By Brian Summerfield, Online Editor, REALTOR® Magazine
Our countdown of the most significant developments in real estate during this decade continues with the seventh-ranked trend:
#7: Record Lows in Mortgage Rates
Many years from now, when academics write detailed, wide-ranging accounts of why and how the housing market was pumped up to bubble proportions from 2001 to 2006, one of the central explanations will be the mortgage interest rates we’ve seen in the past decade. The average rate for a 30-year fixed mortgage in mid-2000 was above 8 percent. However, it declined to less than 6 percent in 2002, and stayed under 7 percent for most of this decade.
As much as exotic financing and easy credit are to blame for all of this, one of the biggest causes of price inflation in housing was the fact that rates were so low. Monthly payments were lower, so people could (or thought they could) afford to spend more on a home. Some have argued that low rates also led to the advent of ARMs, which sent many borrowers into default because they didn’t understand the way those loans work or experienced declining financial fortunes.
To be sure, low mortgage rates in and of themselves weren’t a bad thing. They did make home ownership attainable for many viable consumers. And no economist I know of is calling for a return to the incredibly high rates we saw in the late 1970s or early 1980s.
So why did rates fall to record lows during this decade? Well, it’s tough to make the case that one thing definitively caused mortgage rates to drop. Many point to the Federal Reserve’s policy under Alan Greenspan of fueling economic growth through low interest rates on short-term loans as the main factor, a charge Greenspan has denied. Others say prodigious savings of individuals in other large economies (particularly China and Japan) put downward pressure on mortgage rates in our country. (Typically, when savings go up, interest rates go down, and globalized financial markets allow this monetary phenomenon to cross national borders.)
Whatever the case may be, the fact is that rates remain low—in fact, the 30-year fixed rate set a new record just last week—and current Fed Chair Ben Bernanke wants to keep them that way for the near future. But some observers also see an increase as inevitable. If we see a spike in inflation and Treasury yields over the next decade, as has been predicted, we can expect a similar rise in mortgage rates over the same time frame.
Other Major Real Estate Developments of the Decade