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A Brief History Of Mortgage And Deposit Rates

By now, the phrase "rising interest rates" seems like one of those quaint old expressions that has passed out of common usage. When was the last time you heard it? But if a recent trend continues, that phrase may come back in vogue.

Quietly, mortgage rates have been rising since late November. This is not big news yet, because mortgage rates are still extremely low on a historical basis, and rates on savings accounts have yet to budge. Still, the move in mortgage rates has been sustained enough to make it worth playing the "what if" game -- what if this trend continues? How high could rates be in a year's time?

Looking at the past can give you some feel for what the future could hold.

Cautions on history

Before you review the past trends for interest rates, it may first be helpful first to review the benefits and the limitations of looking at history for clues about the future. History is not a road map, because the past does not repeat itself in any sort of orderly or predictable manner. However, history can give you a feel for the range of possibilities, such as what has happened most often in the past and what the extremes have resembled.

Financial market history is like a batting average in baseball. If a 10-year veteran has hit between .300 and .330 every year of his career, he is most likely to bat in that range again this year. That's not to say he won't suddenly slump to .250, or have a spectacular season and hit .360, but history gives us an idea of what it is most reasonable to expect.

The biggest jumps in mortgage and deposit rates

If interest rates start rising, here's what history tells us is most reasonable to expect from mortgages, as well as from short-terms rates such as savings accounts, money market accounts and short-term CDs:

  1. Mortgage rates are more likely to rise than fall. Looking at every rolling 12-month period over the past 40 years, found that mortgage rates fell in 61 percent of those periods, rose in 38 percent, and remained flat in the remainder.
  2. When mortgage rates rise, they tend to move by a greater amount than when they fall. The average 12-month increase in rates was 1.05 percent while the average 12-month decrease was 0.84 percent.
  3. The largest 12-month increase in mortgage rates was 5.83 percent; the largest 12-month decrease was 4.56 percent.
  4. One-month CD rates are also more likely to rise than fall, by 56 percent to 43 percent, while staying flat just under 1 percent of the time. Savings and money market rates could be expected to behave similarly to short-term CD rates.
  5. The magnitude of typical increases and decreases is almost identical, with the average 12-month decrease being by 1.63 percent, while the average 12-month increase was by 1.62 percent.
  6. The largest 12-month increase in 1-month CD rates was 9.39 percent; the largest decrease was 7.84 percent.

The inflation factor

The above shows that both interest rates can rise pretty steeply, but will it happen again soon? That could all depend on inflation, which has often been a catalyst for sharp jumps in rates.

Inflation has largely been a non-factor in recent years, but February saw the Consumer Price Index suddenly jump by 0.7 percent. If that sort of thing continues, expect to see that history of epic interest rate climbs become very relevant once again.


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