Mortgage rates for the 30-year fixed mortgage continue to hover below 3% for the 10th consecutive week, according to Freddie Mac, but seeing that average rate in the early 1980s would be unheard of.
In November 1981, the 30-fixed year mortgage had reached a high of 18.37%, a peculiar sighting for most millennials and younger generations.
“Due to the oil embargo there was inflation in the early 80s and so Paul Volker tried to combat it by using monetary policy and raising interest rates to keep up with 13.5% inflation,” said Sebastian Hart, a capital markets analyst at Better.com, referring to the then-chairman of the Federal Reserve. “Therefore, the Treasury ticked up to 15% and mortgage rates went up to 18%.”
Fixed mortgage rates tend to track the yield on the 10-year Treasury bond.
1990s and the dot.com bubble
Two decades later, the 30-year fixed mortgage rate trend dropped to as low as 6.77% in October 2001. This was during the dot.com bubble, a term coined for the mid 1990s to 2001, when investors betted largely on internet-based companies and ignored their actual cash flow. When this bubble burst, investors lost trillions of dollars and a mild recession followed.
In periods of economic uncertainty, investors chase the safety of U.S. Treasury bonds, which increases their prices and lowers their yields, and mortgage rates follow those yields.
“We saw rates go to mid 6s and to mid 8s here and that was because the equity market was out of control and the Federal Reserve lowered interest rates,” Hart said.
By June 2003, the 30-year fixed mortgage rate reached 5.24%, at that time a new low.
Aside from lowering short-term interest rates, the Federal Reserve has other moves that affect the movement of mortgage rates.
“The Fed is a gigantic buyer of secondary buyers,” said Odeta Kushi, Deputy Chief Economist at First American Financial Corporation, an insurance lender. “They purchase [mortgage-backed securities], which increase MBS prices and lowers the yield and lowers the mortgage rates.”
Housing bubble and further declining rates
After mortgage rates inched their way back to 6% and higher, they fell again when the housing bubble burst in 2008 and the Great Recession followed.
“The housing bubble and bust implemented an unprecedented technique in monetary policy called quantitative easing and an era of cheap credit,” Kushi said.
Quantitative easing is when the Federal Reserve increases the economy’s money supply by buying government and mortgage bonds.
By 2009, mortgage rates fell below 5% to 4.82% in April. That was the lowest in the past 50 years, according to First American Financial Corporation.
2020 and the coronavirus pandemic
Today, as rates remain at near record lows of 2.88%, experts say homeowners can expect this to remain until the end of the year.
“There’s a saturated dynamic at play in the mortgage market where so many Americans are in the mood to refinance and mortgage originators can only originate a certain number of mortgage pieces,” Hart said. “The industry is not lowering rates as expected because there is an imbalance of supply and demand.”
Improvement in unemployment numbers will also not change rates much, Kushi said.
“Positive economic data might give mortgage rates a small boost with more liquidity pouring into the market,” Kushi said. “We really should expect rates to remain at historical lows in the near term.”
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