Is 8% the New Normal?
(Averages offer helpful perspectives sometimes)
We seem to thrive on averages in the world of real estate. A sobering average many are just beginning to acknowledge is that the 30 Year fixed mortgage rate in the US averaged 7.74% from 1971 until 2023, reaching an all time high of 18.63% in October of 1981 and a record low of 2.65% in January of 2021. That is a wide, wide spread that shows how just like all averages, everything in real estate is hyper-specific, not just hyper-local.
Sometimes when driving to in traffic, we bemoan the times we are moving at 3 mph.....followed then by the times we speed along at 60 mph. As we turn off the car upon arrival, it shows our average speed was 32 mph......
In 1981 while rates hit that all time high of 18.63%, they averaged 16.63% that year. By 1986 they averaged down to 10.19%. While these sudden and relatively short bursts of higher rates have happened, we forget that in 2018, the 30-year averaged 4.54%.... 2021 was an anomaly. A highly unusual year. The ultra-cheap money was cheap to offset the damage of COVID lockdowns, the massive recession that hit in 2020.
In 2018, US GDP grew by 2.95%. In 2019, it pulled back to 2.29%. 2020 saw a 2.77% dip.....followed by a 5.95% surge in 2021 and a more sober 2.06% in 2022......averaged over 5 years, GDP grew by 2,096%. On an economy the size of the US (almost $27 TRILLION), 2% is BIG. We often forget just how large the US economy is. Looking back at this 5-year period, the average is rather dull. Look at the ups and downs and they are DRAMATIC!
No-one knows what comes next, whether rates stay higher for longer, or dip next year, or whether a recession hits next year or the following year..... looking back at the past 5 years we should see that the huge spikes and dips that inevitably happen usually don't last too long, and certainly not forever. Is 8% the new normal? We have no idea. But take one more look at the average for the past 50 years and one thing is certain: 18.61% is NOT normal or permanent....and neither is 2.65%!