Is 8% The New Normal?
We seem to thrive on averages in the real estate world. A sobering average many are just beginning to acknowledge is that the 30 Year fixed-rate mortgage in the US averaged 7.74% from 1971 until 2023, reaching an all time high of 18.63% in October of 1981, and a record low of 2.65% in January of 2021. That is a wide, wide spread that shows how just like all averages, everything in real estate is hyper-specific, not just hyper-local.
Sometimes when driving to my weekend house in traffic, I bemoan the times we are moving at 3 mph.....followed then by the euphoric times I speed along at 60 mph. As I turn off the car upon arrival, it shows my average speed was 32 mph......
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In 1981 while rates hit that all time high of 18.63%, they averaged 16.63% for the entire year. By 1986 the rate average had plunged down to 10.19%. While these sudden and relatively short bursts of higher rates have happened, we forget that in 2018, the 30-year averaged 4.54%.... 2021 was an anomaly. A highly unusual year. The ultra-cheap money was cheap to offset the damage of COVID lockdowns, the massive recession that hit in 2020.
In 2018, US GDP grew by 2.95%. In 2019, it pulled back to 2.29%. 2020 saw a 2.77% GDP decline.....followed by a 5.95% surge in 2021 and a more sober 2.06% in 2022......averaged over 5 years, GDP grew by 2.096%. On an economy the size of the US (almost $27 TRILLION), 2% is BIG. We often forget just how large the US economy is. Looking back at this 5-year period, the average is rather dull. Look at the ups and downs and they are DRAMATIC! Headline-grabbing!
No-one knows what comes next, whether rates stay higher for longer, or dip next year, or whether a recession hits this year, next year or the following year..... looking back at the past 5 years we should see that the huge spikes and dips that inevitably happen usually don't last too long, and certainly not forever. Is 8% the new normal? I have no idea. Currently the rates for fixed jumbo loans - the kind those living in large, expensive cities are more accustomed to - are lower, now below 7%. But take one more look at the average for the past 50 years and one thing is certain: 18.61% is NOT normal or permanent....and neither is 2.65%!