U.S. mortgage rates vary widely over time. At certain times they've also been quite volatile, rising or falling by more than 25 percent within a few weeks. There are several reasons for this phenomenon.
A Short History of Mortgage Interest Rates
When the U.S. Federal Reserve began tracking interest rates on home mortgages in April 1971, the average interest charged on 30-year fixed-rate mortgages was 7.3 percent. As it turned out, rates weren't this low again for more than 20 years. From April 1972, rates climbed steadily to a high of 18.63 percent in October 1981 before descending fitfully to an all-time low of 3.31 percent on Nov. 21, 2012.
Range and Volatility
Two characteristics of U.S. mortgage rates stand out: their range and volatility.
Because rates are always expressed over a full range from 0 to 100 percent, it is easy to mistake a rate range that never exceeds 18.5 percent or drops below 3 percent -- just a little over 15 percentage points from top to bottom -- as being relatively restricted. Looked at another way, however, the range from 3.31 percent to 18.63 percent represents a percentage increase of about 563 percent.
Interest rates can also be volatile. By April 1980, rates had climbed to more than 16 percent before dropping to a little over 12 percent in July and then climbing again -- this time to the all-time 18.63 high in October of the same year.
A closer look at the Fed's interactive graph shows that although some periods are more volatile than others, volatility is more the rule than the exception. In May 2013, interest rates had nearly bottomed out again at 3.35 percent; by June 27 they had climbed to 4.46 percent -- a percentage increase of nearly a third -- before dropping back to 4.10 percent in October.
Causes and Non-Factors
Macroeconomic factors -- various big economic events -- affect mortgage interest rate volatility and range. Two alleged causes, however, are hardly influential.
The conventional wisdom is that interest rates drop in a recession because the demand for money slows down with the economy and because the Federal Reserve acts to stimulate falling economies by lowering interest rates. A look at the Federal Reserve graph, which shades each recessionary period, doesn't confirm this. Of the six recessions shown, interest rates rose substantially in one, rose modestly in a second (where interest rates reached an all-time high) and dropped only slightly in the remaining four.
Because your lender dictates the terms of your loan, it's natural to think your lender dictates interest rates. In fact, lenders, like you, are simply responsive to large events over which they have little control and simply accept the rates that currently prevail.
Investor and Consumer Sentiment
One of the biggest changes in economics in the 21st century has been the increasing number of influential economists who attribute economic events to the prevailing sentiment of investors and consumers. A series of groundbreaking articles on investor behavior by Malcolm Baker and Jeffery Wurgler in The Journal of Finance from 2004 through 2006 has led other economists to re-examine consumer sentiment on the economy.
Simply put, what these economists agree on is that how we feel about the economy both as investors and as consumers profoundly influences economic outcomes. The severe recession that began with the collapse of the subprime housing market in late 2007 cost many Americans their homes and jobs. This has had a lingering psychological effect on demand, which in turn has held interest rates down long after the recession that began it ended. Moreover, as Mark Huffman points out in Consumer Affairs, the lingering effects of the Great Recession are not only psychological; they are real. A 2014 study of wealth in America shows a dramatic fall in the wealth of a majority of consumers.