Recent Drop in Interest Rates
Last week saw a noticeable drop in mortgage rates.
The three main questions I receive on a daily basis are:
Are mortgage rates going to come down some more?
When will they get back to "normal"?
How do I know when rates have hit bottom?
Much smarter people than me have already figured this out. Bear with me, as the answer requires understanding two concepts:
Economic Cycles
Timing
At the end of this article you will be able to:
Know why mortgage rates change
What causes the change
How to predict the next low
How to know when you have hit bottom
Look at the graph below. It shows mortgage rates from Friday April 16th 1971 all the way to Thursday February 27th 2025 - that's a span of almost 54 years.
This graph is produced by FRED which stands for "Federal Reserve Economic Data", in this case, from the Federal Reserve Bank of Saint Louis which has traditionally been (and continues to be) the primary aggregator of economic information in the US.
You can access this graph yourself, and this is the complete citation:
Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MORTGAGE30US, March 1, 2025.
At first glance, it looks like rates were at a level of 7.5% in 1971, then they went through the roof to an all time high of 18.63% on Friday October 09 1981, and then they started to drop non stop until they hit bottom at 2.67% on Thursday December 31 2020.
That's 39 years of dropping mortgage rates!
How do we make sense of this?
We are going to look more in detail at the behavior of the rates over time:
From 1971 to 1982, mortgage rates went from 7.5% to 18.63%. A period of 10 years.
From 1982 to 1991, they dropped to slightly under 10%, while occasionally moving above 10%. A period of 9 years.
From 1991 until 2002, they moved within a band with an upper limit (ceiling also known as resistance level) of 10% and a lower limit (floor or also called support) of 7%. A period of 11 years.
From 2002 to 2011, rates dropped to 5%—this period was the crazy real estate boom. A period of 9 years. (During that time rates did fluctuate between a ceiling of 7% and a floor of 5%.)
From 2011 until 2022, mortgage rates kept under 5%. A period of 11 years. During this time, the ceiling was 5% and the floor was 2.67%—rates moved within that band.
From these observations you can see that:
Rates are always changing.
For a number of years they tend to move within a range determined by a ceiling and a floor, known as the "Price Range" or Band.
Even though they are constantly moving, there is an underlying trend that is either pushing them up or down within that time period.
Do you see a pattern starting to emerge?
Each period lasted a minimum of 9 years to a maximum of 11 years.
This period of years is called the "Economic Cycle." It also goes by these other names:
Boom & Bust Cycle
The Business Cycle
According to economist Martin Armstrong, who has researched this topic the most, when it comes to this cycle, the average length of the Business Cycle is 8.6 years.
He is not the only one to have noticed this: Paul Volcker, who served as Federal Reserve Chairman from 1979 to 1987 wrote a book in 1978 about this cycle entitled "Rediscovery of the Business Cycle".
Other notable economists who have noticed, tried to analyze, predict and explain this economic cycle are:
Wesley Clair Mitchell (1874–1948) – Pioneer of Business Cycle Analysis
Joseph Schumpeter (1883–1950)
Arthur Burns (1904–1987) – Federal Reserve Chairman
Hyman Minsky (1919–1996)
Milton Friedman (1912–2006)
Modern economists who have spoken about the Business Cycle:
Robert Shiller – Nobel Prize-winning economist
Ray Dalio – Hedge fund manager and economic historian
Lawrence Summers - Former Treasury Secretary
Last but not least is the Biblical story of Joseph in Egypt, found in Genesis 41. This passage describes an economic cycle of abundance and famine, 7 years of prosperity followed by 7 years of famine. People have been noticing this cycle since the beginning of time!
Every time the Business Cycle changes, rates fundamentally jump to another range or band.
Another observation: When the Trend is Down, and we jump to a new Business Cycle, what was the floor of the previous cycle becomes the ceiling of the new cycle. Example: On the Business Cycle from 2002 to 2011, the floor or bottom of the range was 5%. This now becomes the new ceiling for the next Business Cycle.
Conversely, when the Trend is UP, what was the ceiling of the previous Business Cycle, now becomes the bottom of the new one. You can see this now on the new Business Cycle we have entered into since 2022. The bottom of the band we are living through now is 5%. You can see that when you look at the trend (the two blue arrows on the graph above).
Rates often change three times per day, sometimes more, but the RANGE of movement, or the Volatility Range, is bound or limited on the low side by the upper limit of the previous business cycle.
Now you know what really drives rates (the Business Cycle), you also know what is the lowest rate you can expect, (the Floor Rate for the current Business Cycle we are on), you know how long this phase or Business Cycle would last (9 to 11 years) and you also know the Trend we are in! (Up Trend)
Doesn't this make planning a lot easier?
A glimpse into the future:
2022 plus 10 years brings us to 2032!
2032 will be a year of changes. We will be moving into a new Business Cycle!
I shared with you ONE economic cycle, but in fact there are MANY!
There is actually an even bigger cycle that is defining the Trend we are on!
Just by looking at the graph, from 1982 to 2022, that's 40 years, right? Each business cycle lasts about 10 years more or less, so we can readily see that for 4 consecutive business cycles the Trend was down, would this mean then that for the next 4 consecutive business cycles the Trend is now UP?
I leave you to figure that out!
If we cannot fight the Trend, since the Trend is a bigger cycle that controls the smaller cycle within, the Business Cycle, are we doomed? If the Trend is UP does that mean we can't get a lower rate?
No! the opportunity is catching the rate when it is moving in the direction of the floor of the current Business Cycle.
The floor where we are now is 5%. Anything that touches, approximates or has a 5 in it, that is your chance!
No one can accurately predict whether or not it is going to touch 5% or how close it will get to it. For most people, getting it right within 0.5% is plenty and more than good enough! You can almost never time the market perfectly.
At the time of this article, if you qualify, you could get a 30-year mortgage at 5.875%:
In other words, you can get a 5 in front! We have not seen this for a while! This is a sign that we have approached the floor for this Business Cycle!
Will it go lower? Maybe. Will it go higher? Yes, that seems likely based on historical patterns.
What's the ceiling of the new Business Cycle we are in? It is hard to tell, but it seems as of now that our new ceiling is somewhere between 7.5% and 8%.
How low could it go? About 5% in my opinion. Why wouldn't it go lower? Because that's the floor of our new Business Cycle we are in now.
Should I wait for it to go closer to 5%? Yes, you can. The intra cycle lasts 1 or 2 weeks. If you decide to wait for the right moment to strike, you need to be ready!
If the rate touches 5% or goes even lower than last Friday, you will have 1 or 2 days to lock it—that's it—and then it'll move back towards its ceiling.
But wouldn't it come back down again to touch the Floor? It could, but no one can truly predict it and it could take a year or more. In the meantime, having lost the opportunity might cost you more!
Your mortgage broker cannot lock your rate until your loan file is ready to go. This means you need to spend 3 to 4 days in applying for the loan, your loan officer creating a loan file, and be ready to lock. In the old days, you could lock a rate just with the name, address and social security number. Today, lenders demand that the file be complete and submitted.
Many lenders, specially in the non Fannie Mae and Freddy Mac world, now require Underwriter Approval BEFORE you can lock a rate. This could mean that it could take a full week from the moment you decide to apply until you get Initial Underwriting Approval.
This means for you that to get the lowest rate you could qualify for in this new Business Cycle, you need to:
Start the Process of getting Pre-Qualified
Have your Paperwork and Application Ready
Then, when the opportunity knocks at your door as it is doing it now, you will be ready to STRIKE!
I hope this information was valuable to you!
To see how extraordinary this opportunity is, have a look at the 15-year mortgage rate as of today:
With that I would like to thank you for making it this far, and I hope you seize this window of opportunity! Feel free to contact me for a Free Brainstorming Consultation if you would like to discuss your personal situation.
