Understanding Comparative Mortgage Rates

The Great Depression birthed the mortgage as we know it today. The American public found themselves in a place of tremendous need. Insurance companies saw their moment and created what we now know as mortgage loans, as a means of predatory lending. In these loans, insurance companies typically loaned less than the value of a home for a short period of time (3-5 years), with a balloon rate attached to the end. Obviously, this led to a substantial foreclosure rate. President Franklin D. Roosevelt responded with the National Housing Act of 1934, setting the stage for the mortgage industry we recognize today.

The Federal Home Loan Mortgage Corporation (Freddie Mac) initiated 30-year fixed mortgage rate tracking in 1971. At its inception, mortgage rate tracking in the early 1970s reflected numbers similar to what we have seen in 2023. In 1974, the effects of inflation began to take hold. (Sound familiar?) By the end of the 1970s, mortgage rates had reached a then all-time high of nearly 13%. As America heads into the 1980s we begin to see the Federal Reserve, led by Chairman Paul Volcker, raise the federal funds rate to combat inflation. The result was mortgage rates peaking at what is still the all-time high of ~18.5% in 1981. The efforts to reduce inflation, and subsequent interest rates, took the rest of the 1980s to achieve. At the end of 1989 mortgage rates were just under 10%.

The 1990s became an advantageous real estate market based on the mortgage rate. America had a budget surplus, and the dot-com bubble was upon us. As technological investments proved fool's gold, treasury bonds became in vouge. Treasury bond prices and mortgage rates have an inverse relationship. As treasury bond prices increased in the 90s, the mortgage rates subsequently decreased. By 1998, 30-year fixed mortgage rates were below 7%. A heavy refinance boom is seen in the late 90’s from those who had purchased their houses in the late 80’s to early 90’s.

As we head into the new century, things get complicated, quickly. Subprime loans began to flood the real estate marketplace in the early-2000s. These subprime loans, for all intents and purposes, crashed the real estate market at the end of the 2000s causing what we now know as The Great Recession. As you would expect, with the economic gridlock we saw during The Great Recession, the Federal Reserve was forced to act. Their decision to quantitatively ease reflects a similar decision they made in response to the COVID pandemic. By the end of 2009, mortgage rates were below 5.5% and we would continue to see this number decline into the 2010’s. In 2012, the 30-year fixed mortgage rate reached a then record low of under 3.4%. The rest of the 2010’s can be characterized as an advantageous real estate environment with mortgage rates never topping 5%.

The COVID pandemic certainly altered the path mortgage rates were on entering the 2020’s. As the economy froze from quarantine, the Federal Reserve again turned to the strategy of quantitative easing to encourage economic activity. This strategy produced the now infamous 2-3% mortgage rate. In December 2020, the 30-year fixed mortgage rate reached an all-time low of ~2.6%. Rates would continue in the high 2%-low 3% clip through the end of 2021. As we began 2022, the inflation from the dramatic increase in economic production became a problem. In turn, the Federal Reserve raised the fed funds rate rapidly, altering course from quantitative easing to quantitative tightening. By the end of 2023, we see the 30-year fixed mortgage rate around 8%.

It's important to understand the context of the 30-year fixed mortgage rate. The average rate, year-over-year, since the creation of mortgage rate tracking, is 7.6%. If you bought a house anytime between 1971 and 2023, the average mortgage rate for that 50+ year window is 7.6%. For comparison, the 30-year fixed mortgage rate, today, is about 7.625%. There are a number of other factors that factor into the complexity of the housing market where we currently find ourselves. However, understanding the history of the 30-year fixed mortgage rate will help set expectations and improve communication.

Historical 30-year Fixed Mortgage Rate Average in the United States, per Freddie Mac