in place. And before lenders began putting due-on-sale clauses in their mortgages, many lenders allowed their loans to be “assumable”.
We’ve had one interest rate increase so far this year, and in May, the Fed demurred. They’ve got five more Open Market Committee Meetings to discuss rate increases. According to the New York Times (Fed Holds Rates Steady and Stays on Track for June Increase):
The Fed is midway through what is meant to be a long and gradual push toward historically normal rates. It raised its benchmark interest rate in March to a range of 1.5 to 1.75 percent. Economic projections released at that meeting indicated that officials were split on whether they expected to raise rates a total of three or four times this year, with a narrow majority leaning toward three over all.
There is an entire generation of potential homebuyers that know nothing but low interest rates. However, this was the result of an artificially induced stimulus, and those days are receding in the rear-view mirror. It does not take much connecting-of-dots to figure out that the time to buy a home with still historically low interest rates is now. So don’t be a Mugwump! ~PCQ
[1] For the Fed’s prime rate history, go to this link.
[2] The Mugwump is that ubiquitous bird found mostly in North America that perennially sits on the fence, with its “mug” on one side and its “wump” on the other. Its defining feature is that it never gets off the fence….
