In today’s rapidly evolving real estate market, it’s easy to become a prisoner of the “now.” The mortgage business is no different, as the past 12 months has seen a steady increase in “prime” rates raising from 3.78% at the beginning of October 2017 to 4.65% as of October 2018.
Mortgage Industry Rates – A 20-Year Historical Overview
From an outside perspective, it’s easy to look at this rise in rates over the past 12 months as a sign of a slowing “buyers” market and the end of the golden age in home buying, but let’s take a closer look at the average “prime” rate over the past 20 years:
As you can see in the chart above, mortgage rates are still at a historic low. May of 1998 saw prime rates hit 7.14%. The year 2000 saw a 20-year, year to date, high of 8.52% in mortgage rates, and even just ten years ago the prime rate in August of 2008 was 6.48%. Cue, the real estate collapse of 2008. The financial market as a whole was in disarray, and the government needed to step in and find a way to accomplish two major tasks:
- Put laws and regulations in place to ensure the housing market becomes a sustainable, viable part of the American economy (see: Dodd-Frank Wall Street Reform Act of 2010 for more information).
- Decrease the federal prime rate standard to help reenergize the dilapidated housing market.
Today’s Mortgage Industry
Flash forward eight years, when October of 2016 saw a ten year low in prime at 3.47%. Now, some may be wondering, what has changed over the past two years that has contributed to prime raising 1.18%? In short, our economy has changed. America has seen a decrease in unemployment from a ten year high in 2010 at 10.8% to 3.9% in August of 2018.
With the decrease in unemployment and America back on its feet, it was time for the Federal Reserve to “rip off the band-aid.” The decline in prime was always meant to be a temporary solution to help kick-start the economy and the housing market. The rise in rates over the past twelve months is intended to bring prime back to a more sustainable economic figure, but at a rate that is still in line with historic all-time lows.
The economy is on the rise and America is back on its feet, but something else has changed: The American mortgage market is lending more responsibly. Gone are the days of stated income, irresponsible balloon loans, and predatory subprime lending. These irresponsible lending practices that doomed our housing market have been replaced with more responsible, sustainable lending practices with stricter income, credit, and asset regulations. Companies like OVM Financial have made it their mission to help ensure that we never see another 2008 collapse by practicing fair and responsible mortgage lending.