Current (July 2010) US mortgage rates are far lower than at any time during the past 40 years. Anyone with ideas of buying a house in the near future should spend time to consider the benefits. This article discusses how current rates compare with past rates, as well as how mortgage rates affect housing affordability.
For the month of June 2010, the average 30-year fixed rate averaged an amazingly low 4.74% across the US (per Freddie Mac). Basic reason for the most recent downtrend is relatively lackluster demand for residential real estate. Although high unemployment is clearly limiting demand, more conservative lending standards (since the anything-goes mortgage craze of the mid-2000s) are likely the most significant cause. However, considering that rates have been falling generally since 1981, “macro” trends from as far away as China have also been involved.
Compared to the past 10 years, rates will likely remain low into 2011. However, as overall economic strength increases, rates are likely to begin moving upward.
MORTGAGE RATE HISTORY
The Federal Home Loan Mortgage Corporation (Freddie Mac) publishes tables of mortgage rates and “points” since 1971 (http://www.freddiemac.com/pmms/pmms30.htm). Discussion below is focused primarily on the basic 30-year fixed rate.
From a low of 7.3% in 1971, average 30-year fixed rates rose to an astounding high of 18.45% in October 1981 and did not fall below 8.0% again until February 1993.
To emphasize the extent of high rates, consider that the 30-year rate was at or above 8.0% for nearly 20 years (1973 – 1993).
During the 1990s, the 30-year rate ranged from a high mark 10.48% in May of 1990 to a low of 6.71% in October 1998. The lowest annual average 30-year rate (6.94% in 1998) was 2.2 percentage points (or 46%) higher than the June 2010 average rate (4.74%). For the same mortgage amount, the current (2010) rate results in a mortgage interest payment that is 32-percent lower.
In January 2000, the 30-year rate averaged 8.21 percent. For the entire 2000s (2000 – 2009), the monthly average peaked at 8.52% in May 2000 and then fell, almost steadily, to a low of 4.81% in April 2009.
The National Association Of Realtors (NAR) publishes a “Housing Affordability Index” on a monthly basis (http://www.realtor.org/research/research/housinginx). Higher values mean greater affordability. Current “Fixed” index value of 160.8 is much greater than the 115.3 value from 2007. However this index is lower than the most recent peak of 174.2 in May 2009.
Based on national averages for the various factors, decline of the housing affordability index from May of 2009 to May of 2010 is due primarily to an increase in the “Payment as percent of income” amount, from 14.6% (of income) to 15.4%. In May 2010, average mortgage rates are only slightly lower (5.09% vs 5.14%), while Median House Price is higher ($179,400 vs $172,100) and Median Family Income is lower ($60,498 vs $61,845).
EFFECT OF MORTGAGE RATE
Direct effect of mortgage rate can be calculated using an online calculator; see http://www.mortgagecalculator.org/. For the “pure” mortgage payment (Principal + Interest), input zero for property taxes and PMI (private mortgage insurance).
For mortgage amount of $100,000 (30-year fixed rate) total monthly mortgage payment (Principal + Interest) is $599.55 at 6.0% and $521.04 at 4.74%. Interest amount is $500.00 at 6.0% and $395.00 at 4.74%.