The History of Interest Rates
“Debt: The First 5,000 Years” by David Graeber
In his book entitled “Debt: the first 5,000 years,” author David Graeber details how since the dawn of civilization (starting with the first known Sumerian civilization around 3,000 years BC), average interest rates have been hovering around 5-8 percent. This provides you a perspective not available anywhere else! When I started in the mortgage business back in 2006, a “good” rate was around 7.5% to 7%, anything under 7% was a steal.
By way of comparison, on a real estate deal, anything less than 7% generally does not pan out. The reason you see deals at under 7% is because appreciation of properties has been saving the day. But appreciation of this kind is not normal, this has been a phenomenon only appearing since the early 2000s when the Federal Reserve Board ramped up its money printing. In my opinion, this way of doing business is coming to an end, after 20 years of excesses and in reality brewing since 1971 when President Nixon decided to cut the tie of the US dollar to gold in order to default on England’s request to be paid in gold.
When you consider current events, which are the cumulative effects of these excesses and mismanagement, you can see that mortgage rates between 1.7% to 3.5% right now for a 30-year mortgage are the lowest they will ever be! It is my solid belief that after this unsustainable operating basis finally comes to an end (something that has been predicted since 1971), in our lifetimes we will never see these rates again.
There is another reason why we are seeing these low interest rates at the moment. Firstly, even though the USA’s monetary policies are less than perfect (with more and more money being printed out of thin air), everywhere else in the world it is much, much worse! Particularly in Europe! The USA looks “good” in comparison to what is going on in the rest of the World. Secondly, there is an ocean of money from institutional investors (such as pension funds) constantly looking for investment. The residential mortgage industry in the USA has been identified as one of the last places where these mega institutional investors can get a return on their investments.
Traditionally, these mega investors would have invest in government paper, meaning bonds and other government debt instruments, but as governments continue to behave in a chaotic and untrustworthy way, these mega investors are switching to investments in the private sector. Huge mortgage banks, such as for example Rocket Mortgage, create their own financial offerings (like large bundles of mortgages) which they sell to these mega investors.
This in turn creates a gigantic flow of money that becomes available for mortgages at a very cheap rate. A mega investor would rather get a low rate of say 2 percent with an actual collateral, such as a house, than sink trillions of dollars into something with no guarantee, such as for example, a government bond. (In the past it was unthinkable that a government could default, so government bonds were considered very safe—but today, this is not the case anymore.)
Therefore, for a small window of time, while the rest of the world crumbles economically and we in the USA are “better” in comparison, and these mega investors are flowing money into the coffers of USA’s biggest mortgage bankers, we can enjoy rates that are the lowest they have been in 5,000 years! The low level of interest rates we currently have means that, technically speaking, inflation alone could pay your mortgage.
But remember, this is unsustainable. With the Fed announcing three rate hikes for 2022 (the first one probably in March), we now know for sure that the only way is UP for rates.
In a future blog post I will describe how my first real estate client paid for his mortgage by inflation alone!