We talk a lot about the current home mortgage interest rates being historically low. Are they really? What were interest rates in the 1950s, the 1940s or even in the 1920s?
Do doubt in recent years we have experienced very favorable interest rates. Most of us over age 40 can remember in the early 1980s when a 30 year home mortgage was at 15% To say it was difficult to purchase a home at that time is a true understatement. When rates began to fall from that incredibly high ceiling to 9%, we all celebrated.
One of my favorite stories was related by a friend who owned a small apartment project and had a 15% mortgage. He calculated that “the breakeven occupancy was 115%”
A little research shows that we are experiencing a period much like 65 years ago. In 1946, after World War II, rates were at a low point of slightly under 3%, which was an all time low since 1900. In the 1920s, 30s and 40s rates rose to the 4% level which is comparable to those we are enjoying today.
So what does this tell us? Every decade has its unique interest rate story based on the economics of the world. The economy dictates how high or low interest rates will go. Historically, economic trends change every 10 years and those changes are clearly reflected in mortgage interest rates.
Now when we recognize that our U.S. currency is much less valuable today then in past decades our perspective changes. I am referring to “purchasing power”. A dollar in 1950 had a much greater purchasing power then a dollar today.
Let’s compare the purchasing power cost of a 4% interest rate home mortgage in 2012 to the same mortgage at 4% in 1950. Since the U.S. currency “purchasing power” is worth far less today a mortgage payment of 4% in 2012 is far, far less costly as compared to the same payment made in 1950. Another way of saying this in economist jargon would be “a dollar today is cheaper then 60 years ago therefore you are making the same payment with cheaper dollars”
The value of the dollar’s buying power today is a fraction of what it was many decades ago. A dollar in 1965 bought you about 4 gallons of gasoline. What do you get for $1.00 today at the local gas station? Very little.
The only conclusion that we arrive at is that today a 4% mortgage is more favorable then 60 years ago. It not only appears that rates are at a low point historically. They are in “purchasing power “terms far better off in 2012 then rates were in 1950 or any year since then.