How Far, How Fast: Are 1% Mortgages Really Coming?
You know it’s August when Target starts selling Halloween. Pumpkins, skeletons, jumbo size bags of candy that no parent wants to see return are back on the shelf. Yes, back again, but with 30% more. Before the weather starts to cool my house is ready for trick-or-treaters. You see the signs first, then the season changes. Oh Henry! Mortgage rates work the same way.
The Fed only cut by 25 basis points, I get it. But lately I have seen some scary rate offers. Some lenders are pricing some freakishly attractive offers along their mortgage aisle. Outside the industry looking in, it looks awesome. To me, it’s just the early decorations before the season turns. Last time I had these chills it was 2019.
Here is why the mortgage business is the best business in the world. Every cycle ends the same way. Rates climb too high, the economy sputters out, followed by a cascade of refinancing. Lower rates aren’t just inevitable, it’s the candy that keeps the next round of buyers returning to your doorstep. After 20 years writing loans, it does get old, yet history says mortgage rates always fall further than anyone expects.
I’m not here to blame the rain. I’m here with the receipts. The last rate spike was the biggest head-fake in years. However, the long-term trend still points lower, and why 1% mortgages are that house on the block giving into consumption with that full size candy bar.
Orange the new Black [6% the New 18%]
Back in October (LOL) 1981 , 30-year fixed mortgage rates blasted sky high to 18.63% [1]. This was the result of Federal Chair “Tall Paul” Volcker’s aggressive monetary policy. These moves ultimately pushed the federal funds rate above 20% to mitigate runaway inflation. The aggressive form of monetary policy was known as the Volcker Shock.
Under the Volker reign, a quarter-million home with 20% down ($200,000 mortgage), would have cost beyond $3,000 per month in principal and interest. The shock was short-lived and within two years, rates were half of what they were at the highs. By the 1990s, they were in the single digits. The market psychology that drives rates to unsustainable levels are the same reasons they find ways back down to new all time lows. Today’s 6% rates feel like the 18% of the 80s because we just came off a historic low of 2.65% in January 2021 [1]. Everyone thought that double digit rates were the new “normal.” Then they collapsed…
Law of low mortgages
Rates are made in a Lab, not a Market!
We don’t live in the same world as the 1980s. Today, consumer spending accounts for 70% of U.S. GDP [2]. High interest rates choke consumer demand, slow the economy, and risk tipping it into deflation, not inflation. Jerome Powell’s monetary policy is working, its leading to demand destruction. Just ask the home builders.
Central banks now control rates with levers that were not widely used in the past. For example:
Quantitative Easing (QE): Between 2008 and 2017, the Fed’s balance sheet exploded from $882 billion to over $4.47 trillion [3]. That pushed long-term rates down.
Forward Guidance: Policymakers shape market expectations before policy even changes.
Liquidity Tools: Reverse repos, swap lines, and “emergency facilities” give the Fed direct control over the cost of money.
Unlimited Support: Fed’s MBS purchases escalated quickly from $500B to $1.2T after 2008. During the pandemic, ballooned from $1.7T to $2.7T [6].
This isn’t a free market setting rates. It’s a Frankenstein system that requires black magic to keep the economy running. When growth falters, policymakers invariably agree on the same solution. The market needs lower rates. During the credit crisis the Fed bailed out Wall Street. During the pandemic the Fed bailed out Wal Street, Main Street, and every man, woman and child. The problems will change but I do not have any faith in restraint.
Godzilla vs. King Kong Dollar
The divergence in monetary policy between the world’s major economies provides another clear signal.
As of late 2025, the Bank of Japan raised its benchmark rate to 0.5%, its highest since 2008, aiming to strengthen the yen [4].
Meanwhile, the U.S. Federal Reserve cut rates to 4.25% in response to slowing growth and higher unemployment [4].
Forget what you hear about the dollar. The global cost of capital still follows the Fed. Not Tokyo’s, not anyone else. As the U.S.-Japan rate gap narrows from 5.4% in June 2024 to 4.0% today this depletes the carry trade; borrowing yen to invest in dollars. Mortgage rates do not need to wait on the Fed. Expect mortgage rates to improve well before the official Fed pivot.
Inflation Leads, Rates Recede
Rates don’t drive inflation but inflation drives rates. Here’s the cycle:
Inflation rises → Central bank hikes → Economy cools → Central bank cuts
We are already seeing clear signs of disinflation:
PCE inflation: the Fed’s preferred measure, is sliding back toward the 2% target [1].
Supply chains: have long since normalized [1].
Wage growth: is softening in real terms, reducing upward price pressure [1].
By the time the Fed declares inflation “under control,” the bond market will have already sold the story. That’s why mortgage rates often fall well before the Fed pivots.
One Crisis away from 1% Mortgages
Ignore recency bias and the interest rate paid on your first home. I understand our system rewards spenders and punishes savers. However, the big picture says the 40-year trend of interest rate cycles continues. Each peak has been successively lower than the last, and each trough has pushed the boundaries of what was previously thought possible. In January 2009 rates were in the low 5’s and many of my clients objected that rates were going to give more, even another full point. By 2015, 4% rates lost its shine.
Is this a pattern? Is it an accident? Is it a result of an economy carrying more debt each cycle? As of Q2 2025, total U.S. household debt stood at $18.39 trillion [5]. Higher for longer sounds reasonable if the market can bear it. In a payment over price economy, cheap money is no longer just stimulus. It’s surviving until next summer. That is why the next rate cycle could take us not just back to 3%, but potentially lower than 2%. Unfortunately, I have no idea how long it will take to get there. Perhaps it’s just a single crisis away. It is the illogical math meeting monetary policy in an illogical leveraged world.
No better, no time soon
References
[1] Federal Reserve Bank of St. Louis. (2025). 30-Year Fixed Rate Mortgage Average in the United States (MORTGAGE30US). https://fred.stlouisfed.org/series/MORTGAGE30US
[2] U.S. Bank. (2025). How does consumer spending impact economic growth?
https://www.usbank.com/investing/financial-perspectives/market-news/consumer-spending.html
[3] Federal Reserve Bank of St. Louis. (2017). What Is Quantitative Easing, and How Has It Been Used?
https://www.stlouisfed.org/on-the-economy/2017/november/quantitative-easing-how-used
[4] Reuters. (2025). BOJ to unwind ETF holdings as split board signals hawkish tilt.
[5] Federal Reserve Bank of New York. (2025). Household Debt and Credit Report.
https://www.newyorkfed.org/microeconomics/hhdc
[6] The Evolution of the Federal Reserve's Agency MBS Holdings.