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Mortgage Rates: Is 8% the new normal?

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October 20, 2023

Mortgage Rates: Is 8% the new normal?

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Averages offer helpful perspectives

Extreme data points, both highs and lows, make excellent headlines but are rarely useful information in the long run. Rates raising from the 2’s to the 8’s is an enormous jump, but here’s a statistic that might be surprising these days: the 30-year fixed mortgage rate in the US averaged 7.74% from 1971 until 2023. It reached an all-time high of 18.63% in October 1981 and a record low of 2.65% in January 2021.

In 1981 while rates hit that all-time high of 18.63%, they averaged 16.63% that year. By 1986 the average was down to 10.19%. Both 1981 and 2021 were anomalies, highly unusual years.

Even looking back at the past 5 years we should see that the huge spikes and dips that inevitably happen usually don’t last too long, and certainly not forever. Is 8% the new normal? No one knows for sure. But take one more look at the average for the past 50 years and one thing is certain: 18.61% was NOT normal or permanent, and neither is 2.65%!
What’s to come?

While we cannot predict the future, we can look at the global and national trends that could indicate what action the FED might take in the long term.

1. The FED saw inflation staying a bit sticky last month, resulting in new language about HIGHER RATES FOR LONGER – maybe much longer. This seems to be the headline narrative of the week, however, narratives often change.
2. Strikes/demand on higher wages. Many workers are in revolt mode as they see their incomes not keep up with inflation or the much higher incomes of the leaders of their companies that highlights the growing wealth disparity. Miraculously, this is being highlighted by both political parties. Structural shifts – mostly fueled by new technologies such as AI – are making this more complicated.
3. Government shutdowns. Will we, won’t we? The same old story rears its head again. Government shutdowns are not great confidence boosters. They are also temporary, although the longer they last the worse they get.
4. Commercial re-financing wave. Most commercial loans are shorter term. Many are coming due for refinancing now at much higher rates. Most are held by smaller, regional banks which also finance small businesses. 33 million small businesses employ 61.5 million people nationwide.
5. The public’s excess savings are now below $200 billion, down from about $2 trillion!
6. Oil production cuts by OPEC – combined with the unlocking of China – have resulted in an oil price spike from $68 at the end of June to over $90.
7. The FED has decimated the housing market. It has successfully managed to wreck supply, demand, AND affordability, while barely impacting pricing, with some areas still seeing prices rise. However, the rental market is cooling. Hundreds of thousands of new units are helping!

Based on these trends, one could expect interest rates to decrease into 2024 – we can’t be sure, but here’s hoping! In a world of uncertainty, we can expect that the FED will be slow and late. We have seen this too often. They were slow to raise rates and then did so rapidly. They may be as slow to drop them… and do so rapidly again? Maybe expecting to reach 2% inflation is not realistic when over the past 65 years core CPI has averaged 3.63%. Different experts recommend different remedies.

Those buying now among this uncertainty – even those over-bidding – may be watching the most critical of all housing data points: The US is hugely under-built. The population is projected to grow by around 25 million by 2030, which means we need at least 10 million more homes by then. Add in $70 trillion of generational wealth redistribution and a US economy expected to grow from $26 trillion today to $35 trillion by 2030. Then add in the aging housing inventory requiring renovation or rebuilding, and increasing natural disasters including tornadoes, fires, floods, etc. – and securing a property today may be the wisest of all long-term investments.

A professional, informed, and insightful agent with real-time information remains invaluable in this process. We are always here to advise!
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