Get ready for 8% mortgages
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The interest rate on a 30-year fixed-rate mortgage is the second most salient price in the American economy, after only the price of gas. And it looks like it's going to hit 8% sooner rather than later.
Why it matters: A world of 8% mortgages is one Americans haven't seen in over 23 years. The last time mortgage rates were that high, Bill Clinton was president, Brad Pitt married Jennifer Aniston, and Apple Computer was worth $15 billion — a mere 0.5% of its current value.
By the numbers: A $500,000 30-year mortgage would have cost $1,972 per month at the 2.8% mortgage rate that was available in early 2021. Today, with a 7.9% rate, that payment would be $3,488 — a 77% increase.
- Between the lines: More than 100,000 Americans have taken out mortgages in 2022 and 2023 with an interest rate above 8%, per Black Knight, where a spokesperson tells Axios that "we expect that number could continue to press higher in coming weeks."
Catch up quick: The Federal Reserve raised interest rates 11 times between March 2022 and July 2023, from zero to more than 5%. The goal was to cool the economy and bring down inflation by making it more expensive for companies and individuals to borrow and invest.
- Mortgage rates are one of the main ways in which Fed policy is felt in the real economy.
The big picture: High mortgage rates are painful for anybody wanting to buy a house, and mortgage brokers have very little business right now. New applications are at their lowest level since 1996, per the Mortgage Bankers Association.
- The non-housing economy, on the other hand, saw much smaller increases in rates. For a big company like Apple, for instance, the yield on its 10-year bonds increased by about 3.2 percentage points since December 2021, per MarketAxess' Bondticker. But the 30-year mortgage rate has risen 4.6 points over the same time period.
- Meanwhile, most homeowners continue to happily sit on mortgages with rates below 4%.
The bottom line: In the Fed's ideal soft-landing scenario, its rate-hiking campaign would slow down isolated areas of the economy while keeping the rest of corporate America going relatively strong.
- As such, policymakers are likely to be perfectly happy with 8% mortgage rates.
