Interest rates have played a pivotal role in shaping our economic landscape over time. They are the lever that central banks use to stimulate economic growth, curb inflation, and stabilize financial markets. Consequently, they are a driving force in real estate markets nationwide.
We saw this play out during the pandemic when rates were lowered to stimulate the economy. Those record low rates sent home prices soaring. Now that rates have been raised in order to curb inflation, home prices are stabilizing.
This has had a major effect on buyer morale and buyer activity in the real estate market, as many have taken a step back due to the higher rates we’re seeing now. The days of rates below 3% are gone, and we may never see them again in our lifetimes. So that begs the question, what is a “healthy” rate and when is the right time to buy real estate?
Interest rates are ever-changing, so let’s zoom out and look at the bigger picture that they paint for us over time.
A Breakdown by Decade
Freddie Mac’s mortgage statistics begin in the year 1971, so that’s where we’ll pick up. We’ll name the average rate for 30-year, fixed-rate mortgages.
1970s: The average mortgage rate at the beginning of the decade was around 7.33%. That rate steadily increased to 12.9% in December 1979.
1980s: Interest rates reached double digits in the 1980s in response to the country’s OPEC embargo. 1981 saw the highest rates in modern history with the average 30-year fixed-rate mortgage at a whopping 16.63% (and their highest point in October of that year, topping 18%).
1990s: Things started to calm down in the ‘90s, which saw an average rate of just over 10% in January of 1990 to 8.0% in December of 1999, and some years in between recorded in the high-6’s.
Early 2000s: The average rate in the new millennium steadily decreased from the 8% mark to the 5- and 6-percents. The infamous year of 2008 recorded an average rate of 6.03%.
Post-2008 Financial Crisis: Mortgage rates steadily declined in the new decade and remained low to facilitate the recovery of the real estate market. With the average rate falling from just over 5% in 2009 to as low as 3.65% in 2016, housing markets rebounded nationwide.
COVID Pandemic: This unforgettable period saw an average mortgage rate of 2.96% in 2021 – the lowest rate ever recorded. While this was an incredible opportunity to jump into the housing market, rates this low were not meant to last and made it unsustainable.
2022-Today: And here we are. The rate spiked from 3.55% in January of 2022 to 7.63% this month (October 2023).
The Best Time to Buy
The best time to purchase a home is ultimately when you feel you are financially ready and are comfortable with the current rate. If you want or need to purchase property at some point in time, keep in mind that you can refinance if rates go down!
There are also a few things you can do to improve the rate of your loan when going to buy a home. Take a look at these options.
1. Go in with your best credit score: The higher your credit score, the more opportunity you have to lock in a lower interest rate.
2. Save up: A larger down payment could help lower the interest rate you’re given.
3. Explore loan types and terms: The interest rate for an Adjustable Rate Mortgage could vary from that of a Fixed Rate Mortgage. In addition, 15-year mortgages tend to have lower rates than 30-year mortgages.
4. Buy down the rate: Discount points are essentially prepaid interest that borrowers can pay to lower their subsequent monthly payments. Think of it as paying a chunk of your interest up front rather than dispersed throughout the life of your loan. Sometimes, sellers offer rate buy downs as an incentive to the buyer that closes on the home.
It’s clear that interest rates are always changing, and the real estate market adapts to the current rate. Lower interest rates generally encourage buying and investing but bring with them higher prices and tough competition. Higher rates can cool the competition and stabilize prices but bring a higher monthly payment. The market you buy into is a matter of preference and ability. Just know you have options, and that real estate agents and mortgage lenders are here to help you get the most out of your purchase.
If you need assistance navigating or starting the process, we’re here for you! We can connect you with reputable lenders in our local area, show you what’s out there to buy, and negotiate the best price for you.