Well, it finally happened. The first reduction in the Federal Reserve rate in four years. To give you our best guidance on the future of mortgage rates, not only do we need to look at recent and past historic rates, but also what influenced those rates. Teaser; we may not be done with elevated interest rates. Let’s start with the graph shown below.
Lessons from History
You can see that the average mortgage rate from 1990-2023 was 5.97%. Today’s mortgage rates have been fluctuating between 6.1% and 6.3%, which is only marginally above the near term averages.
When we broaden the view, we see that the average rate from 1972-2023 was 7.81%. In fact, rates did not go below 6% until 2003, when monetary policy was adjusted to deal with the Dot-com recession. It’s also important to note that the 1970s and early 1980s spike was due in part to a period of high inflation that began in 1972 and did not come under control until 1983. Rates remained elevated throughout the 1980s to keep inflation at bay.
Inflation and Demographics
Inflation as we have all experienced is the key economic driver of interest rate policy. This is the main reason that rates stayed low following the rate reduction stimulus during the Great Recession from 2008-2012. The question we often get asked is, “Why didn’t rates go back up to pre-recession norms of approximately 6%?” The short answer is demographics.
Economics 101 teaches us about the impact of consumer spending and its effect on the economy. Since approximately 75% of our economy is based on our consumption of goods and services, the more people there are in their peak consumption years, the more growth the economy experiences. Fewer people of peak spending age slows economic growth.
As noted in the graphic below, economist Harry Dent’s research revealed that peak consumption occurs in our family formation years, beginning in our early 30s to early 40s, and peaks between the age of 46-50.
The next graphic illustrates that the Baby Boomer generation (those born between 1946-1964) transitioned out of peak spending years by 2013(birth year lagged 46-50 years for peak spending period). Lower spending on the part of Boomers kept our economy from overheating, thus there was not a need to raise interest rates.
Demographics and the Next Spending Wave
An unexpected by-product of the pandemic was that some Boomers left the workforce earlier than they may have otherwise. As you can see in the graphic above, the generation immediately following the Boomers (Gen X) was almost 30% smaller than the Boomer generation, leaving fewer workers to fill jobs vacated by Boomers. The result being accelerated wage growth, and increased spending power for the Gen Xers and the Millennials.
Early Millennials (born 1981-1996) are currently in their family formation years, with the oldest among them approaching their peak spending years. The Millennial Generation will continue to be an economic force through the entire 2030’s.
What does this all mean? Other than allowing for a possible (likely mild) recession, interest rates are likely to remain at current levels or higher for some time due to the pressure of wage and spending growth. In our opinion, the demographic pressures on our economy could easily fuel another bout of higher than desired inflation reports as we navigate later into 2025 or 2026. The result being rates staying near current levels and even possibly creeping up again to keep inflation at bay.
Considerations for Home Buyers and Sellers
Inflation leads to rising prices for goods and services, including rent. Over time, real estate has proven to be a powerful hedge against inflation, by fixing your housing cost based on today’s prices and interest rates.
Buyers waiting for a significant dip back to sub-5% interest rates are likely to be disappointed. The best option is to buy an affordable home today while current supply offers more options and to lock in your housing cost. Demographics along with an overall shortage of housing would suggest that upward price pressures will likely return to the market soon.
Home sellers who bought prior to the pandemic runup have substantial equity, even though we are below the market peak seen in Spring 2022. The current market offers more choices and opportunities for negotiation than during that peak period. If your housing needs have changed, or you’ve been waiting for the right moment, we believe the window of opportunity is now.
Bottom line, if you’re considering a change in your housing status over the next 12-24 months, let’s meet for a no-obligation strategy session to discuss your individual situation and goals. Call me today, and we’ll explore the unique opportunities of today’s real estate market.