The press loves a good scare story, and mortgage rates hitting a 12-year high is just the ticket.
Mortgage rates did hit a 12-year high, and I suppose for those who are newer to the world of finance that probably seems like a big deal, but the reality is a little different. The 30-year fixed mortgage averaged 5.11% last week. That isn’t remotely a historically high mortgage interest rate. In fact, it wasn’t that long ago that a 5% mortgage was a great rate. It still is.
But, these haven’t been normal times. The U.S. economy seems to lag on differently than it once did. The inflation we see today is the only real inflation we have seen in decades. Every time the American economy looked it like might get going back to “normal” something happened to smack it back down turning what used to be crazy, historically low interest rates into normal interest rates to the newest generation hitting financial literacy.
This 10-year chart of the Federal Funds rate shows that we haven’t seen a Fed Funds rate above 2.5% in the last decade. In fact, just when we got close to something that might be considered normal or nonaccommodative monetary policy, we had to slam on the brakes and bring it back to zero, thanks to Covid.
If you have only paid attention to money and finance for the past decade, something like 2.5% might sound like normal interest rates, but check out this chart of the Federal Funds Effective Rate that goes back to 1998.
Turns out that 2.5% Fed Funds rate is baby interest rates. Keep in mind that 6%+ you see over on the left edge was the Fed trying to cool down the economy (mission accomplished), but the 3% and 4% are not crazy interest rates even though they might seem like that today.
You see, savings accounts used to pay money. Bonds used to pay money. But, ever since Wall Street nuked the economy with Great Recession, the economy has been holding on by its fingertips. The inflation and fast-growing job market of the past six months are the first inkling of a real recovery since then.
The Recessions and Interest Rates
I came of financial age during the run up in the economy and stock market known as the Internet Bubble. Investors lost their minds and threw billions of dollars at anything that sounded even remotely internet connected. Barnes and Noble literally spun off a second company for its online website because the internet was fast money and bookstores were not. Never mind that it was the same business but on a computer.
Check out my Plynk review.
Alan Greenspan’s infamous “irrational exuberance” comment came during this period. Then, when the Fed took away free money, it turned out that companies that had no profits and no hope of profits weren’t good investments after all. Some analysts rode the bubble popping all the way down, telling their clients to “buy the dip” that wasn’t a dip. By 2001, the economy was in recession and got kicked while it was down with the 9/11 attacks.
2004 To the Housing Bubble
In 2004, much like today, the economy seemed to be stabilizing but with very low interest rates. The Fed embarked on a campaign to slowly raise interest rates in order to bring monetary policy back to “normal.” From 2004 through the Summer of 2006, the Fed steadily raised rates a quarter-point at a time.
2007 and Housing Bubble
By late 2007 it was obvious the housing market was in trouble, although no one knew just how badly. The Fed started cutting rates again, with the economy in the 5% range for just over one year. Again, the Fed cut without panicking, but steadily with a half-point cut in September 2007, and a series of 0.25% cuts all the way until October 2008 when the big banks began failing. The Fed dropped interest rates to “effectively zero.” They stayed there for an unprecedented seven years until the American economy, that had been broken so badly by the housing crash, was strong enough to even try regular interest rates.
From 2015 to 2018 the Fed managed to gradually raise rates to 2.50% before it had to start cutting again. In hindsight, the Fed was raising rates in 2018 not because they needed to be raised, but because the Fed didn’t want them at zero. But, that meant the economy got tripped up by rates that were too high.
The result was a series of cuts all through 2019 to try and save the economy that The Fed had pumped the brakes on too hard. Unfortunately, in 2019, the coronavirus pandemic shocked any possible life out of the economy and rates went back to zero.
2022 Interest Rates
Which brings us to today. Whenever an analyst or talking head on TV says that the Fed was too slow to raise interest rates, or that they fell behind on inflation they are engaging in either revisionist history, or just flat out lying. The Fed was naturally afraid to repeat the mistakes of 2017 and 2018 where the Fed marched interest rates higher despite virtually no inflation above its supposed 2% target.
So, about that 12-year high mortgage rate?
Yup. We haven’t had a full-strength economy for 12+ years, so it makes sense. If you need to buy a house, then buy a house. Chances are 5% is going to be a good mortgage rate for a long time to come…
That is, unless something else whacks the economy again?
—– over eager Fed raising rates too quickly to appease talking heads on TV? That would be my bet.
2022 Interest Rate Projections
The Fed is going to raise rates 0.50% at its May meeting. That is all but a forgone conclusion. What nobody seems to realize is that will be a much harder brake than people are anticipating. Another 0.50% hike this summer will all but stop this economy in its tracks. If the Fed sticks to the data and ignores the voices on TV, it should stop there. If not… well, I guess we all get to see how fast the Fed can cut rates back to zero again.