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Understanding How Mortgage Rates Affect the Housing Market

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Mortgage Rates And Its Impact to the Housing Market

David Bartels

Meet David Bartels - Selected as one of America's Top 100 Real Estate Agents, he is among the Top 1% of of all agents nationwide and leader of the #1 ...

Meet David Bartels - Selected as one of America's Top 100 Real Estate Agents, he is among the Top 1% of of all agents nationwide and leader of the #1 ...

Sep 12 3 minutes read

Home sales (and values) have been on a strong uptick nationwide thanks to low interest rates, freer lending standards and a drop in the foreclosure rate. Sellers everywhere are breathing a giant, collective sigh of relief! 

But how do mortgage rates affect the housing market? Let's take a closer look at the historical data of mortgage rates over the years to have a better understanding why it is a huge factor in determining if property buyers can achieve the American Dream of owning their own home. Because truth be told, not a lot of Americans, especially the hardworking middle class, can buy a home without getting a home mortgage. 

U.S. historical mortgage rates from the early 1970s to 2015 have been on a decidedly downward trend

The charts tell the story, painting a remarkable picture of the history of U.S. mortgage rates over the past decades.

Source: MacroTrends

The growing housing market started well into the 1970s, but when the market crashed in the 1980s, the U.S. Federal Reserve took aggressive action to curb the rampant inflation. The Fed did so by raising interest rates to historic highs - so high, in fact, that the going 30-year fixed mortgage rate stood at 18.5% in 1981.

The mortgage rate at that time has directly affected the U.S. housing market, as few American households had the means - or the desire - to pay an 18% interest rate on a home mortgage.

As inflation ebbed in the 1980s, U.S. mortgage rates gradually slid downward, and kept sliding, well into the 21st century.

At the time in the 1980s, an $82,000 home, with 20% down, would cost $1,109 a month, excluding fees, taxes and insurance.

If 18.45% mortgage rates were still around today, a $322,700 home, with 20% down, would cost $3,986 a month, with total interest payments over 30 years of the loan amounting to $1.18 million.

Today, at 4%, that same $322,700 home costs about $1,232 a month, with a total cost of about $444,000 over 30 years.

Based on historical data, mortgage rates continue to plummet down and this, in turn, gives the buying market a great advantage. Today, many people in their unrelenting pursuit of the American dream especially those working in good jobs with decent pay, are more willing to borrow more money for a new home.

Now, in 2019, as interest rates are at lower levels, Americans continue to rely on the mortgage interest rate model to both buy and refinance new homes and that's a trend that will likely continue.

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