History Says Mortgage Rates Above 6% Are Still Too Low – Orange County Register

“Numerology” attempts to find reality within various measurements of economic and real estate trends.

Buzz: Mortgage rates today would be 8.9% if valued at this century’s typical range above inflation.

Source: My trusty spreadsheet examined the relationship between the monthly average of a 30-year fixed-rate mortgage (by Freddie Mac) and the rate of inflation (12-month change in CPI).

Fuzzy mathematics: Critics say the Federal Reserve’s inflationary war, which has roughly doubled mortgage rates, has gone too far.

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Since 2000, 30-year mortgages have averaged 5%, compared to 2.5% inflation – that’s a lending rate 2.5 percentage points above the cost of living.

US inflation of 6.4% in January – plus the historical range of 2.5% – equates to 8.9% for home loans.

But in January, 30-year loans averaged 6.27% against inflation of 6.4% — with lending rates at 0.13 percentage point under cost of living.

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January was the 22nd straight month that average mortgage rates have been below the pace of inflation.

This is highly unusual as mortgage rates have traditionally outperformed cost of living growth. Why? Lenders want to earn more than inflation consumes purchasing power.

how weird is it There is but one such streak left in the history books: 20 months ending in July 1975, a time when inflation soared due to an Arab oil boycott, driving US consumer prices higher.

During those 20 months, mortgages averaged 9.1% versus 10.7% inflation – a 1.6 percentage point gap. In the current phase, which began in April 2021, mortgages have averaged 4.4% against 7% inflation, with loans 2.6 points below cost-of-living growth.

This is one of many economic oddities of the pandemic era. It’s the aftermath of the Federal Reserve’s unprecedented bailout of cheap money to the housing market, which has been used to boost an economy with whiplashes.

I would note that the current mortgage premium is rapidly declining above inflation. The Fed is now trying to cool down an overheated economy. Its rate hikes are trying to tame the worst inflation in four decades.

Go back to March 2022 when the Fed’s fight against inflation got serious. Mortgages have averaged 4.2% this month versus the inflation rate of 8.5% – a gap of 4.3 points.

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So January’s 6.27% mortgage was historically a steal.

Yes, mortgages over 6% will choke home sales and put tremendous pressure on home prices. Yes, this is painful.

But that’s just the fact that the Fed is raising mortgage rates almost to the pace of inflation. That’s still cheap when you look through a historical lens.