Mortgage rates zoomed in the last quarter of 2016, with the 30-year fixed ending the year at 4.32 percent. It rose more than three-quarters of a percentage point in the final three months of the year. That’s a lot, but let’s put this in perspective.
Bankrate has surveyed mortgage rates every Wednesday since Sept. 25, 1985. The 30-year fixed was 12.31 percent that first week, and that’s the highest it’s been.
Mortgage rates were even higher — around 18 percent — in the early 1980s, before Bankrate’s survey.
In the 1,629 weeks of our survey, the 30-year fixed has averaged 6.99 percent — much higher than today’s rates.
The first time the 30-year fixed dipped below 4 percent was May 16, 2012.
As far as I can tell, mortgage rates had never been under 4 percent until then. In an appendix to an obscure research paper from 1956, I found evidence that you could get a 4 percent mortgage in Chicago more than a century ago.
The Bankrate Daily
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Why mortgages rose so much
Mortgage rates rose as part of a sell-off in bond markets. According to conventional wisdom, investors dumped their bonds after the presidential election because they believe that Donald Trump will raise infrastructure spending and cut taxes. That would lead to bigger federal budget deficits.
“With Trump getting in, that brings in a lot of inflation fears and uncertainty that causes rates to go up,” says Brian Koss, executive vice president of Mortgage Network.
Those of us who went to college in the 20th century were taught that federal budget deficits are inflationary and lead to higher interest rates. Apparently, a lot of bond traders went to college in the 20th century, because they sold bonds on the assumption that inflation is inevitable. When investors sold bonds, mortgage rates went up.
Those investors were jumping to conclusions. I’m not saying they’re wrong; I’m saying it’s too soon to know if they’re right. They jumped to conclusions in two ways that I can think of:
The president isn’t in charge of spending and taxes. Congress is. Who’s going to get his way in the budget debate: Trump or House Speaker Paul Ryan?
Deficit spending doesn’t always lead to higher interest rates. We had budget surpluses in the last half of the Clinton administration, and then George W. Bush brought back deficits. Under Bush, mortgage rates went down. The deficits got bigger under Barack Obama. Mortgage rates fell to record lows. Inflation was too low for the Federal Reserve’s comfort.
Higher mortgage rates will reduce demand for houses, right? We were taught that demand goes down when prices go up.
But the law of supply and demand doesn’t have an iron grip on housing. You look for a home when you want to, and then you buy what you can afford, right? I mean, a lot of people buy their first homes when they start families. No one checks house prices and mortgage rates when deciding whether and when to have children.
“The lead-up to the election had no impact on home sales or demand; pent-up demand, historically low mortgage rates, relatively strong job creation and significant demographic tail winds created the best real estate market in a decade,” says Jonathan Smoke, chief economist for Realtor.com.
He adds that a jump in mortgage rates could disrupt sales, but “we don’t have a comparable period in history with good data to draw any sharper conclusions.”
Elizabeth Rose, branch manager for Movement Mortgage, in Dallas, says: “I don’t think this is bad news for housing at all. We can look back on history and see that people buy houses no matter what the interest rates are. The 1970s and 1980s are evidence of that.”
She acknowledges that mortgage rates might affect some people’s ability to buy. But she agrees with me that determined homebuyers will simply choose smaller houses or longer commutes in exchange for lower house prices. A lot of buyers won’t even have to do that. Mortgage rates are in the 4 percent range. That’s still low, and this rate increase doesn’t affect affordability much.
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You must go
When you cover the mortgage and real estate beat, you notice how inescapable the subject is. Case in point: A Tribe Called Quest’s new album, “We Got It From Here … Thank You 4 Your service.” The first two songs are about (among many other things) gentrification and environmental racism.
In “The Space Program,” Q-Tip raps:
They’d rather lead us to the grayest water poison deadly smog
Mass un-blackening, it’s happening, you feel it y’all?
Hey, ho, let’s go
Speaking of A Tribe Called Quest, co-founder Phife Dawg died last spring, and New York renamed a crossroads after him. Malik “Phife Dawg” Taylor Way is the intersection of Linden Boulevard and 192nd Street in Queens, New York, near the spot where the group stood atop Nu-Clear Cleaners in their video for “Check the Rhime.”
Fellow Queens musicians the Ramones also got an intersection named after them. Ramones Way is the intersection of 67th Avenue and 110th Street, right in front of Forest Hills High School, where the original members attended.