End of cheap money: US mortgage rates doubled in less than a year

First modification: 09/23/2022 – 21:06

A year ago, when the world was coming out of the worst of the coronavirus pandemic, the rate for a 30-year mortgage loan in the United States was just over 3% per year, a historically low level that encouraged the purchase and maintained house prices on the rise.

The Mortgage Bankers Association (MBA for its acronym in English) calculates that today that same interest averages more than 6.2%, for the first time since October 2008, when the world entered a global economic recession.

The reason: the aggressive tightening of monetary policy by the Federal Reserve, which has brought with it excessive increases in interest rates, has considerably weakened the housing market.

Sales of housing units fell for the seventh straight month in August, and while price growth has slowed as demand has weakened, tight supply is keeping prices high.

But access to housing is not the only thing that has become more expensive. Nor is the United States the only country to use the strategy of high rates to fight inflation.

Goodbye (the last?) to negative rates, an experiment of more than a decade in Europe

Only in the week that ended on September 23, around a dozen central banks opted for increases in their interest rates, the most orthodox way to curb rampant inflation because it discourages consumption.

“The era of ultra-low rates is over (…) Rates are like when they give us a vaccine, a small damage. But inflation is a serious disease that does much more damage,” Daniel Lacalle, doctor in Economics and professor at IE Business School, explained to France 24.

From Norway to Indonesia to Taiwan to Argentina, monetary decision makers have used rates to deal with stubborn basket prices.

But perhaps one of the most representative cases is Switzerland: the European test with negative interest rates that began after the Great Recession ended last Thursday with the return of the Swiss National Bank to positive territory.

Launched in Europe to revive economies after the financial crisis, this policy turned the standard money business model upside down: financial institutions had to pay a fee to park cash at their central banks, and some homeowners found mortgages that interest was paid to them.

The strategy today is the opposite, and although the effect of the rate hike has not yet generated an aggressive move towards investment mechanisms such as CDTs, many Europeans are once again seeing returns on their savings.

“A large part of family savings in Europe is in deposits, which gave negative returns and now there is beginning to be what is called a ‘deposit war’ in which banks offer modest but positive amounts for citizens to deposit your money in the bank,” Lacalle told France 24.

In the middle of a deck of possibilities, there are also those who stick to stimulating consumption as a measure to improve the economy: the Turkish president, Reyep Tayyip Erdogan, has promoted a massive cut in interest rates despite the fact that the country already accumulates inflation of 80% in the last year.

With Reuters, AP and EFE