Mortgage rates soar past 7%, first time in two decades
Numbers: Rates hit 7.08% this week, up from 6.94% on seven days earlier and 3.14% one year ago. What does it mean for house hunters? Look at it two ways …
* A loss of 36% of the buying power of the same house payment over 12 months.
* Or a 56% jump in the monthly payment for the same amount borrowed from October 2021.
How long ago?
Let's jog your memory back to April 2002 …
The news: The nation was still reeling from the Sept. 11, 2001 terror attacks and the brief recession that preceded the hijackings. Questions swirled about what to do with the Taliban regime in Afghanistan, which the US fought for 20 years in retaliation for its aid to the 9/11 terrorists.
The economy: The business climate was on the mend, but US unemployment was 5.9% and 6.7% in California. The nation had lost 1.4% of its jobs in the preceding 12 months; California was down 1.2%. Oh, and a gallon of gas cost $1.66 in California.
The culture: "Scorpion King" starring Dwayne "The Rock" Johnson topped the box office. "Foolish" by Ashanti was No. 1 on the music charts. "ER" and "CSI" were must-watch TV shows. In sports, Anaheim's Angels began what would be a World Series championship season, and Tiger Woods won his second consecutive Masters Tournament.
The back story
What's behind the "last time it was this big"? Well, this throwback will sound a lot like the current economy.
The Fed boosted interest rates beginning in June 1999 to chill an overheated economy, especially a stock market filled with speculation on dot-com technology shares. The Fed's pricey money cratered stock prices and created a brief and "official" recession. The recovery was twisted by the terror attacks.
By April 2002, the central bank was in retreat. Its key Fed Funds rate, which was pushed to 6.5% in May 2000, was at 1.75%.
The reversal began in January 2021. Then came the terror attacks. And inflation, which topped out at 3.5% in this cycle — yes, 3.5% was a major Fed worry then — was down to 1.6% in April 2002. (Remember: It's 8% these days!)
Twenty years ago, mortgage rates were slow to fall. But despite 7%-plus rates and broad economic turmoil, housing was relatively unscathed. U.S. home prices were rising 6% a year in April 2002, while California values were up 10%.
It took almost two years from April 2002 — with the Fed cutting the Fed Funds to 1% — for the economy to fully heal.
In April 2004, mortgage rates were under 6%, jobs growth was back, U.S. home prices were appreciating 9% a year, and California values were up 21%.
The Fed in 2000 used pricey money to ice an overheated economy — and a recession happened. Then the Fed reversed course, and normalcy returned.
Lesson No. 1: This business cycle took roughly four years from first rate hike to normalcy. And the early 2000s seem simpler times than today's economy.
Real estate enthusiasts will cite the early 2000s as an example of how rising rates and recessions don't always mean falling home prices. Well, that "fact" ignores a key factor — home values were propped up by that era's easy-money "subprime" lending practices.
You do remember how those home-loan gambles ended, yes?
Lesson No. 2: It's a good bet that lenders won't play saviors with stupid loan tricks in 2022's high-rate/high-inflation environment.
Lesson No. 3: Don't forget the price pain when ponder 7% mortgages.
In April 2002, a homebuyer spent $317,000 on a median-priced single-family home in California, getting a $1,688 monthly payment after putting $63,000 down, or 20%.
Today, it's a $4,373 monthly check to the lender on $822,000 median-priced house. That's a 160% jump for a home that requires a $164,000 downpayment – $101,000 more than two decades ago.
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]