A file of percentage symbols in front of a home represent unstable home interest rate trends.

Home Interest Rate Trends: What We Can Learn From History

We’re at an interesting point in the economic development cycle. Multiple pointers seemingly contradict each other as numerous industries try to fight their way out of the global COVID-19 crisis. In the home building and development industry, home interest rate trends have been a recent cause for concern. And indeed, plenty of news has been made about this rapid rise, with CNN calling out the fixed benchmark rate as double that from a year ago. 

Do these home interest rate trends threaten the economy, especially home buying? To answer that question means digging deeper into the history of home interest rates, and how that history compares with our current situation.

A History of Home Interest Rates, From 1970 to 2022

Perhaps the best way to calm fears about high-interest rates is to zoom out a half-century. In 1971, the first year finance company Freddie Mac began to survey mortgage lenders to establish benchmark interest rates, that benchmark began around 7.5%–a full percentage higher than we are currently seeing. 

Inflation began to spike in the mid-1970s. As a result, home interest rates began to rise. By the end of the decade, the benchmark hit 12.90%, a number that would be unheard of today.

But that wasn’t the end of a historic mortgage interest rate hike. Economic fears in the early 1980s continued that spike, helped by a concerted effort through the Federal Reserve to combat inflation. By the end of 1981, the benchmark home interest rate reached an all-time high of 18.45%. For context, that’s about six times the current average mortgage rate. 

Average interest rates began a steady decline from that all-time high. By the end of the 1990s, rates even briefly dipped below 8%. That trend continued in the early 2000s, with rates steadily hovering between 7% and 9%. 

And then, a global recession hit. Beginning in 2009, the Federal Reserve actively cut interest rates to increase buying. Rates dropped below 5% for the first time since benchmark tracking began. The rates peaked at a then-record low in 2013 when mortgage rates briefly dropped to 3.35%. Of course, the economic uncertainties of the COVID-19 pandemic saw those rates drop even further, arriving at what still is a record-low 2.77% in August 2021.

Where We Stand Today, and What the Future Holds

The past 18 months have seen mortgage rates move upward again. As of today, we stand at 6.48%. In fact, it’s the first time since 2018 that the home interest rate benchmark rose above 5%. But will that trend continue?

That’s where even experts tend to disagree. Most economic forecasts estimate a 7% rate by the end of the year, which is relatively consistent with where we stand today. But within that average, estimations fluctuate widely, from 5% to nearly 10%. 

Which of these estimates is correct? As we stand today, it’s an impossible question to answer:

  • On the one hand, continued inflation along with Federal Reserve interest rate hikes and volatile stock markets could continue to drive interest rates up to levels not seen since the 1990s.
  • On the other hand, fears of a recession may depress demand in homes, which is a historical predictor for lowering interest rates to stimulate demand. 

It’s almost impossible to predict which of these two extremes will come true, or whether the home market will fall somewhere in the middle of that pendulum. That’s a major reason why so many developers and home builders are unsure of what the future holds.

How Do Home Interest Rates Affect Home Prices and Consumer Buying?

Average home interest rates, of course, are only part of the equation in understanding and forecasting consumer demand in real estate and new construction. In fact, a study by the Urban Institute showed that the relationship between home interest rates and home prices is relatively weak. While higher interest rates tend to occur alongside higher home price appreciation, the correlation isn’t as strong as one might believe.

Home interest rates are, however, closely connected with consumer buying demand. The reason is simple: A home is the biggest investment the average consumer tends to make. When the economy is weak, demand for homes naturally declines. The Federal Reserve begins to push lower interest rates to prop up that demand, and help to strengthen the economy again. Historically, we’ve seen the same cycle in the 1980s, after the 2008 global recession, and during COVID-19.

This leads to a surprisingly counterintuitive conclusion. Interest rate hikes are less unusual historically than they might appear. However, these high rates could actually be an indicator of stronger-than-anticipated consumer demand. If low-interest rates are indicative of trying to drive demand, rising interest rates may just as easily be interpreted as the market’s response to that demand rebounding. 

The key, of course, is neither lowered nor heightened interest rates. Instead, it’s stability, which is one thing the current market cannot offer. That’s why proactive steps to meet consumer needs are more important than ever.

AI Helps Developers and Home Builders Meet Consumer Needs Amidst Fluctuating Demand

Interest rates, rising or dropping, are ultimately only the background to what matters the most in the developer and home-building industry: stimulating consumer demand. And while the price of homes and mortgages certainly influences that demand, developers and home builders can actively work to distinguish themselves as a premier option. As a result, they will drive local demand for their properties and construction.

Take AI-enabled digital assistants as an example. Most home builders have limited staff and are still using traditional communication methods. As a result, they struggle to meet the digital-first, around-the-clock demand of the modern consumer. Digital assistants provide 24/7 responsiveness, creating a continuous, helpful stream of communication that goes from construction all the way to resolving issues after move-in.

Learn more about how AI-enabled digital assistants are changing the home building and developer landscape.