Everyone knows mortgage rates are low. But just how low are they compared to historical averages, or should I say, medians?
Well, fortunately John Burns of John Burns Consulting did the math for us in a recent newsletter.
Currently, 30-year fixed mortgage rates for conforming mortgages sit at 3.51%, on average, per the latest Freddie Mac survey released this morning.
They’ve been pretty steady of late, changing no more than five basis points (0.05%) in the past month, at least, according to the survey.
And with the Fed pledging to continue buying mortgage-backed securities, they’ll ideally stay put for a lot longer.
Where Mortgage Rates Used to Be?
So we know where rates are now, but just how high were they in the past?
Well, as noted, John Burns ran the numbers for 30-year, fixed-rate conforming mortgages over the past 42 years.
Below are the medians to put it in perspective:
- 8.15% over the past 42 years
- 7.45% over the past 30 years
- 6.52% over the past 20 years
- 5.72% over the past 10 years
FYI: The median is the middle of a set of numbers, and is a good measure to avoid outliers skewing the data.
As you can see, mortgage rates have inched lower and lower over the past several decades, and that median will drop even more thanks to the near-record low rates available today.
Low Mortgage Rates Boost Purchasing Power
Clearly this has had a major impact on purchasing power for prospective homebuyers.
In fact, Burns noted that back in November 2008, a family who could afford a $1,000 monthly mortgage payment could take on a $165,000 loan amount.
At that time, the 30-year fixed stood at a reasonable 6.05%, before the Fed took action with its ongoing quantitative easing.
Today, that same family’s $1,000 mortgage payment would afford them a $222,000 mortgage.
This means they can afford a home that is 34% more expensive, simply because the interest rate is so much lower.
While this may be viewed favorably for those looking to buy today, and existing homeowners hoping their values rise, it presents a problem down the line.
In the future, if property values rise as a result of this newfound affordability, and mortgage rates eventually rise as well, home prices will once again be too expensive.
This could lead to another bubble, especially if banks and lenders are forced to get “creative” again with their financing in order to keep payments manageable.
However, Burns notes that with rates as low as they are, home prices can rise another 28% nationally before equaling the typical housing affordability seen over the past decade.
Looked at another way, 133 of 134 markets in the U.S. are “underpriced” from a payment/income standpoint. But only 69 of 134 markets are underpriced from a price/income standpoint, which reveals that home prices are being propped up by the low rates.
This hasn’t historically been the case. In fact, in the past both home prices and mortgage rates have increased in tandem because both tend to move higher when the economy is growing.
And assuming home prices do rise 28%, price/income ratios will wind up 27% higher than their historical norms, which can create major problems.
Unfortunately, there’s no turning back now. The Fed didn’t want to let home prices fall back down to earth, so we’re looking at ongoing inflated prices.
Of course, this is good news for existing homeowners looking for an exit, along with new buyers who stand to see some pretty stellar appreciation.
It just appears as if we’ll have to deal with the consequences again in the future. But hey, that’s what we always do anyway.
Read more: How much house can I afford?