Are rates historically high?

Question of the week: Are rates historically high?

Answer: It depends on how we define “high” and “historically.”

For purposes of answering our question, historically will be January 2006. Why? Because I have consistent data with rates from the Weekly Rate & Market Updates that have used the same criteria each Friday for the conforming mortgage rate (see fine print below under the chart weekly rate chart).

Speaking of charts, this week we have a bonus chart:

Since January 2006 the median interest rate (the middle of all the rates listed, the median of 6, 5, 4, 3, 2 is 4; there are two numbers above 4 and two numbers below) is 4.00%. During the period the highest rate was 6.625% in June 2006, the lowest was 2.375% a few times between November 2020 and January 2021.

The average price of rates (add up all the rates and divide by 862 weeks) for every Friday from January 2006 to last Friday is 4.228%, about one-quarter of one-percent above the median. Because the average is higher than the median, this means that the conforming rate was over 4% by higher values for more weeks than under 4%.

As you mentioned, the highest rate in our time frame was 6.625% in June 2006. From June 2006 until the real estate and mortgage market meltdowns that pulled the country (world) into the Great Recession, rates bounced from about 5.5% to 6.5%.

In 2006 the median home price in Los Angeles County was $585,400, and the conforming loan limit was $417,000. To purchase the median home in June 2006 with 20% down, a homebuyer would need a jumbo loan, with a rate of 6.75%. For a $468,320 30-year fixed rate mortgage at 6.75%, the June 2006 monthly mortgage payment would be $3,038 per month.

In June 2022 the median LA County home price was $860,000. I will make an assumption that the median price is the same for this exercise. Purchasing the median price with 20% down would require a loan amount of $688,000—above our maximum conforming limit of $647,200; the high-balance rate, which as you can see below is 5.625%. The payment for 30-year fixed rate $647,200 mortgage at 5.625% is $3725 per month.

From the highest rate in 2006 to today’s rate, the median home value has increased 47% and the payment for the median home has increased 23%.

Using an inflation calculator, I put in purchasing an item for $3038 in 2006 (the monthly mortgage payment) what the item would cost today due to inflation over the past sixteen years. The result was $4465, or it would cost 47% more—the same rate the median home in LA County increased in value.

At the lowest rate during this period, we will use November 2020, of 2.375% the median home price was $664,160 in Los Angeles County. Putting 20% down results in a $531,325 mortgage, above the $510,000 conforming loan limit. The high-balance rate for the third week of November 2020 was 2.625%. The payment for a $531,325 30-year fixed rate mortgage at 2.625% is $2134 per month.

The payment for the median home in LA County when rates were at their lowest in the past sixteen years was 75% lower than the monthly payment for the median home price today and the median priced home increased 29%.

Historically over the past sixteen years, rates today are higher than the average and median rates during the period. However, calculating purchasing a new home over the historical period, the current rates produce a payment that is in-line, or better, than adjustments for inflation. Rates have climbed less than inflation over the past decade.

One other point. Purchasing a home today does not mean you are always going to have that rate. If, when, rates drop after your purchase you can refinance and lower your payment, while benefiting from increasing home values over time. Someone who purchased their home in June 2006 at the highest rate and refinanced several times over the years as rates dropped, would be paying about one-third of their original payment today, or if they kept making the same payment every month would be close to paying off their home.

Yes, rates are higher than a year ago, and so are property prices. Waiting for either to drop creates the risk that neither will, and one, the other, or both, may go up in the near and medium future. How long will you wait to buy? How will you know when the time is right if, when, prices increase, even if rates do decline? If you are considering purchasing a new home, give me a call and we can run through your options and “what-ifs” for different values and rates.

Have a question? Ask me!

Rates for Friday July 22, 2022:  Not a lot of economic news impacting markets this week. The Fed is expected to push its benchmark rate up another 0.75% next week, which is priced into the market. Investors are feeling less bearish on fixed rate assets, like mortgages, evidenced by rates dropping for the second week in a row, and third Friday of the last four.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                              5.00%          Down 0.125%

30-year high-balance conforming        5.625%        Down 0.25%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I love baseball. In the morning I will look at the schedule and hope that there is a day game on the East Coast so I can put the radio broadcast of the game on my computer as background while I work. I don’t care what teams are playing, I just enjoy listening to baseball radio broadcasts.

When I mention this to others, some look at me a bit sideways wondering what kind of person listens to games instead of music. For that matter, who listens to baseball games on the radio? Older guys like me, I guess.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog