## Monday, February 3, 2014

### What is the historical average mortgage interest rate?

Today's blog is a short and straightforward one, but I think of great importance. It all started with a question I had during a casual conversation with those in the industry: "What is the historical average mortgage interest rate?"

I'd heard it was around 7.5% but that was just a rumor that couldn't be confirmed.  I saw a lot of head scratching but none of us had a concrete answer so the next day I took to Google to try and solve the puzzle.  Surprisingly, the links listed on Google didn't even offer a simple answer.  There were plenty of sites with fancy graphs showing mortgage interest rate trends and charts but no site could offer one numerical answer, even though I shuffled through three pages of links.  I then took to the most opinionated internet resource on the planet - Facebook - where I polled people with the same question,  The responses were from the 4% range (a joke) all the way up to 11% as the all time average mortgage rate.

It became apparent that no one had bothered to take the time and crunch the numbers!  So I collected the data, turned off Facebook, took out my calculator and opened an Excel spread sheet to get to the bottom of it.

But how far back should I go back?  1950?  1890?  The Ming Dynasty?  My research revealed that rates as we know them have been in existence since about 1971.  Before that, most mortgages were funded by savings and loans or large commercial banks, and a lot of variable loans, balloon loans, and shorter term loans existed.  In 1970, Freddie Mac (FHLMC, the Federal Home Loan Mortgage Corporation) was established to regulate the business of mortgage interest rates and home buying.  So for clarity, I tallied all numbers from 1972 on, when Freddie was in full effect and our current model of interest rates alive and well.

I added up those 41 years, divided by....let's see now, oh - 41!...and came up with the answer.  So without further adieu, drum roll, please.  The historical average 30-year fixed mortgage interest rate is:

8.53%

There it is.  Quite a long way off from the interest rates we're used to seeing the last couple years in the 3's and 4's.  But what does that tell us?  Here is some more information behind that number.

The highest was in 1981 when they were a whopping 16.04%
The lowest was 2013 when they fell to 3.66%!

The best 5-year run of rates was from 2009 to present, when they averaged 4.36%.
The worst 5-year run was from 1980-1984 when they averaged an astronomical 14.76%

These averages based on the yearly average, not monthly, so how can we group the pattern of where interest rates have hovered?  Since 1972, mortgage interest rates have been:

Under 4%         2 years
Under 5%         4 years
Under 6%         8 years

7 or 8%            12 years

9% or more     15 years
10% or more   11 years
12% or more    6 years

Amazingly, they've been over 9% a lot more than they have under 6% (15 times to 8 times) and in the 7 or 8% range 12 out of those 41 years.

What does this all mean?  I guess it means try to buy a home now if you can, or refinance, before rates inevitably crawl back up toward the historical average of 8.53%.  Or, if nothing else, you now have a rare piece of real estate and mortgage trivia to share with your friends on Facebook!

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By the way, the data I used can be found on the Freddie Mac website.