Bad news for house hunters: Mortgage rates hit 7.09%, highest level in 21 years

“Memory Lane” takes a stroll through financial history because the economy has a funny habit of repeating itself.

Buzz: Mortgage rates hit 7.09% this week, the highest level in 21 years in yet another blow to Southern California’s already depressed homebuying affordability.

Source: My trusty spreadsheet reviewed Freddie Mac’s weekly report on the average 30-year fixed-rate mortgage.

Numbers: After a springtime dip, rates have risen across financial markets this summer. The main culprit is a stern Federal Reserve that’s willing to keep all interest rates high to make sure problematic inflation won’t return.

Last November, mortgages hit their last peak of 7.08% as the Fed’s attempts to cool an overheated economy took full force. But as inflation began to slide from a four-decade high of 9%, fears ballooned about a possible recession. The Fed’s chore was done, right?

So mortgages fell to 6.09% by February.

And while inflation has cooled even further, there’s plenty of evidence the economy remains resilient, at a minimum. That strength in the business climate has pushed rates back up to a new cyclical peak.

How long ago?

Let’s jog your memory …

April 2002 news: President George H. Bush was dealing with Middle East tensions. Venezuelan dictator Hugo Chavez survived a two-day coup. Gray Davis was elected California governor. A school shooting in Germany killed 16.

April 2002 culture: The top-rated TV show was “ER,” and tops at the box office was “Scorpion King” featuring Dwayne “The Rock” Johnson. The No. 1 song was “In the End” by Linkin Park. Golfer Tiger Woods won the Masters tournament. The pro basketball playoffs began, eventually won by the Lakers. And the baseball season would eventually see the Anaheim Angels win the World Series.

The back story

What’s behind the “last time this big”?

In April 2002, a mild recession tied to the dot-com stock market collapse and the 9/11 terror attack had just ended. So the Fed began lowering rates – mortgages had been as high as 8.6% in 2000 – after winning that era’s inflation war (from nearly 4% down to 1.2%).

California’s economy also was shaky. Unemployment statewide was 6.8%. (It was 4.6% in June 2023.)

The result

Today’s house hunter faces high mortgage rates plus stubbornly lofty home prices. The Southern California six-county median sales price is just $20,000 below its record $750,000 set in April 2022.

Ponder what this means to local monthly payments.

This week’s 7.09% rate for a buyer paying $730,000 – the local median for June – theoretically gets a $3,921 payment, assuming a 20% downpayment.

This buyer’s payment benchmark is up 18% from February’s 2023 low. It’s up 104% from January 2022, when the mortgage rate hit its all-time low of 2.65%.

And that payment is up 190% since the last time that rates were above 7%. Why the jump? April 2002’s regional median price was $251,000.

History lesson?

Few can make a home purchase pencil out.

Lofty mortgage rates are a big reason why Southern California homebuying in June just finished its worst 12 months of sales in a database that dates to 1988.

Affordability is at a 16-year low, with only 16% of Californians financially able to buy, according to the California Association of Realtors.

So what’s next for home loans? Look back along Memory Lane, noting the links between rates and the cost of living. Since April 2002, mortgage rates were essentially halved because inflation tumbled equally steeply.

The 30-year fixed loan averaged 10% between 1976-2002. It’s run an average of 4.8% since. Meanwhile, the U.S. cost of living rose at an average 4.7% annual pace in the 26 years ending in 2002. Compare that to 2.5% during the next 21 years.

So keep your eye on inflation, just like the Fed.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

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