History and Outlook of Mortgage Interest Rates
After the economic downturn caused by the credit crisis and pandemic, mortgage interest rates approached 3%. If a trade war storm causes inflation and recession, mortgage rates could potentially return to the 3% era again.
However, if such a situation occurs, the economy and housing market would likely face greater challenges. Despite lower mortgage rates, purchasing homes might become more difficult.
Current mortgage interest rates are much lower than their historical peaks in the 1980s, but significantly higher than the lows of under 3% in 2021. As housing prices continue to rise, many people are postponing their dreams of homeownership.
Is Now a Good Time to Buy a House?
Those considering buying a home may wonder if now is a good time to purchase. While there are expectations that mortgage rates will drop when the Fed lowers interest rates, looking at past mortgage rate trends shows various fluctuations depending on circumstances. The saying “the 2-3% mortgage rate era won’t return” might not necessarily be true.
If your financial situation is sound and you can manage new mortgage payments, higher mortgage rates may not be problematic. While we cannot predict the future of mortgage rates, understanding trends can help make wiser decisions about when to buy a home.
History of Housing Mortgage Rates
Congress established Freddie Mac in 1970 to expand the secondary mortgage market, and began collecting mortgage rate statistics in April 1971. The annual average interest rate for 30-year fixed-rate mortgages reached its highest point at 16.64% in 1981 and fell to a historic low of 2.96% in 2021. The current average rate is in the high 6% range.
1970s: Inflation Shock
- Lowest annual average mortgage rate: 7.38%
- Highest annual average mortgage rate: 11.20%
In the 1970s, mortgage rates steadily rose from the mid-7% to about 9%, then jumped to over 11% by the late 1970s. This was due to hyperinflation that persisted from the mid-1960s to the early 1980s.
1980s: Aftermath of Oil Shock
- Lowest annual average mortgage rate: 10.19%
- Highest annual average mortgage rate: 16.64%
This upward trend continued into the 1980s, reaching an all-time high of 16.64% in 1981. In response to OPEC’s oil embargo, the Fed adjusted short-term rates several times throughout the 80s, and by the mid-1980s, interest rates had fallen to 10.32%.
1990s: Moving Away from Price Shock and Declining Trend
- Lowest annual average mortgage rate: 6.94%
- Highest annual average mortgage rate: 10.13%
Home buyers felt some relief in the 1990s. Mortgage rates dropped to below 7% in 1998 and rose slightly to 7.44% in 1999. The dot-com bubble and growth of the internet contributed to lower interest rates.
2000s: Mortgage Lending Boom
- Lowest annual average mortgage rate: 5.04%
- Highest annual average mortgage rate: 8.05%
Mortgage rates peaked at 8.05% in the early 2000s, then fell to 5.04% by 2009. This was due to the housing market collapse and credit crisis, caused by rapid growth in the housing market following a surge in subprime mortgage borrowers.
2010s: Long Housing Market Recovery Period
- Lowest annual average mortgage rate: 3.65%
- Highest annual average mortgage rate: 4.69%
Mortgage rates remained low over the past decade. They temporarily rose to 4.17% and 4.54% in 2014 and 2018 respectively, but were still four times lower than historical highs. During this period, low housing purchase demand led to a downward trend in mortgage rates.
2020s: Housing Boom Brought by the Pandemic
- Lowest annual average mortgage rate: 2.96%
- Highest annual average mortgage rate: 6.81%
The COVID-19 pandemic brought historically low mortgage rates, but these didn’t last long due to multiple Fed rate hikes from March 2022 to July 2023. Rates surged to 5.54% in 2022 and 6.81% in 2023, before slightly decreasing to 6.72% following the September 2024 rate cut.
Will the 3% Mortgage Rate Era Return?
In 2021, the average 30-year mortgage rate fell below 3%, but it’s now well above 6%. With the Trump administration taking office, deteriorating economic conditions and growing inflation concerns make it likely that interest rates will rise again.
People experienced record-low mortgage rates in 2020 and 2021. The lowest point for 30-year fixed mortgages was 2.65% in January 2021, and rates remained below 3% for about two years. However, the possibility of mortgage rates falling back to 3% is very low, as the Fed prioritizes controlling inflation over preventing recession.
The low interest rates during the pandemic were due to the Fed’s aggressive rate cuts to mitigate the impact of COVID-19. But if a tariff bomb proceeds, rates are likely to increase to counter inflation.
Many experts predict that 30-year mortgage rates will remain between 6-7% in 2025, and may decrease further in 2026 but still remain above 6%.
However, if stagflation occurs (simultaneous recession and inflation), the Fed would have no choice but to drastically lower rates, in which case mortgage rates could reach 3%. But the lower this possibility, the better for the economy and housing market.
New Jersey Best Realtor Richard Choi
