Fed plays the Grinch as rates hit 23-year high

Mortgage rates have surged to their highest level since 2000 — with hints they'll go higher — as the Federal Reserve plays housing's Grinch to cool the economy.

My trusty spreadsheet looked at the rates on the average 30year fixed mortgage from a survey by Freddie Mac. To help explain home loan swings, I compared rates with the consumer price index's inflation rate.

The average 30-year mortgage rate was 7.49% for the week, up from 7.31% a week ago and the eighth consecutive week above 7%. The last time it was higher was November 2000.

How much does that jump hurt house hunting? A borrower seeking $600,000 today would have a $4,191 house payment at current rates, up 9% from financing costs at the 6.66% rate in October 2022 and up a stunning 66% from the 2.99% rate in October 2021.

How long ago?

Let's jar your memory and go back to 2000 …

THE NEWS » The Supreme Court essentially chose the presidential election winner, George W. Bush. Turn-of-the-century Y2K computer fears prove unfounded. Microsoft was declared a monopoly.

THE CULTURE » “How the Grinch Stole Christmas,” starring Jim Carrey, was the box-office hit. The top TV show was “Survivor.” And the No. 1 song was “Breathe” by Faith Hill.

THE SPORTS » Pro champions were football's Rams (St. Louis), basketball's Lakers, hockey's Devils and baseball's Yankees.

The back story

Much like 2023, the 2000 economy was seen as too hot. It was fueled by a technology revolution, you know, those “dotcom” businesses that first monetized the internet.

Remember it's the Fed's job to keep inflation moderate. So in Grinch-like fashion, the central bank uses its rate-nudging powers to chill the economic party when the cost of living seems out of control.

The late 1990s were good times, economically. Gross domestic product growth ran above 4% for four straight years — an upswing not seen since. Unemployment was at a threedecade low. And the stock market was riding a long winning streak.

It's also worth noting the inflation that put mortgage rates at 8% in 2000 was a seemingly meek 3.5%. But that was roughly double 1998 and folks had memories of 1970s doubledigit inflation in their heads.

The result

The 2000 rate hikes came

with the dot-com stock market crash.

A mild recession hit the nation in 2001 as joblessness rose to a four-year high. GDP growth, which was 3% in 2000, fell to almost zero the next year.

Then the slower business climate was further jolted by the Sept. 11, 2001, terrorist attacks. So the Fed began moderating rates. Mortgage rates got 1 point cheaper in 2001 as U.S. homes appreciated 13% over two years.

Still, the central bank got its prize: Inflation cooled to under 2% by mid2002.

History lesson?

Consider how mortgage rates move versus the cost of living. It may help explain why home loans seem extra expensive these days.

It's a key relationship because lenders, and the investors who buy mortgages, want to get paid an interest rate well above the inflation rate. This premium rate varies over time. It's a mortgage pricing variable that the Fed doesn't control.

In 2000, the housing market faced a 5.5 percentage-point gap between mortgage rates and inflation.

Then consider August 2023, the latest month with full inflation stats. The 7.1% average mortgage rate came with 3.7% inflation — only a 3.4-point gap.

Could current rates be relative bargains by those 2000 standards?

Yet 2000 stands out as a turning point for mortgage rates. Soon afterward, inflation phobia seemed to break.

From 1972 through 2000, mortgage rates averaged 9.9% as inflation ran 5.2% — that's a 4.7-point gap. But since 2000, home loans averaged 4.9% as inflation cooled to 2.5% — only a 2.4-point gap.

Why the change in mortgage pricing? My guess is that the overall downturn in inflation eased the anxieties of lenders and investors. That lowered the need for hefty premium rates to cover the risks of a high cost of living.

Well, that is until the pandemic era jolted inflation, pushing it to the worst levels in four decades, including the CPI rising to a 9% rate by mid-2022.

If 2000 is a guide, interest rates of all sorts — including mortgages — will likely remain elevated until there's prolonged evidence that this bout of inflation is over.