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Are mortgage rates too high?Not due to inflation – Silicon Valley

“Memory Lane” traces the history of finance. Because the economy has interesting habits that repeat themselves.

Buzz: Mortgage rates have been below inflation for 21 months, breaking records for nearly half a century.

sauce: My trusty spreadsheet is Freddie Mac 30-Year Fixed-Rate Mortgage Rates Averaged Monthly and those Annual inflation rate from the consumer price index.

Number: You might be thinking that mortgage rates are high because the Federal Reserve is trying to keep nasty inflation in check with more expensive money. But history suggests that mortgages are relatively cheap compared to the rising cost of living.

30-year mortgage rates averaged 6.4% in December, up from 3.1% 12 months ago. Annual inflation, as measured by CPI, stood at 6.5%, down from 7% in December 2021.

Thus, 2022 ended with mortgage rates closest to inflation since this loan benchmark underperformed CPI growth for the first time in April 2021. But the last time home loans were below inflation for such a long period of time was the 20-month period ending in July 1975. .

how long ago?

Remember July 1975? Jog your memory…

news: The Apollo space program has ended. ARPANET, the predecessor of the Internet, began to operate. Also reported missing is Jimmy Hoffa, former president of the Teamsters Union.

jobs: Stocks fell 6% in the worst month since the 1973-74 market crash as questions arose about the company’s resilience to the 16-month recession that ended in March 1975.

culture: The movie Jaws was a number one movie, the musical A Chorus Line opened on Broadway, and Bruce Springsteen finished work on the album Born to Run.

back story

In the early 1970s, geopolitical tensions fueled inflation.

Oil prices soared after the Arab oil embargo was imposed on the US. This has caused several waves of inflation over the decade.

The Federal Reserve has acted slowly in response to the rising cost of living. This is one of many federal policy mistakes that have led to prolonged periods of low growth of “stagflation.”

For the entire 1970s, the US economy grew at a post-inflation annual rate of 3.2%. It may look solid, but it’s down from the 4.3% average in the 1950s and his 1960s.


Inflation overtook mortgage rates in the early 1970s.

By 1973, inflation had risen to 8.7%, up from 3.4% at the end of 1972. Mortgage rates at the end of 1973 were his 8.5%, up from 7.4% 12 months earlier.

A year later, inflation rose to 12.3% and mortgages ended at 9.6% in 1974.

Mortgage interest rates remained below inflation until August 1975 as the recession raged. That’s when CPI inflation dropped to 8.6% and mortgage rates hit his 8.9%.


Most real estate experts don’t pay attention to the relationship between mortgage rates and CPI inflation. These people usually follow other inflation indicators and/or the gap between mortgage rates and 10-year Treasury yields.

But almost all housing analysts were surprised by the rise in mortgage rates in 2022, with borrowing costs rising to 6.9% in October.

But mortgage and CPI calculations flashed warning signals that interest rates were too low early on. April 2021 – Mortgages fall below inflation for first time in 41 years.

history lesson

It’s an economic oddity that mortgage rates are so close to inflation. So be prepared in case it recurs.

Since 1971, mortgage rates have averaged 7.8% and inflation has hovered at 4%. This is his historic 3.8% gap between mortgages and CPI rate of change.

why? Long-term lenders want returns well above inflation. So the persistent lack of a mortgage-inflation gap in early 2023 is a cause for concern.

Yes, inflation is different this time. The Federal Reserve has created the lowest mortgage rates in history as part of a massive military stimulus package aimed at easing economic pain in the pandemic era.

But that generosity, combined with shortages of goods and labor, led to 40 years of high inflation. So the Fed is now raising interest rates under its own control. This is frustrating the interest rate sensitive real estate industry.

But inflation must be contained. Looking back to the 1970s, history shows that the risk of a prolonged economic downturn increases if the cost of living is not contained.


San Francisco Federal Reserve Bank President Mary Daly told me in November: The mere fact that there is debate about the formula for setting mortgage rates says something about the economy.

“If inflation were low and stable, no one would have to worry. These correlations wouldn’t work,” she said. “In fact, it’s good for the economy. business or family? ”

Jonathan Lansner is a business columnist for the Southern California News Group.he can be reached at jlansner@scng.com

https://www.siliconvalley.com/2023/01/21/mortgage-rates-too-high-not-according-to-inflation/ Are mortgage rates too high?Not due to inflation – Silicon Valley

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