In the years since the recession, mortgage interest rates have fallen to historic lows, making it that much more affordable to finance the purchase of a new home. In fact, those historic low rates have also been relatively steady, with little fluctuation in the last few years. As a result, we’ve become pretty accustomed to low mortgage interest rates.
But the Federal Reserve has begun a series of increases to the federal funds rate that are expected to occur at certain intervals over the next few years. With the federal funds rate increasing, we might begin to see mortgage rates increasing again, too.
In fact, some experts are expecting interest rates to get up to 5% or 6% in the not-so-distant future. If you’ve only been keeping an eye on mortgage rates over the last few years, these rates might seem shockingly high. After all, rates have mostly stayed below 4.5 % since 2011. But from a historical perspective, a 6% interest rate just brings us back to what has been considered a “normal” rate for much of the last century.
So what makes mortgage rates change over time, and what events trigger those changes? In this article, we’ll look at the history of mortgages and mortgage rates over time to help shed some light on the changes that are occurring now.
The history of mortgage rates
Believe it or not, there was a time when you were expected to be able to pay entirely up front to purchase a home outright. Mortgages weren’t really developed in the United States until the 1930s when insurance companies began to offer them. These companies didn’t expect to make money off of the interest rates at the time. They expected to be able to earn money by seizing properties when borrowers couldn’t keep up with their payments. Still, borrowers were expected to be able to put down 50% of the purchase price in order to secure a mortgage. And because of that, for most people, homeownership was still out of reach.
In 1934, the Federal Housing Administration (FHA) decided to use mortgages as another way to help pull the country out of the Great Depression. The FHA created a new type of mortgage that looks a lot more like the ones we have today, in which borrowers were able to get mortgages with much lower down payments. By initiating the program, the FHA pushed banks and other lenders to offer similar mortgages. At that time, mortgage interest rates were around 6%.
Americans didn’t really have an opportunity to focus on homeownership until the end of World War II. With men away from home and women entering the workforce in their stead, few people were buying homes and mortgage rates dropped below 5%. When the war ended, however, we saw both the baby boom and a home-buying boom. The Veteran’s Administration assisted veterans with mortgages that required no down payment and, in general, the demand for mortgages accelerated.
The 1950s and 1960s
The post-war housing boom continued into the 1950s and 1960s—an era known for the creation of the American suburb. Housing developments were springing up outside of cities nationwide. As a result, interest rates continued to steadily increase over this time from approximately 4.5% to 6%.
Beginning in the early 1970s, mortgage rates began to rise even faster. This was largely due to the Arab oil embargo, which significantly reduced the oil supply and sent the U.S. into a recession with high inflation. As a result, the Federal Reserve raised rates to try to combat that inflation. This made the price of goods somewhat stable, but buying a home became considerably more expensive.
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Mortgage rates hit their all-time high in the early 1980s when the average interest rate reached a staggering 18.39% in 1981. This made homeownership out of reach for many who otherwise may have bought homes around this time. The economy recovered, but it took years for home sales to catch up.
The 1990s and 2000s
As demand for homes increased in the late ‘90s and early ‘00s, lenders began to create increasingly risky mortgage options (known as subprime mortgages) to draw in borrowers with less-than-stellar credit. That’s when the housing market crashed in 2007 and the Great Recession began. Mortgage rates dropped back down to below 6% and continued to decrease.
Mortgage rates steadily decreased, staying below 5% for the most part. Following the Brexit vote in 2016, mortgages dropped to historic lows around 3.42% when the stock market took a dive and investors began shifting funds into mortgage-backed securities. Having nowhere to go but up, mortgage rates are gradually increasing once again.
Why do mortgage rates change?
As we can see from looking at interest rates by year, major economic events can have a big impact on mortgage rates both in the short and long term. But how do these changes actually happen? That has to do with the Federal Reserve.
The Federal Reserve influences nearly all interest rates that lenders offer, including mortgages. The Federal Reserve sets the federal funds rate, which is the rate at which banks lend money to each other. This rate impacts the prime rate, which is the rate banks use to lend money to borrowers with good credit. Most loans and mortgages use the prime
rate to set the base interest rates they can offer to borrowers. So, after the Federal Reserve raises or lowers rates, mortgage loan rates are likely to follow suit.
Other factors are involved in mortgage rate changes as well, like investing trends. As we saw after the Brexit vote, investors were able to drive mortgage rates even lower by shifting funds from the stock market into mortgage-backed securities.
Over time, mortgage rates have risen and fallen alongside economic and political events. While that means rates can be relatively unpredictable, changes to mortgage rates tend to happen gradually.
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