The Housing Market CAN THRIVE at 5% Mortgage Interest Rates

Housing Market Can Thrive | SummitLDSHousing market thrives:

Early November saw the 30-year, fixed mortgage rate hit a seven-and-a-half- year high of 4.86%.  Experts predict that mortgage rates will continue to rise, reaching 5% in 2019.

However, let’s put it in context.  Today’s rates are higher than the 3-3.5% rates of 2016, but they remain well below the historic average of 8%.  However, this increase has prompted discussion about how the housing market will respond to higher rates.

“Mortgage rates have adjusted in the past in response to high inflation, a technological revolution, a housing crises and a financial collapse.  However, today’s higher mortgage rates are due to a near record-long economic expansion, and a strong labor market.” Mark Fleming, Sr. real estate market analyst.

Almost impossible for most buyer’s to believe is the fact the in 1981 the 30-year, fixed-rate mortgage was over 18%.  As a title officer, I remember the first file I closed.  This was the interest rate and the buyers were simply happy to be buying a home regardless of the rate.  Rates declined throughout the 80s, leveling to around 10% at the end of the decade.   I distinctly remember making the statement toward the end of the 1980s, ”the title industry believes that we will never see interest rates in single digits again.”

During the 80s, the Federal Reserve was waging a war on inflation.  In an effort to tame double-digit inflation, the Federal Reserve drove interest rates higher.  Traditionally, the Fed raises rates in a strong economy to encourage sustainable economic growth, and cuts rates when the economy needs support.

During the 1990s and early 2000s inflation calmed, the 30-year fixed mortgage rate averaged 8.4% through most of the 1990s, dropping to below 7% in 1998.  A major reason was strong economic growth due to the arrival of the internet and information technologies.  Strangely enough, capital investments in new internet-based “Dot Com” businesses as a leading factor in the decline of inflation caused by strong economic growth.

However, in the early 2000s the “Dot Com” bubble burst, sparking a mild recession.  The Federal Reserve lowered the interest rates further in a combative effort and 30-year fixed-mortgage rates reached below 6% by 2003, a historic low at that time.  To further combat the crisis, a monetary stimulus policy was implemented which increased the money supply by buying government and mortgage bonds.  A new era of cheap credit was born and, as a result, mortgages rates fell below 5%, a level not experienced in the real estate marketing for more than 50 years.

Riding this wave, the Fed continued the monetary stimulus and mortgages entered this decade with a 4.7%, dropping to 3.5% by 2012.  Mortgages rates hovered around the 4% mark until 2016, at which time the 10-year Treasury yield rose as the economy expanded and the 30-year, fixed-rate mortgage followed suit.  Mortgage rates currently hovering around 4.85%.

The lesson – The key take-away from this trip through mortgage-rate history is that people were still buying homes across all of these mortgage rate eras.  Mortgage rates adjust due to many factors.  Today’s higher mortgage rates are due to a near record-long economic expansion and a strong labor market.

If you think 5% is high…just visit the Mortgage Memory Lane.


Article edited by Dona Myers, excerpts from an article by Mark Fleming, senior analyst for CoreLogic, Fannie Mae and First American, a regular contributor to CBS, CNBC, Fox Business News and NPR and frequently quoted in such trade publications as The Wall Street Journal, New York Times and Housing Wire.