As a mortgage broker in 2023, I am constantly surprised by the number of clients who are expecting interest rates to decrease significantly in the very near future. While speaking with prospective homebuyers on a daily basis, it has become clear to me over the last 15 months, that many homebuyers and many younger homebuyers, in particular, hold the belief that interest rates are bound to decrease back to historic lows soon, and that this is a fact. This belief is leading to many homebuyers across the nation obligating themselves to mortgage payments that may not be comfortable for them, based solely on the expectation of a future decrease in interest rates. Unfortunately, this line of thinking is misguided, as it fails to consider the possibility that interest rates may remain steady or even rise in the coming years. While the historically low mortgage rates of recent years have certainly spoiled us, it is important to remember that market fluctuations are unpredictable, and it is always wise to be prepared for the worst-case scenario. 

What does history tell us?  One of the most interesting phenomena to examine is the historic behavior of mortgage interest rates in a rising inflation environment.  Inflation is the rate at which prices for goods and services increase over time. When inflation rises, the purchasing power of money decreases, and lenders often increase their interest rates to compensate for the declining value of money. This increase in interest rates affects many aspects of the economy, including mortgage rates.

Historically, when inflation rises, mortgage interest rates tend to follow suit. In the 1970s, for example, inflation soared, and mortgage interest rates rose as well. In 1979, the average 30-year fixed mortgage rate reached an all-time high of 18.45%. This was largely due to the Federal Reserve’s efforts to combat inflation by raising short-term interest rates.

During the 1980s, inflation was still high, but the Federal Reserve’s efforts to control it began to pay off, and mortgage interest rates began to decline. By the end of the decade, the average 30-year fixed mortgage rate had fallen to around 10%.

In the 1990s, inflation remained relatively low, and mortgage interest rates continued to decline. This trend continued into the early 2000s, when mortgage rates reached historic lows, with the average 30-year fixed mortgage rate falling to around 5%.

However, starting in the mid-2000s, inflation began to rise again, and mortgage interest rates followed suit. By 2007, the average 30-year fixed mortgage rate had risen to around 6.5%.

The Great Recession of 2008 brought a period of low inflation, and mortgage interest rates fell dramatically. The Federal Reserve kept interest rates near zero for several years to stimulate economic growth and keep inflation low. As a result, mortgage rates reached historic lows once again and stayed low for many years.  But as the economy recovered, inflation began to rise again in 2022 and mortgage interest rates began to climb once more, leading 30 year interest rates into the 6-7% range by late 2022.

What does this historic behavior of mortgage interest rates in a rising inflation environment tell us about the current economic climate? It suggests that we should definitely not bank on a significant decrease in rates, we may even expect mortgage rates to continue rising as inflation continues to climb.  When it comes to mortgage interest rates in a rising inflation environment, it is important to keep these factors in mind and to work with an experienced, knowledgeable mortgage broker to determine the best course of action for your individual circumstances.

In conclusion, the historic behavior of mortgage interest rates in a rising inflation environment tells us that we should not assume that interest rates will crater any time soon, in fact, it may be very wise to expect rates to continue to climb as inflation rises.  It is important to consider a variety of factors and work with a knowledgeable mortgage broker when making decisions about buying or refinancing a home. By doing so, you can make informed decisions that align with your financial goals and best interests, in addition to ensuring you are locking in the lowest rate possible.

Peter Vrehas

Broker/Owner

NMLS: 250949

Naples Mortgage Company, LLC