Editor’s Notes: Mortgage Rates

Rising Interest Rates & The Steep-Slope Market










It’s been said that the difference between a statesman and a politician is that the statesman will do what’s right for his country while a politician will do what’s right for himself. Unfortunately, we have too many politicians and very few statesmen.

Everyone wants low-interest home loans, but the backside to that is that the lower the mortgage rate, the higher inflation will be in the long run. In the long term, inflation can be dangerous for any country’s economy. The Russian ruble is a case in point as it continues to tumble. The ruble is now equivalent to 13¢ United States Dollar (USD), just a fraction of what it was worth several years ago. Meanwhile, the USD is one of the most stable currencies in the world. That stability is due to constant management, which brings us to our current interest rate.

For decades, mortgage rates were around 5%. Then, in the late 1960’s, they started to dip. The Federal Reserve Board wanted to raise the interest charged to banks, but met resistance from politicians since it wasn’t politically expedient. When inflation skyrocketed in the 1970’s, the feds finally got the go-ahead and started raising rates, but it took over a decade before inflation was finally under control.

The average 30-year fixed mortgage rate hit an all-time high in 1981 at 16.63% and an all-time low last year at 2.96%. While mortgage rates are only part of the equation, interest rates affect everything from construction materials, to gas, to car loans, and to goods and services. With low home loans, there was every reason for the consumer to buy those big-ticket items at any price. As demand increased, so did prices.

During inflationary times and with prices going up, and interest down, there’s also no reason to save for the future. Any money saved today will buy less tomorrow, so spending endures and prices continue to rise.

Which begs the question; with mortgage rates again on the rise, what will happen to home prices, housing demand, and by extension, the steep-slope market? According to Zillow®, housing prices should continue to rise through at least 2024, albeit at a slower rate. This prediction is echoed by several other banking and financial sources. While some markets will flatten out, particularly those on the East Coast, the West should hold its own. One financial institution went out on a limb and stated the opposite view that, “the housing market will face a world of pain now that mortgage rates have reached 4.7%.” This is completely ignoring the point that 4.7% was, and is still is, a fairly reasonable rate. In fact, this is the low-end of the Federal Reserve Board’s expected target home interest rate range.

What’s expected to happen is that homeowners will now have to downsize their expectations on home size in order to keep their monthly payments within budget, but financial institutions are predicting continued growth. All this conjecture is completely ignoring the fact that there’s still a limited amount of homes on the market. In some popular areas, you can’t buy a home at any price, or at least not the one you want. Once again, it’s a simple case of supply and demand.

The Federal Reserve Board, when left to its own devices, will endeavor to do its best to keep inflation under control. They’re trying to allow for a slow, positive growth, rather than subjecting the country to an economic rollercoaster. As interest rates rise, more people will opt to save. There will be less spending and inflation should come down to acceptable levels. At least that’s the plan.



Marc Dodson