Who remembers when mortgage interest rates were in the teens? 15%? 18%? In October 1981 interest rates reached 18.45%! No wonder that I don’t remember, I was a junior in high school and I’m sure I was more interested in boys at that time than mortgage interest rates. At that time both my parents were selling real estate and both doing quite well despite the astronomical interest rates. When I started in real estate in 1992 interest rates were around 7% to 7.5% and the Denver real estate market was much like it is today – multiple offers, offers over full price, each new listing priced higher than the last. It really wasn’t any fun.  Don’t get me wrong, my income was fun but the daily dealings with frustrated buyers was not.

But how could it be that the real estate market was thriving if Mortgage Rates were 7.5% or 18%?  Because it is all relative. While most things were cheaper in 1980 homes were not – at least if they are adjusted for inflation.  Below is a chart of home prices adjusted for inflation over the past 40 years. Check out the thick red line, this shows the real price (price adjusted for inflation). Notice how homes back in the 1980s did not cost much more than homes in 2012. The houses used for the graph are today’s median-priced homes, which controls for the fact that home sizes have changed over time.

Now let’s look at average interest rates over time. Notice that the current average Mortgage Rates and interest rate is set just a little bit higher than a 40 year low, around 4.5%. If you take into account the information from both charts this is still a great time purchase real estate – whether it be a primary home or investment property.

“Higher interest rates are now causing sales to level out, but the tight supply condition look to be with us for the balance of the year in most of the country” said Lawrence Yun, chief economist for the National Association of REALTORs. So while you may be paying a little higher interest rate than you would have a year ago, you may also get to reap the benefit of a slowing of rising home prices.

Source:
Mortgage Insider, “Well back in my day, interest rates were 18%”, July 4, 2013
Bloomberg, “Home Prices Climb in 87% of U.S. Cities Amid Recovery”, by Elizabeth Dexheimer, August 8, 2013