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Inflation is bad. It has been worse
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Faced with strong and persistent inflation, the Federal Reserve has felt compelled to raise its baseline interest rates twice in 2022 - the first such hikes since 2018. All indications say more increases are to come.
The Fed will likely continue aggressively raising rates until inflation is brought under control, which is one of its primary missions.
Early returns show the bump may have provided some relief. April’s consumer price index (CPI) slowed slightly to 8.3%, down from 8.5% in March.
For homebuyers, though, the hikes are also the primary culprit driving up mortgage interest rates. In April, they reached their highest level since 2009.
Those 40 and younger probably cannot appreciate it, but inflation has been worse – much worse. After a series of harrowing economic events in the late 1970s and early 80s, prices at one point were rising at an alarming annual rate of 14.5%.
Then as now, the Fed pushed back with higher interest rates. By late 1981, 30-year mortgage interest rates topped out at 18.45%. At first, some consumers were able to take advantage of the higher returns on savings, but not for long.
The average house cost $82,500 back then. Those who financed 80% of the cost at 18.45%, paid a monthly mortgage payment of $1,019, with $400,000 going to interest over the life of the loan. Doesn’t sound that bad? Remember, those were 1981 dollars.
To put it in perspective, imagine you bought a home today at the 2021 median of $322,700, with a 20% down payment. If you financed the remaining $258,160 at 18.45%, your monthly payments would be $3,986, not including tax and insurance.
You would pay $1.43 million over 30 years, with about $1.18 million – 82% of your payments - going to interest.
Amid today’s mortgage market, fretting usually begins when mortgage interest rates top 5%. Ten percent, let alone 18.45% is hard to conceive.
And it was not just housing. As is typical, the ballooning Fed rate trickled down to all lending rates. Demand for borrowing nearly dried up completely. With little business re-investment, recession followed. Unemployment grew to a rate of 10%.
Although jobs and consumer spending remain robust, some worry that today’s rising borrowing costs could cause a sudden recession. It is hard to predict.
Current Fed Chair Jerome Powell believes the country can navigate the inflation quagmire properly this time, leading to an economic “soft landing” without a downturn or a significant increase in joblessness.
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