Remember The Great Depression? Money Costs Much Less Today
Any elderly American who is alive today and lived through the Great Depression of the 1930s would blink their wrinkled, cataract-filled eyes at how 2020 economists view the world.
Back then, this writer’s parents would walk miles to save pennies of streetcar fare. People would roll up and save string from butcher shop packages. If the string was too short to roll into a ball, they would put snippets in cigar boxes and recycle them.
Interest rates on five-year balloon mortgages were only 5% in the early 1930s, but with millions of people out of work, tens of thousands of families lost their homes to foreclosure. One of those homes was a Rogers Park brick bungalow owned by my father and mother.
Nothing was wasted, and that Depression thrift carried into World War II where there were shortages and everything from gasoline and auto tires to meat and vegetables were rationed. So, Victory Gardens sprouted in nearly every vacant lot in Chicago.
Archives of the now-defunct Federal Housing Finance Board show long-term mortgage rates in the 1960s were not much higher than the Great Depression era. Five decades ago, between 1963 and 1965 you could get a mortgage at 5.81% to 5.94%. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6%-to-9% range.
In the early 1980s, run-away inflation caused home-loan rates to skyrocket over the moon. According to Freddie Mac, benchmark 30-year mortgage rates peaked at a jaw-dropping 18.45% in October of 1981 during that Great Recession.
Rates finally fell below 10% in April of 1986, and then bounced in the 9%-to-10% range during the balance of the 1980s. Twenty-one years ago—in August of 1999—when many of today’s Millennial borrowers were in grammar school, lenders were quoting 8.15% on a 30-year fixed mortgage, so that was a good deal.
However, interest rates began falling gradually over the last decade. Mortgage rates hit what was then a rock bottom on November 21, 2012, when the 30-year fixed mortgage average was 3.31%, Freddie Mac reported.
Then came 2020—the Year of the Pandemic. On July 16th home-loan interest rates plummeted to a historic record low of 2.98% nationwide—the lowest ever recorded by the Freddie Mac’s Primary Mortgage Market Survey, which dates back to 1971.
“Mortgage rates fell below 3% for the first time in 50 years,” said Sam Khater, Freddie Mac’s Chief Economist. Since then, rates have held below 3% for benchmark 30-year-fixed home loans. On August 27th, the rate averaged 2.91%, down from 2.99% a week earlier. A year ago, the 30-year fixed rate averaged 3.58%.
With millions of Americans out of work, Chicago neighborhood businesses failing, rioters looting and racial protests in the streets, 2020 makes the Great Depression years look like an ice cream party.
To cool the economic flames in Chicago and across the nation, the Federal Reserve announced a watershed new policy on how it will manage interest rates in the future. The Fed said it plans to keep interest rates near zero even if inflation exceeds its 2% level.
What this means is borrowing rates for home mortgages, auto loans, and business loans likely will remain ultra-low for years to come.
Jerome Powell, chairman of the Fed, said the change in policy reflects the reality that high inflation—once the biggest threat to the economy—no longer appears to be a serious danger.
Powell said inflation is hovering at a sub-1% annual rate, well below its 2% target. Since that target rate was official adopted in 2012, the Fed never has consistently hit that level.
At the end of 2019, the United States was about $17 trillion in debt—roughly 80% of the gross domestic product (GDP). By the end of June, 2020, the debt stood at $20.53 trillion, roughly 106% of GDP. This does not include the trillions more Uncle Sam owes itself in bonds held by the Social Security and Medicare trust funds.
The borrowing is not over. The Treasury is expected to borrow more than $1 trillion more by the end of the year, and that does not count another stimulus package.
So, if you are a home purchaser shopping for a mortgage priced below 3%, now is the time to buy.