Rate Revolution: Why I am thankful for the “Red ❤️”
History of Rates 1971- Present: Courtesy of Mortgage News Daily
If you look at the history of mortgage rates since 1971, your eyes go straight to the big peaks of the early 1980s. My eyes see something of greater significance, the period we're in right now.
That "red circle thingy" on the chart, where rates shot up from all time lows into the 7%+ range, has changed the mortgage industry in ways we're only beginning to understand. I am so grateful for it. The band Semisonic reminds me that “Every new beginning comes from some other beginning's end.” The COVID market was great on the wallet but heavy on the heart. Working at breakneck speed for every deal that had to be done yesterday - good riddance. I actually enjoy this market. More time to shop. More time to compare. More time equals better decisions. At the end of the day, its better for the client, the focus of this business.
Despite the high probability for a Fed rate cut next week [1], we are not out of the woods yet on this mortgage market.
Here's why I think this red-circle moment isn't just a painful transition it's the setup for the most productive era in mortgage history. Ever.
I. The Great Reset
For years, the mortgage industry carried a kind of unspoken hierarchy: purchase money loans = priority, refinances = back of the bus. I remember a recruiter calling me right before the pandemic, telling me that if I wasn't a purchase money mortgage loan officer, I was "cruising for a bruising." The message was clear: refinances were for the bottom feeders, purchases were where the real professionals played. When 2022 came along - stocks were down, bonds were down. Loans meant less, deposits meant way-way more. Banks did not want your credit - they wanted your cash.
When rates jumped, it didn't matter whether it was a purchase, a refi, a cash-out, or a construction loan—every deal needed attention, creativity, and strategy. Tyler Durden said, “Its only after we have lost everything that we are free to do anything.” When everything gets destroyed, everything matters. What hurt most about the business was lending deviating from lending. Banks are chasing deposits, limiting their portfolio options. Local institutions like Mid-First cut their mortgage staff by 95%. Other regionals like WaFd only offer credit cards. No lot loans, no construction loans, just Visa and Mastercard. Will anyone bother to stay up late for Monday Night Football when it features the Jets & Colts? Lending is a sad state of affairs when players can't play (turn a profit). Every day I see a post of another lender forced to close shop.
The best loan officers stopped thinking in buckets of refinance or purchase. It should be in service to last names, “Smith,” “Johnson,” and “Brown.” It is all about the customer's entire financial picture. Solutions over sales. The post-pandemic mortgage market changed the business, for the better, and for the long term. It forced us to realize that customer focused means customer relationship, and the mortgage business is back to being the service business.
II. It Exposed the Real Affordability Crisis (Not Just Rates)
In the 1970s, double-digit rates defined an entire housing era. My parents' generation bought their first home at 14% and thought that was just how things were. In the early 2000s and especially at the closing table, everyone reminded me that when they bought their home with a 12-handle, it could not get any better. True, in the 80s when mortgage rates hit 18%, the median home price was about 2.5 times the median household income [2]. Borrowing was expensive, but houses themselves cost as much as today’s Crate & Barrel sofa.
Fast forward to 2022: We were living in a fantasy world of sub-4% mortgage rates, but home prices had exploded to 4.4 times median income in most markets, some places even higher. We had cheap money, but expensive everything else. Then rates doubled in what felt like five minutes, and suddenly we had the worst of both worlds: expensive borrowing costs AND expensive houses.
The market seized up. Required a new perspective. It wasn't just the rate shock. Rather, the collision of two unsustainable trends that had been building for over a decade. Buyers who could barely afford payments at 3% certainly couldn't afford them at 7%. Sellers who had watched their home values triple weren't ready to accept that the party was over. In Phoenix, if the price is not right, a seller just may take their ball and leave [3]. Suddenly, affordability mattered again. Buyers had to think hard about what they could actually afford long-term. Sellers had to offer concessions they hadn't considered in years. Homeowners locked into 3% mortgages are not moving unless they absolutely must. This is called the "lock-in effect" that dropped existing home sales by 40%. But here's what most people missed: That wake-up call wasn't just about remembering that housing can be expensive. It was about remembering that our clients need us most when we can help them navigate complexity, not when everything is easy.
III. It Forced Us to Remember That One Size Doesn't Fit All (And our Clients are more Sophisticated)
Can I level with you? The mortgage industry is not innovative. In fact, we'd been moving backward. Some big banks are still using DOS applications. Even more frightful that the pandemic, many of those same institutions started pulling ARM products from their rate sheets. That was partly due to the yield curve, but how can you make housing affordable based on the most premium priced product?
Most lenders ran the same playbook and had the same sale, take it or leave it!
Everyone wanted to be the cheapest lender offering the same exact product, but nobody was asking how to be the best lender offering the right product for each customer. Was this not the purpose of financial reform? As rates spiked, the 30-year fixed became unaffordable for most people, and suddenly we remembered: Not everyone needs to borrow money for 30 years at a fixed rate.
The best part of the new era is that the customers got way smarter than we gave them credit for.
These aren't the borrowers from 15 years ago who needed us to explain what "points" mean. Today's customers understand discount points, origination fees; they know how to shop rates across multiple lenders, and they're coming to the table with knowledge about programs we haven't offered in years. They're asking about interest-only HELOCs versus principal and interest options. They know the difference between a HELOC and a cash-out refi, and when to use each one strategically. They've done their homework on 7/1 ARMs versus 7/6 ARMs and want to know the spread and which one fits their timeline better.
The pandemic left a lasting impression that became crystal clear: Real estate is fundamental. People get that now in a way they haven't since before the Financial Crisis. I don't care how much A.I. shapes the future, how many people work remotely, or how digital everything becomes. All of us need to live somewhere. Unlike every other asset class, you can't outsource housing to a server or live in your stock portfolio. During the Great Financial Crisis, both lenders and customers wouldn't touch real estate with a 10-foot pole. People were walking away from homes, banks were afraid to lend, and the industry was the disease.
Real estate is again what is always was and will always be, an essential. Never mind a hedge on inflation or a way to diversify your portfolio. The pandemic proved that when everything else was uncertain; jobs, stocks, supply chains, even the dollar - having a roof over your head that you owned, was the ultimate security.
We forgot that CHOICE is a feature, not a bug. And when rates shot up and made the 30-year fixed unaffordable, we suddenly had nothing else to offer these sophisticated customers who knew exactly what they wanted. The pain forced us to remember that our job isn't to sell one product to everyone; it's to match sophisticated customers with the sophisticated products they're asking for.
The Small Long: My calls for the next wave in Mortgage Lending
First, interest rates will improve, when you give them time to breathe. In my opinion, interest rates are going lower than anyone expects. Not just back to the 2-3% range, but potentially even lower than that within the next 10 years. How so? Further investments in technology, especially A.I., is the ultimate deflation bomb. It will unleash a productivity that will drive down the cost of everything, including the cost of money [4]. It's a competitors dream because it will level the playing field for the best loan officers to use to their advantage. If A.I. can process a loan application in minutes instead of days, that will impact the production costs and change the economics of lending, completely.
Lower costs per loan means lenders can afford to lend at lower margins. Lower margins mean lower rates. Lower rates mean higher volume. Higher volume means more scale. More scale means even lower costs. What’s not to love?
Second, the volume that's coming will dwarf anything we saw in the refi boom. The refi boom made every loan worthy of a refinance. If not for a lower P&I payment, a lower rate for cash out to remodel your home, or pay off other higher cost debt. As rates drop to 1-2%, the entire housing market becomes accessible to people who couldn't afford it at 6-7%. Plus, the demographics are on our side. Millennials are hitting peak home-buying years and Gen Z has yet to enter the market.
Famous Last Words…
The period within the red circle on the history or rates chart might appear as the scarlet letter. To me, it is a touchstone to the days long ago when there was a thing called the lock-in effect. The media claimed that low rates were gone forever, and that only the wealthy would be able to afford homes. Rather, the start of a new era when we stopped taking customers for granted and started earning their business every single day. Our clients have upped their game, so should the industry. More tech and even more education is how we are going to help our clientele. Trust me, the best has yet to come.
Mortgages aren't scary anymore. Customers understand the principles. They get how to use debt as a tool to build wealth, not just to buy a house. They know when an ARM makes sense, when to tap equity, and how to structure their financing to match their life plans. Thus, hungry lenders, the ones who learned to hunt during this red-circle period will absolutely dominate the next round.
Five years from now, when we're originating loans in volumes that make the refi boom look quaint, with profit margins that make today's numbers look like a rounding error, we'll look back at this red-circle moment as the catalyst for the most productive period in mortgage history.
For that, my heart is thankful. My wallet, a little excited.
Get Low!
1- https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
2- https://www.moneygeek.com/living/home/1980s-vs-today-homebuyers-comparison/
3- https://www.phoenixnewtimes.com/news/phoenix-homeowners-delist-properties-en-masse-market-shifts-22643073
4- https://www.housingwire.com/articles/how-ai-is-already-transforming-and-improving-the-mortgage-underwriting-process/