How We Got Here, A Brief History of Mortgage Rates

0:09) Hello there, we’re trying to build out our market analysis page and to get another foundational (0:13) piece I wanted to share with everybody how we actually got here because a lot of people (0:18) are still are in the game plan of or in the mode of thinking that I will wait for rates (0:27) to come down. (0:30) Some people did purchase with two unbuy downs, not expecting this, the current environment to last this long, thinking that, you know, rates would come down by now they could refinance at some point. (0:44) This is the average 30 year fixed rate chart for the last 50 years basically back going back to the early 70s.(0:54) And if you’ll notice, we are at, this is where we are right here. (0:59) Right, six and a half. (1:03) And what seems more normal.This right here where we are, or where we were 2021 in that range, you know, which that’s that’s the first thing to look at which which one seems more. (1:20) There we go. Yeah, which one does seem more normal right.(1:24) Now obviously we want the rates to be a little lower right now than they that they currently are, that’d be great. But if you go back and look historically speaking, you know, rates were typically in this range now, much, much more recently, obviously (1:40) we were, you know, more in the fives, that would, I think that would be a good goal to have for us but, you know, don’t honestly don’t get your hopes up. (1:50) Now, here’s what we’re gonna do we’re going to kind of go back and take a look at like I said, how we got here.So this is a chart of inflation versus the average mortgage rates for the the same chart we just had with the average mortgage rates but I have included (2:04) the inflation rate in this table as well and as you can see, it’s definitely a correlation. (2:13) Average mortgage rates follow inflation. You cannot get around it.That is just how it works. (2:19) And as you can see here in the 70s, you know, we had inflation spike rates start to go up. Inflation went down a little bit rates kind of went back and down and held the end again.(2:29) Inflation spikes mortgage rates go up and but anyone who is waiting for rates to come down and or you know I want to wait for rates to drop get back down to where they were. (2:40) You need to really take a look at this chart because one thing that we noticed is, you know, back here in the 80s once inflation really went down and got under control. (2:50) It did take time, as you can see here it took time for mortgage rates to come down obviously it was a slow, steady gradual reduction in rate.(2:59) And so it definitely took some time for us to get there. (3:04) Inflation stayed fairly low and kept going down for quite a while so that that is one thing that we we are getting back to and that we definitely do need. (3:14) Let’s go to the next chart.(3:18) Here we go. (3:20) So, if anybody thinks that the federal funds rate has anything to do with the actual mortgage rates they are incorrect. (3:28) They play no part.(3:30) Some economists some analysts think it does they say that it’s a certain percentage, it goes into it. (3:38) It is the exact opposite the Fed is waiting for is reacting to the data they always say they are data dependent. (3:46) They are reacting to the market.(3:49) They are not actually setting the market. (3:53) Now, the Fed does have what actually matters more when it when it comes to the Fed is actually what they say that matters more because if you if you listen to their press conferences if you read the, the minutes in the, in their meetings. (4:10) What you really want to do is pay attention to what how they feel what their analysis is how they feel about the economy moving forward that plays much bigger part in the in the actual Fed funds rate itself because as you can see here the this light green line fed the Fed funds rate is all over the place.(4:28) Going up going down, and a lot of times they are late to the party, especially here, you know, around the COVID time they were really late late to the party. (4:36) And if, if them, lowering the funds rate, you know, so, so much much actually mattered then then mortgage rates would follow the funds rate more than it actually follows inflation so that’s the, the key metric there. (4:52) Let’s go to the 10 year I’ve said before we’ve said before the 10 year is actually one of the metrics that you can follow if you want to know how mortgage rates are doing they track closely with a 10 year treasury yield, which also again tracks.(5:05) So now if we look back on the 2020 2021 period, because that’s the part that a lot of people are mistakenly thinking we are going to get back to we’re hoping that we get back to. (5:17) Now, the incorrect assumption is thinking that that is something that could possibly be attained again. And I will say, we really don’t want that again.(5:36) If we go back, sharing this chart again. So this is obviously the average 30 year fixed rate from the Federal Reserve Bank of St. Louis, the shaded areas, that’s also something to know the shaded areas are recessions, and typically, in the 70s it was different, we had stagflation in the 70s. (5:58) So we had inflation and a recession.(6:05) So stagnant economy and inflation, not a good combination but typically you know since the 80s, every time we’ve had a recession we’ve had a reduction in mortgage rates because a lot of times, things get cheaper they’re trying to reduce costs of goods and whatnot so inflation goes down. (6:21) And so do mortgage rates. So that is what we see every single time we have a recession is a little bit of a reduction in mortgage rates.What do you notice about this time right around our last recession during COVID was, we had, we already had inflation, very, very low, historically low for quite a while. (6:46) We had inflation underneath 2%, damn near 1% for a good 10 years before that. And so that is constantly pulling mortgage rates down, continuing to pull mortgage rates down.(7:05) And then what happens in 2020, we had a little mini recession, and it was quick, because we were all surprised at the severity of not necessarily the code virus itself but the lockdowns right, the lockdowns, the supply chain disruptions, everybody basically closing everything down. (7:26) Even the, the states that open back up quickly, like Texas, Florida stuff like that they still close down for what several weeks to a couple of months. (7:36) And so, what’s, what is that going to do to the economy it’s going to throw it into a recession no matter what right, so we had a quick recession.(7:45) That was not natural, nothing that we were expecting and predicting because things were trucking along fairly well at that point, we already had super low inflation, up until that point as well. (7:57) And then, not only do we have the Federal Reserve looking at things trying to help spur the economy on but they felt like they needed to be a new buyer in the mortgage backed security market. (8:12) And that is one of the, one of the aspects that people don’t really remember is like mortgage backed securities, the mortgages are a product and so investors are constantly buying mortgage backed securities, which is the actual like funding arm basically of your mortgage.(8:29) And they’re also buying 10 year treasuries and all the kinds of other bonds. (8:33) Now if, if you purchase, if a lot of purchases of mortgage backed securities are made, the actual rates go down because the more people that want to buy that product, they can say well I can give you a lower rate of return and they lower, lower the incentive, and then people keep buying it, the rates continue to go down. (8:49) So what you had was a Federal Reserve thinking they need to help things out and purchasing, not only do they lower the funds rate to hopefully let businesses operate more cheaply, but they also became a player, a buyer in the mortgage backed security market, thereby throwing a, not, not just an extra investor that shouldn’t have been there, a massive investor, and one that was not concerned with a return.(9:17) So when you have, have a player like that just buying willy nilly without caring about the actual return on their investment, it really threw a wrench into it so that is why we had 3% rates. (9:28) And we really shouldn’t want that again because it was a not, not a, not a great, I mean, not a great time to be in. (9:36) So when we look, when we start thinking about where we need to be, what, why, why would, why would you think rates would get back down to 3%? (9:50) Because when you look at the factors, at the recipe that it took in order for rates to get down that low, we should not want that again.(9:59) Now we, as you can see here, let me pull up the last five years. (10:06) Here we go. (10:07) This is the last five years, right? (10:08) Look at how low inflation was right before it spiked, you know, right at the end of COVID and whatnot and inflation spike.(10:17) Look how low inflation was, right? (10:19) And that is how low mortgage rates got. (10:23) Inflation has been hovering here in between around right around two and a half to 3%. (10:28) We finally got it back down under the three.(10:32) What makes you think this is again, thinking about if you’re trying, if you’re thinking about purchasing, you want rates to go down. (10:38) Everybody wants rates to go down. (10:39) You’re waiting for rates to go down.(10:41) With these economic factors right now, what makes you think rates will go down more? (10:47) Because as of right now with inflation at about two and a half percent working two and a half to 3% and mortgage rates tend to be not exact all the time, but tend to be about four points higher than inflation. (11:10) So if inflation is at two and a half and the average mortgage rate right now is six and a half to 6.75, that makes sense, right? (11:19) So we need inflation to get way back down, like extremely low again. (11:26) And that’s where we were.(11:27) We were not just extremely low down to 1%, but we also had the 10-year treasury yield tightening up. (11:35) And then again, like I said, recession, Federal Reserve buy mortgage-backed securities causing yet another buyer in a market that usually doesn’t have that buyer in the market causing rates to go down even more. (11:46) So that is why I say that a good goal or target may be for rates to be in the fives, because I think if economic conditions get favorable again, right, we could possibly see inflation under 2%, which would lead to mortgage rates hovering in the fives somewhere.(12:14) That’s a good goal to have. (12:16) That’s what we should be hopeful for. (12:18) But if you’re sitting around waiting and waiting and waiting for rates to go down, you have to look at the actual data and not just what some of these predictors are hoping is going to happen.(12:30) And you have to realistically think, is inflation going to continue to go down given our current environment or not? (12:37) And so that is how we got here.