18% Mortgage Interest Rates Are Going To Make A Comeback

Don't believe me? Then you my friend have forgotten your history. From late 1978 through 1986 , mortgage rates were in the double digits. In October of 1981, the average 30 year conventional mortgage rate had reached a whopping 18.45% according to the Board of Governors of the Federal Reserve System.

The Question you may be asking is "Why in the world would interest rates hit 18% again?". That's an easy question to answer. To explain it in a very simplistic manner, it goes a little something like this: When home prices drop, foreclosure rates rise. When foreclosure rates rise, banks lose a lot of money and their stock price gets hammered. When bank stocks get hammered, they can fail (IndyMac for example), get acquired (Countrywide was acquired by Bank of America), or continue with operations with a focus on boosting profits to get back on track. Bank profits come from the interest rates they charge the borrower. Now put yourself in the bank's position...fewer loans are being approved due to tighter lending rules. This means fewer customers to make a profit off of. So how do you increase your profits to make up for the billions lost in the housing bust? You increase the interest rates on the limited supply of borrowers that will qualify for a loan. This equates to higher and higher mortgage interest rates with each year to come. 18% interest rates on conventional mortgages a reality? Ohhh yes! It's coming and faster than you might think.

The Prime rate on December 19, 1980 was 21.50%. According to the Wall Street Journal, the "Prime Rate"can be defined as "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks". Still think this is a far fetched idea of mine? History doesn't lie. It is what it is and I can tell you we're in for a major interest rate explosion.

The question real estate investors should ask is, "Do I buy now when rates are in the low 6% range or do I wait a little longer for a better purchase price and risk a higher interest rate?". That will be the mantra heard throughout investor circles all over the country.

Just my 2 cents: Buy now and don't wait for interest rates to hit astronomical levels. Prices are incredible right now and with current rates in the 6% range, you'd be crazy not to rap up your last few investments before the tide turns.