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Old 12-26-2018, 07:15 AM
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Default Prime rate and the economy

Help me understand why things got so out of whack. Here's a historical chart of the prime rate.
https://20somethingfinance.com/prime-rate/
It spiked in the late 70' and early 80's. Just when I was getting my first mortgages. If I recall, mine were about 12%, but the price of homes was reasonable. Those folks with savings were enjoying a nice rate on their savings. Then comes the early 2000's and the rates were dropping like stones. Also when the price of homes went through the roof! Personally, I'd say buyers in the 70's or 2000's were in the same position. Cheap homes and low rates in the 70's, and expensive homes and low rates in the 2000's. But the savers, those that invested their savings in the banks, are the biggest losers in today's market. Banks aren't paying squat in interest rates, and John Q public pretty much has no choice but to invest in the market for a decent return. I don't know what would happen to the economy, but I'd love to be getting 4% to 6% on my money in a bank saving account!
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Old 12-26-2018, 07:39 AM
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My wife & I were the lucky ones when we purchased our first home.
Back then it was a lottery for first time home buyers lower interest rates.
We were Soooo happy the day it went live to receive a phone call that we were one of the winners
Our prize was 9.95% 30yr

I recall making 8%+ and short 90-180 day CDs

indeed times have changed
if I recall, the going rates were 12-14% at the time for a 30yr
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Old 12-26-2018, 08:13 AM
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When rates are low builders jack up prices to maximize their profits. When rates are high the profit margins are slimmer.

Check the historical prices of vehicles and homes. In just about all situations it now takes a larger % of a workers income to buy either compared to the 1970's. The bigger corporations continue to escalate their profits while the average joe blow takes it in the shorts and pays more.

In the 60's and 70's it was entirely normal to see the dad working, mom at home and yet the family had a decent house and at least one vehicle. Try that today on just one average income.
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Old 12-26-2018, 09:43 AM
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Quote:
Originally Posted by cyber16 View Post
My wife & I were the lucky ones when we purchased our first home.
Back then it was a lottery for first time home buyers lower interest rates.
We were Soooo happy the day it went live to receive a phone call that we were one of the winners
Our prize was 9.95% 30yr

I recall making 8%+ and short 90-180 day CDs

indeed times have changed
if I recall, the going rates were 12-14% at the time for a 30yr
In 1982 I bought my first house @ 14.5% interest on a 30 year mortgage. To offset the high interest rates, starter homes were quite small, in fact mine was a split entry, 960 square feet per level. That was in 1982 and the price of the house was $57,500 (including lot) and my payments were $672/month which included property taxes and insurance. One of my neighbors paid 17.75% on their first 30 year mortgage and his house was 912 square feet per level. My second house was bought 10 years later in 1992 and at closing my interest rate was 9.5%. I bought a 5 acre lot and foolishly cut some square footage out of the original plans as the covenant required a minimum of lot + house value to be over $150,000, and reduced the price by around $20,00 to get as close to the minimum, and the smallest payment. It is a 4 level with approximately 750 square foot/level. The market is really driven by what people can afford. Around us they can't build the homes fast enough and they are all basically starter homes, $350K and up. Of course it's all relative. My dad was shocked at the price of my first home and my payment, he built in 1966 a fairly large home, under $10,000. Certainly he had a number of things unfinished at the time but his payment was about $100/month. We have enjoyed a long spell of super low interest rates which have set a baseline for an entire generation. Eventually it will all catch up to us. At our annual business association conference, we have an economist who has been predicting a Depression in 2030, just like the 1930's.
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Old 12-26-2018, 09:51 AM
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I remember some of those days. 13% mortgage and 15% cd's. When the rates dropped (quickly) I would get a weekly call from the local bank pleading with me to trade in the 15% 3-yr. CD for a 9% 5 year CD.

The Fed lowered the rate after 9-11 to keep the economy rolling. They started raising it back up to a 'normal' level when the last recession hit in 07-08. They then kept it artificially low for too long, (basically 0% rate) overheating the economy to a point, and now they're raising the rate back up. Best thing would be for the Fed to be limited to one rate change per year is they want the economy to stabilize.

The Fed thinks it can micro-manage the economy to prevent a recession. Problem is, when they micro-manage it they prevent small ups/downs that the market needs and ultimately, this seems to result in a major problem.


I'd guess that by this time next year you can get 4% cd's. There's 3+% out there today. 6% cd may not happen again for a long time. Hopefully, the incredibly bad fed decisions that led to the peak in the early 80's won't be repeated.
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Old 12-26-2018, 10:00 AM
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I'm seeing the large drop in prime rate back in the early 2000's as responsible for the mess we are in now. Cheap money and folks in debt up to their A**. Meanwhile responsible folks are paying the price with low returns on their bank accounts. Did the Feds drop interest rates, so "everybody should be able to own a home?" I never bought into that thought. Not everybody is responsible enough to own a home. I'm betting the majority of folks that were foreclosed on, had an equal or higher debt on credit cards and auto payments. Nobody wants to do without today!
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Old 12-26-2018, 10:22 AM
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Quote:
Originally Posted by Shellback View Post
I'm seeing the large drop in prime rate back in the early 2000's as responsible for the mess we are in now. Cheap money and folks in debt up to their A**. Meanwhile responsible folks are paying the price with low returns on their bank accounts. Did the Feds drop interest rates, so "everybody should be able to own a home?" I never bought into that thought. Not everybody is responsible enough to own a home. I'm betting the majority of folks that were foreclosed on, had an equal or higher debt on credit cards and auto payments. Nobody wants to do without today!
Yes - the drop in rates in the early 2000's stems from the Clinton Administration's idea that everyone should own a home. Then when the housing market crashed, people lost jobs, houses & disposable income - for many people - became near non-existent. So the Fed had to lower rates further to make borrowing affordable. Now we are seeing rates rise again which typically coincides with low unemployment, positive market position - albeit not lately - and higher disposable incomes. It's a never-ending cycle.
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Old 12-26-2018, 10:24 AM
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David I echo your path
It was i think 1984 when we purchased our first starter, it was just east of GreenHaven golf in Anoka
It was a 1950's two bedroom single level 1 bath with full basement about 700 square foot up stairs & half finished lower. with a detacched 1.5 car garage Paid $57.5k
Lived there for 11 years, really did nothing for improvements, added central AC upgrade the electrical screw in fuse box to breakers including some wiring & the service to the house. Them screw in fuses kept blowing with loads on them.
All updates were diy

During the final three years at that house I started my business, worked 24/7 banked & invested in myself. Now what was fine for a starter home for two adults was bursting at the seams with two young children just staring school.

It was that time, after a month or so, we found a 3k square foot four level front back split house in burl oaks of coon rapids, it was over the July 4th weekend, by July 21st we were moving it.

Our purchase price of this home in 1995 was at the time a little inflated, but not nearly as bad as what happened in the later housing years. The sellers already moved out due to a job relocation to MI, so I undercut my offer some with a promise of a fast close due to cash sale.
At this time, prior to our offer, I told the sellers agent, you get the buyer to take this offer & you can sell our Anoka home.
He did & we took our time in selling that anoka home for well over $80k

We have never looked back.
other than driving by a few times asking ourselves how we managed it all with everything else life was tossing our way.
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Old 12-26-2018, 10:30 AM
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The drop after 9-11 was the gov't response to keep the economy rolling fearing that the attack would stifle the economy.

The drop in 07-08 was the response to the recession. Gov't throwing money into the market to prevent a depression.

Look up 'Helicopter Ben' if you want to know the reasoning. He was Fed chair and said that he would 'throw dollars out a helicopter' if need be to prevent a meltdown.

The economy is addicted to low rates and it doesn't like the idea of returning to something resembling normal.

I owned a real estate company in the 80's and 90's. Houses were selling well with 6-7% interest rates.

And you're right, today's mindset is 'instant gratification'. Borrow, don't save for anything. I remember the days when a neighbor got a BRAND NEW car and everybody went over to admire it.
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Old 12-26-2018, 11:19 AM
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Quote:
Originally Posted by David Anderson View Post
In 1982 I bought my first house @ 14.5% interest on a 30 year mortgage. To offset the high interest rates, starter homes were quite small, in fact mine was a split entry, 960 square feet per level. That was in 1982 and the price of the house was $57,500 (including lot) and my payments were $672/month which included property taxes and insurance. One of my neighbors paid 17.75% on their first 30 year mortgage and his house was 912 square feet per level. My second house was bought 10 years later in 1992 and at closing my interest rate was 9.5%. I bought a 5 acre lot and foolishly cut some square footage out of the original plans as the covenant required a minimum of lot + house value to be over $150,000, and reduced the price by around $20,00 to get as close to the minimum, and the smallest payment. It is a 4 level with approximately 750 square foot/level. The market is really driven by what people can afford. Around us they can't build the homes fast enough and they are all basically starter homes, $350K and up. Of course it's all relative. My dad was shocked at the price of my first home and my payment, he built in 1966 a fairly large home, under $10,000. Certainly he had a number of things unfinished at the time but his payment was about $100/month. We have enjoyed a long spell of super low interest rates which have set a baseline for an entire generation. Eventually it will all catch up to us. At our annual business association conference, we have an economist who has been predicting a Depression in 2030, just like the 1930's.
$350K starter homes? That's nutz!
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