Mortgage Rates Then and Now

    By Brent Duhaime

    Historically, home loan mortgage rates in the U.S. paint a clear picture of the constant changes in the economy, inflation, and government policies over time. Here’s a peek at some of the historical highlights:


    1. 1930s: Creation of the Modern Mortgage System-Mortgage Overhaul

    • Prior to the 1930s, home loans were short-term and risky. The Great Depression led to mortgage defaults across the board, prompting the U.S. government to found institutions like the Federal Housing Administration (FHA) and Fannie Mae to stabilize the housing market.
    • The introduction of the 30-year fixed-rate mortgage made home loans more accessible, and mortgage rates were relatively low (around 5-6%). Brilliant minds made it happen.


    2. 1950s-1960s: Stable and Moderate Rates

    During the post-World War II economic boom, mortgage rates were steady, ranging between 4%-6%. The economy grew, and so did the suburban housing market, fueled by the GI Bill and FHA loans.


    3. 1970s: Inflationary Pressures

    • The U.S. experienced rising inflation in the 1970s due to oil prices and loose monetary policies. By the end of the decade, mortgage rates climbed sharply, averaging around 9-10%.
    • The government introduced adjustable-rate mortgages (ARMs) to offer more flexibility on home loans as rates began to rise.


    4. 1980s: Record-High Mortgage Rates

    • In response to extreme inflation in the late 1970s and early 1980s, the Federal Reserve, under Paul Volcker, raised interest rates dramatically to control inflation.
    • Mortgage rates peaked in 1981 at an all-time high of around 18-19%, making it difficult for many people to afford homes. Can you imagine taking out a home loan at this time?


    5. 1990s: Falling Rates with Economic Growth

    • After inflation was brought under control, mortgage rates began to decline steadily, settling in the 7-9% range throughout the 1990s and kicking off a period of opportunity.
    • Economic growth, especially during the tech boom, helped maintain lower rates compared to the highs of the 1980s.


    6. 2000s: Boom, Bust, and Financial Crisis

    • In the early 2000s, mortgage rates dropped to historically low levels, around 5-6%, helping fuel the housing boom. Subprime lending also became widespread, offering mortgages to borrowers with poor credit.
    • The 2008 financial crisis was largely due to the collapse of the housing bubble. As a result, mortgage rates briefly rose before falling as the Federal Reserve cut rates to stimulate the economy. If you lived it, you know.


    7. 2010s: Post-Recession Low Rates

    • Following the recession, mortgage rates remained low, hovering between 3% and 5% for most of the decade as the Federal Reserve kept interest rates low to encourage economic recovery. It worked and worked extremely well.
    • By the late 2010s, the U.S. housing market was growing again, but rates remained historically low. 


    8. 2020s: Pandemic and Rate Volatility

    • At the onset of the COVID-19 pandemic, the Federal Reserve cut interest rates to near zero, pushing mortgage rates to historic lows, with 30-year fixed rates falling below 3% in 2020 and 2021. Cheap money hit the streets and once again it cranked up growth.
    • In 2022 and 2023, rising inflation prompted the Federal Reserve to hike interest rates, causing mortgage rates to climb back up, with 30-year fixed rates surpassing 7%. First-time home borrowers were hit especially hard, pinching them out of the market.


    Influencing Factors:

    • Federal Reserve Policies: The Fed’s control over the federal funds rate significantly impacts mortgage rates. Lower rates typically reduce mortgage costs, while higher rates increase them.
    • Inflation: High inflation usually leads to higher mortgage rates as lenders demand higher returns to offset the eroding value of money.
    • Global Events: Wars, pandemics, and economic crises can cause sudden fluctuations in rates, either pushing them higher (due to uncertainty) or lower (due to stimulus measures).


    Conclusion:

    Mortgage rates have seen significant fluctuations over time, largely driven by inflation, economic cycles, and Federal Reserve policies. Rates have ranged from highs of nearly 19% in the early 1980s to historic lows below 3% during the COVID-19 pandemic.


    Homebuyers today face rising rates in response to inflationary pressures, but rates remain well below their historical highs. With that, what will the market look like tomorrow?