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MORTGAGE RATES ARE UP, BUT COMPARED TO WHAT?

Posted on 06/15/2022 by Jon Barrett

We’ve all been hearing the same thing in the news and in every industry publication – the Fed is raising interest rates again and mortgage rates are up because of it – just like every previous time there has been uncontrolled inflation in the U.S. economy.  But is this increase unprecedented and does it make buying a home untenable for most buyers?  The answer to that is a resounding, “No” because even at five to six percent mortgage rates are well within (or even still below) the “normal” range established over the past 20 years of mortgage lending.

As a response to the COVID-19 pandemic (and the economic downturn many thought would accompany it), the Fed lowered interest rates to historic lows (near-zero) which, in turn, drove mortgage rates to never-before-seen lows.  Now that the Fed is raising rates to combat rising inflation rates, we are no longer seeing mortgage rates in the twos or threes, and we’re now up all the way into the five to six percent range.  But here’s the shocker – that’s normal!  As recently as 2019, rates were hovering in the mid-fours.  Prior to that, rates held steady at around four percent for the seven-year period from 2012-2018 and were over six percent prior to 2009.

But how does the Fed’s monetary policy affect mortgage rates in the long term? 

Well, if you look at the past two responses to inflationary events under the Burns/Volcker and Greenspan chairmanships, the increases in the Fed’s interest rates eventually led to a normalization in inflation as well as a reduction in mortgage rates by around 33%.  While these two previous events also resulted in a period of recession, that was likely due to several other economic factors that may not necessarily be present today, with most experts expecting only a small recession and contraction of the economy over the next four quarters (check out the Inman article HERE). When you look at today’s rates versus the rates of the past 20-plus years, mortgage rates are still well within the normal range, even at five to six percent interest.  However, because rates are still going to be in flux over at least the next year as the Fed attempts to get inflation under control and housing values are not forecast to go down (and if they do it would likely only to be a small correction), if your clients are looking to buy a house right now, don’t let the normalization of mortgage rates scare them away.  We’re not likely to see the ultra-cheap rates we did during 2020 and 2021 again for a while and waiting too long may mean they are stuck with even higher rates that may price them out of the home they want due to the increase in the monthly payment.

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