The average 30-year fixed mortgage rate recently surged to a recent high of 7.22%, a level that can feel particularly difficult to accept to anyone who is searching for a home – especially when we all know someone who purchased a home during COVID, or right after, when the 30-year rate bottomed at 2.65%. During the pandemic, a combination of emergency Federal Reserve policy, near-zero short-term interest rates and large-scale bond purchases helped push mortgage rates to historic lows. For a period, borrowers could obtain 30-year mortgages near or even below 3%. Those rates were extraordinary and unlikely to represent a sustainable long-term norm.But a little historical perspective is important; today’s mortgage rates aren't particularly unusual. The rates we experienced during COVID were. As you can see from the chart below, provided by YCharts, historically, mortgage rates have frequently been in the 6%–8% range—and sometimes much higher. Freddie Mac’s historical data stretches back to 1971, including a period in 1981 when the average 30-year mortgage rate exceeded 18%.
Source: YCharts
The challenge is that homebuyers still believe that 2-3% mortgage rates are obtainable, caused by the recency bias we are experiencing. Moving from a 3% mortgage to something closer to 7% dramatically increases the monthly payment on the same loan amount. That has created affordability challenges and made homeowners with low-rate mortgages reluctant to move, especially when nearly 40% of homes owned in the United States have no mortgage!
Waiting for mortgage rates to return to 3% may mean waiting for an economic environment that never returns. Rather than viewing today’s rates as exceptionally high, it may be more appropriate to view them as a return toward historical norms.
The 3% mortgage was an exception. Today’s environment may simply be a new normal.
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