Home Interest Rate Trends: What We Can Learn From History

Home interest rates have been the subject of much discussion in the recent past. Rates moved from a historic low in the aftermath of the COVID-19 pandemic. Then, new highs in late 2023 that carried through this summer. However, experts now predict a drop at the end of 2024 that will extend into next year.

This shift, and especially the rise of interest rates culminating in this summer’s peak, has been a cause of significant concern in the home building and development industry. Higher interest rates naturally mean higher mortgage payments, slowing down industry demand across the board.

As a recent analysis by U.S. Bank put it,

Higher mortgage rates were not only a deterrent to potential new homebuyers, but also played a role in reducing supply. Many existing homeowners remained unwilling to put their houses on the market and sacrifice their lower rate mortgae. In May 2024, the average U.S. monthly mortgage payment reached an all-time high, contributing to slower housing market dynamics.

The effect is undeniable, though concern is not necessarily a cause for panic. Understanding the history of home interest rates, and how that history compares with our current situation, can help to build an understanding of how these rates may impact the housing market going forward.

A History of Home Interest Rates, From 1973 to 2023

Perhaps the best way to calm fears about rising or high interest rates is to zoom out a half-century. In 1973, one of the first years that finance company Freddie Mac began to survey mortgage lenders to establish benchmark interest rates, that benchmark began around 8%—a full percentage higher than we are currently seeing.

1970s

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 for 30-year mortgage interest rates hit 12.90%, a number that would be unheard of today.

1980s

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 above 16%. For context, that’s nearly three times the current average mortgage rate.

A look at average home prices shows just how significant this interest rate hike was for home buyers. A home that in 1980 would have cost just over $63,000 rose to nearly double by the end of the decade, with a median home price of $123,900 in 1990.

1990s

Fortunately for both homebuyers and the entire industry, 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%. Crucially, while that number might have sounded encouraging to anyone in the industry today, it is still higher than the current and forecasted averages into 2025.

2000s

And then, a global recession hit. Beginning in 2009, the Federal Reserve actively cut interest rates to encourage buying in an economy desperate for more purchasing power. Rates dropped below 5% for the first time since benchmark tracking began in the early 1970s. 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, surpassing even the lows of 2013 and arriving at what still is a record-low 2.65% in January 2021.

With the economy getting stronger again in the wake of COVID-19 and several stimulus infusions, home mortgage rates began to move upward again. By early 2023, their steady foothold above 6% was the first time since 2018 that the home interest rate benchmark was staying consistently above 5%.

October 2023 saw what is still a 15-year high, at 8.45%. But as it turned out, that peak was also the beginning of a turnaround: by the end of last year, the rate declined again, ending almost exactly at 7%—which is still close to where things stand today.

Where We Stand Today, and What the Future Holds

To this point, 2024 has seen what may be the most consistent year of average mortgage interest rates in recent memory. The beginning-year average of 7% was still steady in July, before beginning to decline slightly in August and September. Most experts forecast that by the end of 2024, the average will fall between 6.2% and 6.7%.

This forecast is significantly more steady than it was about a year ago when experts predicted anywhere from 5% to 10%. At that point, continued inflation along with volatile stock markets and a Federal Reserve interest rate hike was thought to potentially drive up to the highest levels in recent memory. At the same time, other experts accounted for the potential of a recession that would depress demand in homes, a historical predictor for lowering interest rates to stimulate demand.

The actual home market, of course, fell into the middle of that pendulum. While experts still warn that a recession is possible, a relatively stable economic environment at this moment has caused those fears to become less prominent, making way for more stable predictions in the process.

At the same time, the drastic turnaround in forecasts between this year and last, not to mention the history of significantly fluctuating interest rates since the 1970s, show that predictions are far from guarantees. Home developers and home builders continue to be 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. To be sure, they are closely related; if interest rates are lower, overall mortgage payments will be lower, causing demand to go up and home prices to rise accordingly. On the other hand, high interest rates tend to have the opposite effect.

In other words, consumer demand is the most important part of the equation. 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 COVID-19 pandemic offers the perfect example of this counterintuitive correlation. Interest rates were historically low precisely because no one wanted to buy a home, so banks and government entities both had a vested interest in making home buying more attractive. When low interest rates (along with stimulus packages and a recovering economy) had sufficiently stimulated demand, those interest rates could rise again.

The ideal scenario, of course, is neither lowered nor heightened interest rates. Instead, it is stability, which is a sign that the market is healthy and demand and supply are in equilibrium. This stability, which we appear to be moving toward as interest rate fluctuations become less significant, make it vital to take proactive steps to meet consumer needs and demands.

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 in the developer and home-building industry: stimulating consumer demand. The price of homes and mortgages certainly influences that demand. However, 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.

The home building and real estate market remains as competitive as ever. We continue to be in a seller’s market. With that, comes rising home prices and relatively short turnaround times from listing to sale. Still, potential homebuyers have a wide range of options. As a result, they will gravitate toward builders and partners they feel comfortable working with.

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. This creates a continuous, helpful stream of communication that goes from construction all the way to resolving issues after move-in.

Interest rates and home buying demand can shift significantly. Providing outstanding customer experiences must be a constant offer to prospective homebuyers. Learn more about how AI-enabled digital assistants are changing the home building and developer landscape.