Historical Perspective of Mortgage Rates

One thing I find missing from all the talk about real estate values are the interest rates. The mortgage interest rates are volatile at best. In the early years of my real estate career, in the late 1970s, the interest rates hit 18%. That meant that a typical West Seattle home, which cost about $60,000 to $75,000, would have a principal and interest payment of $900 to $1,200. The average price of single family homes in West Seattle that have closed within the last 6 months is $360,000. To put the 18% rate into perspective that same home today would have a principle and interest payment of $5,425!

While no one is expecting 18% interest anytime soon, the interest rate definitely plays big part of the affordability of home ownership. Today’s rates around 5%, give or take a quarter percent, are insanely low.  Let’s take that $360,000 example again at 5% and we find a principal and interest payment of $1,932. When the rate goes up to 6%, still historically low, the same payment rises to $2,158. To approach if from the other direction that means if you qualified up to the $360,000 at 5%, then at 6% you would qualify for $322,000. That may not look like a big deal now but you would have to start to pare down your list of priorities, the things you want in your home.

Sometimes an international crisis can fuel interest rates spikes as in the case of the Iran Hostage Crisis in 1979 (see chart). The chart below is one that I found in my file from 11 years ago and ends at 2001. Notice the chart bottoms out at 6% and we are at an unpredictably low 5%.

Finally, most of the time when prices down the interest rate are up and vice versa. The value of the home is partly due to how much the average buyer can qualify to buy. Almost like a balloon where you squeeze one end smaller and the other end expands. Rate goes up…price goes down. Rate goes down…price goes up. So we have interest rates so low they are off the charts, and prices lower that any of us thought we see locally, and a bright future for Seattle.