Interest Rate and Value Trends

San Diego

Residential and commercial real estate price trends are directly affected by many variables such as local, state, and national unemployment rates, inflation trends that are moving “too high” or “just right” instead of the most concerning “too low” directions by way of deflationary price trends when asset values are moving downward instead of the more desired upward direction. However, the most important factor that generally impacts real estate values more than any other is the interest rate cycle.

During time periods when interest rates are at or near all-time lows as seen over the past several years, then home values tend to rise near their peak highs. Conversely, rate cycles that are near their all-time highs like back in the late 1970’s and very early 1980’s when the U.S. Prime Rate reached a staggering 21.5% rate, then home values are quite likely to fall because fewer borrowers can afford the higher monthly mortgage payments that are tied to the underlying mortgage rates.

In October 2018, the average 30-year fixed mortgage rate in the U.S. finally exceeded or rose above 5% for the first time since February 2011, according to the Mortgage News Daily. It was just one year ago in 2017 that the most commonly chosen 30-year fixed rate mortgage was at or below 4%. In 2016, it wasn’t unheard of to find 3.5% 30-year fixed mortgage rates.

On a comparative basis over the past few decades, the past few years’ worth of incredibly low mortgage rates haven’t been normal or typical. For example, the average 30-year fixed mortgage rate between 1971 and 2017 was 8.21%. During this same span of time, the lowest average 30-year fixed rate reached was 3.31% in 2012 and the highest 30-year fixed rate was a whopping 18.63% in 1981.

Let’s review below the history of the lowest, highest, and average rates for each year between 2017 and 1971 to better understand the fairly exact correlation between low mortgage rates, increasing buyer demand, and booming real estate prices, or high mortgage rates, decreasing buyer demand, and busting or declining property values:

 

Year                 Lowest Rate         Highest Rate         Avg. Rate

2017 3.89% 4.30% 4.10%
2016 3.41% 4.32% 3.65%
2015 3.59% 4.09% 3.85%
2014 3.80% 4.53% 4.17%
2013 3.34% 4.58% 3.98%
2012 3.31% 4.08% 3.66%
2011 3.91% 5.05% 4.45%
2010 4.17% 5.21% 4.69%
2009 4.71% 5.59% 5.04%
2008 5.10% 6.63% 6.03%
2007 5.96% 6.74% 6.34%
2006 6.10% 6.80% 6.41%
2005 5.53% 6.37% 5.87%
2004 5.38% 6.34% 5.84%
2003 5.21% 6.44% 5.83%
2002 5.93% 7.18% 6.54%
2001 6.45% 7.24% 6.97%
2000 7.13% 8.64% 8.05%
1999 6.74% 8.15% 7.44%
1998 6.49% 7.22% 6.94%
1997 6.99% 8.18% 7.60%
1996 6.94% 8.42% 7.81%
1995 7.11% 9.22% 7.93%
1994 6.97% 9.25% 8.38%
1993 6.74% 8.07% 7.31%
1992 7.84% 9.03% 8.39%
1991 8.35% 9.75% 9.25%
1990 9.56% 10.67% 10.13%
1989 9.68% 11.22% 10.32%
1988 9.84% 10.77% 10.34%
1987 9.03% 11.58% 10.21%
1986 9.29% 10.99% 10.19%
1985 11.09% 13.29% 12.43%
1984 13.14% 14.68% 13.88%
1983 12.55% 13.89% 13.24%
1982 13.57% 17.66% 16.04%
1981 14.80% 18.63% 16.64%
1980 12.18% 16.35% 13.74%
1979 10.38% 12.90% 11.20%
1978 8.98% 10.38% 9.64%
1977 8.65% 9.00% 8.85%
1976 8.70% 9.10% 8.87%
1975 8.80% 9.60% 9.05%
1974 8.40% 10.03% 9.19%
1973 7.43% 8.85% 8.04%
1972 7.23% 7.46% 7.38%
1971 7.29% 7.73% 7.54%
Overall 3.31% 18.63% 8.21%

Source: Fannie Mae

 

Real estate agents and brokers should think about developing marketing plans that are tailor-made or specifically designed for the current or potentially near-term housing cycle in their general region. For example, agents may wish to consider marketing to people interested in selling their homes near the top of the housing price cycle when interest rates are starting to rise again like in late 2018. Other times, agents can reach out to tenants who might have an interest in purchasing their first home when interest rates are near historically low levels like they still are today.

The access to cash or credit is usually the most important determining factor during any type of housing cycle. During both good and bad economic time periods, there are usually tremendous amounts of opportunity available to real estate professionals who can help guide their clients through the prosperous or turbulent economic times. Homeowners and other clients will usually be very grateful for the guidance offered by knowledgeable and informed agents. As such, agents should continue to keep a close eye on the latest and most up-to-date market trends and interest rate cycles that can help or hurt their clients in the near or long term.

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