A Recent History of Interest Rates
Interest rates are something that impact everyone, but are complicated to understand. MMCCU President David Murphy and VP of Lending Jerry Litwaitis explain interest rates and more in the newest episode of their MMCCU podcast, “The Credit You Deserve.” They also put interest rates into perspective and set out to answer what’s happening with Interest Rates lately and what the recent increases mean for home rates and car rates.
What’s Happening with Interest Rates?
“In this podcast, we will cover relevant topics that impact your personal finances,” said Murphy. “With so much fluctuation surrounding interest rates, in this podcast from MMCCU we’ll be exploring the evolution of interest rates through the decades. Starting with the 1980’s, we’ll progress through to the present day, explaining how we got to where we are today. Our goal with this conversation is to provide the context for interest rates.”
Interest Rates in the 1980’s:
Housing costs were lower, but 14% was considered a good interest rate. There were relatively high interest rates on cars and homes, but also high interest on savings and certificates.
The 1980’s were a time of “stagflation,” meaning high inflation mixed with economic stagnation. Interest rates rose considerably and it was simultaneously difficult to afford daily goods and expensive to borrow money. Gas rations weren’t uncommon.
Heading into 1980, the Federal Reserve increased the Fed Funds Rate to 20%, the highest it’s ever been in United States history.
There was deregulation in the Savings and Loans sector, as well as the highest number of S&L failures in history. At the time, managers were tied to financial performance, so there were riskier loans and fewer checks & balances in this sector.
On October 19, 1987, now known as “Black Monday,” the Dow Jones Industrial Average and S&P 500 dropped more than 20%.
Interest Rates in the 1990’s:
The 90’s saw a falling rate environment. Litwaitis joined the credit union in 1992 with consumer loans.
“We ran a vehicle loan special in 1994 where the interest rates was 5.94%, and we did tons of loans,” he recalled. “I had members asking if we were going to do another deal like that. Today if I told you that, you’d probably go somewhere else.”
In 1994/1995, he started doing mortgages. Rates began to fall in the late 90’s, leading to a refinance boom.
He said one member refinanced three times in one year.
“There were closing costs with that, but they still were coming out ahead,” he said. “We did a lot of refinancing and that was pretty much our entire portfolio.”
During this decade, housing values increased.
“Rate Lock was a big thing,” said Litwaitis. “I’d tell members: If you can get an interest rate at “8%- great, 7% -fantastic, anything in 6 percentile range – you won the lottery, do some jumping jacks.”
With the economic boom of this decade, the credit union also grew. Members were able to access more products, including second mortgages. Because of the refinance boom, there was a need to help more people.
“You could book a loan and then send it to a mortgage company,” added Litwaitis. “The involvement of a secondary market helped us being able to release more funds to help more people.”
The decade ended with the Y2K scare, which ended up being a nonissue.
Interest Rates in the 2000’s:
Home values that started to skyrocket in late 90’s carried through into the 2000’s and interest rates continued to fall. September 11, 2001 had a significant effect on the market and a Great Recession took place in the mid-2000’s.
The housing market crashed as the impact of NINJA (no income, no job, no assets) loans came to a head.
“In the industry as a whole – not at MMCCU – many loans were pushed through that shouldn’t have been,” said Litwaitis. “People who shouldn’t have had a mortgage for that dollar amount were being given a mortgage and then the bottom fell out.”
MMCCU fortunately had never changed their regulations and did not fall victim to this issue. Some financial institutions offered interest-only loans, a risky financial approach.
“People took out interest-only loans (a bad idea) on a 30-year mortgage. When their term was up, the borrower still had the initial $1.2 million loan that they now had to finance for 20 years,” explained Jerry. “So, the borrower would go from being barely able to afford the loan to not being able to afford it at all. It was basically kicking the can down the road for those financial institutions.”
Subprime lending contributed to the issue. (People with low credit scores and no down payment would get a loan and it would be packaged in with other loans for a secondary market). This national crisis led to more oversight of home loans and mortgage lending.
“The housing crisis led to a terrible domino effect,” said Murphy. “Once those dominos fell, rates plummeted and the economy fell into shambles. We still see the ramifications today.”
Rates were around 5-6% when the economy fell apart.
Interest Rates in the 2010’s:
David arrived at MMCCU early in the decade, when mortgage rates were in the 3% average range.
“Went 15 years with very low interest rates, so if you’re under age 36, you’ve probably never had to deal with high interest rates,” he said.
The Great Recession has had a profound, long-lasting impact, but curiously 2010-2019 is the only decade in which the United States didn’t go through a recession.
“Unfortunately, we were likely superficially and artificially kept in that economic situation too long, but that’s just speculation and time will tell,” said David.
Rates began to rise late in the decade, then COVID arrived in 2020.
Interest Rates Today and What to Expect Next:
Going into March 2020, interest rates were starting to creep into the 5% range and we were getting back into a normalized rate environment…then COVID hit.
Stimulus payments led to excess liquidity for consumers and excess deposits at financial institutions.
“With inflation rising and supply chain issues, consumers are not able/willing to spend money as freely as needed for the economy to grow.
“Until we start to see more organic cash flow, I think rates on deposits will be on hold,” said Murphy.
Key takeaways: The average of mortgage rates since 1974 is 7.7%.
“Don’t let rising interest rates keep you out of realizing your dream of being a homeowner. There are cycles and you can refinance,” said Litwaiti. “When you take out a mortgage, yes there are costs when you refinance but most lenders offer a refinance option. That opportunity is there. Figure it out in the context of your own finances. The right thing is what’s best for you.”
Interest Rates Predictions:
- We’re not economists nor do we pretend to be them! So these are just predictions.
- We’ll probably see some type of recession, but there are peaks and valleys throughout history… so don’t panic.
- We’re not confident the Fed can control inflation
- We’re going to see some hard times for at least another year
- Late within the next year, we’re going to start see some normalizing. It will be Spring/Summer 2023 before Fed Funds Rate drops to help spur economic growth. (Usually when elections come around, that sways things.)
- Supply chain can make a big difference – if something changes there, rates will follow
Feel free to contact MMCCU with questions! We’re more than willing to help you with anything you might need.
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