Years of ZIRP have conditioned people into believing that rates at 5% are "high", when the historical reality is that 5% is approximately the mean rate over the past 70 years. Volcker famously broke the back of inflation in the 80s by pushing the interest rate up past 20%. https://fred.stlouisfed.org/series/FEDFUNDS
You've got it backwards. Over a standard business cycle, a healthy, growing economy is generally correlated with higher (or rising) interest rates, while a weak or contracting economy is correlated with lower (or falling) interest rates. Bond investors demand higher interest rates when they have more confidence in the economy as they would otherwise prefer to invest in equities, and investors settle for lower rates when they have less confidence in the economy as they seek to exit equities in favor of low-risk alternatives.
The long-term, as in multi-century, trend has been for interest rates to fall as capital becomes more comfortable with trusting returns to come in over longer horizons.
Yes. It is covered in various books. Galbraith covered it in “Money…”[0] I’m not totally sure you can draw parallels to the old world, though. The modern economy seems so different, but basically, rates seem to follow the course of a civilization. IIRC, Low when things are stable, higher at the edges as things destabilize. It’s been a few years since I read the book, though, and I may be misremembering things.
Yes, going back into antiquity. The English Crown borrowed around 14% in the 13th and 14th centuries [1]. The Roman grain markets had lending embedded, too, though nothing resembling a risk-free rate. (Monarchies borrowing had an element of coercion to them, so the rate one would lend freely to them was probably higher than the rate they contracted.)
dutch republic had famously low interest rates for a long time. rest of the world had erratically high interest rates. low interest rates are signs of stability, and long term trust and confidence.
a prolonged high interest rate is a sign of something structurally wrong.
I think the reason people are so shocked is because the principal is already so high and unaffordable that any rate increase feels like a death of a thousand cuts. A rate increase from 2% to 5% when the principal is already $400k+ feels devastating in comparison to a rate of 20% but the principal being $60k
The real estate market is effecively frozen right now because buyers can't afford houses at the current rates and sellers are still holding out hope that they will come back down to 3%.
Once reality sets in we will start to see prices slowly adjust.
What this and the sibling comment ignore is home construction. Without construction (or without cost effective construction) home prices have zero incentive to fall. Home owners will trade homes between themselves at 'inflated' prices. If you can not produce a home cheaper than an extant, equivalently sized home then prices effectively have a floor.
National average construction cost per square foot is $160. $160 * 2000 square feet is $320,000 sans the land which we can assume is 25% the cost of the home constructed on it. So we've magically hit the $400k number.
The only way home prices 'decline' is with population decline, coercion, a recession, or significant regulatory, cultural, and financial shifts.
2 million people 55+ die every year in the US, and immigration has come to a halt. Not all of those folks will have owned a home, but many of them will have, and those homes will be sold.
"The share of below-3% mortgages outstanding, by number of mortgages, declined to 20.0% of all mortgages outstanding in Q3, the smallest share since Q1 2021, and down from a share of 24.6% at the peak in Q1 2022 (red in the chart), according to data by the Federal Housing Finance Agency (FHFA)."
"Data from the Federal Housing Finance Agency's National Mortgage Database analyzed by the Realtor.com® economic research team shows that millions of homeowners are locked in to lower rates, with almost half (49%) holding a fixed rate below 4%."
> Years of ZIRP have conditioned people into believing that rates at 5% are "high", when the historical reality is that 5% is approximately the mean rate over the past 70 years
I don’t like this framing because since 1990, 5% is on the higher end of the interest rates. [1] That is the entire lifetime for an entire generation of people, Millennials and everyone after. We can’t point to the “golden old days” and pretend that once upon a time interest rates were high so, it’s okay and people need to “remember” things were different. The entire economy has restructured since 1990.
Also, the Volkner move in itself was a deviation from the norm, not the norm itself.
Yes we have much higher interest rates in the 1980s and 1990s but house prices as a function of wages have doubled in that time [1]. Here's another view: mortgage debt service as a ratio to personal income [2].
Whichever way you look at it, the current situation is significantly worse and significantly more expensive in real terms so 10%+ interest rates of the past were actually better in real terms.
The real problem is that housing is too expensive. And that's because it's become an investment, people's retirement funds. It should be absolutely impossible for people to hoard housing.
Low interest rates cause higher house prices, because people can then afford monthly payments for bigger principals and they're all still bidding/buying from more or less the same pool of housing.
A risk-free rate of 5% (and rising) means “yields of CCC-rated borrowers — the lowest rung of junk debt — have climbed rapidly to more than 21 per cent in Europe and 18 per cent in the US as prices have plummeted, up from about 16 per cent and 15 per cent at the beginning of the year” [1].
Interesting (pun intended) to me that apparently everyone wants to talk about the rate speculation, rather than about the finding that jobs are picking up in spite of AI.
> rather than about the finding that jobs are picking up in spite of AI.
We are years too early to determine if AI is removing jobs. AI still hasnt really decided what it wants to be yet. Were just in LLM land with bolt ons currently. Once we get hyperfocused models based on industry specific tasks that can run locally then we start to see the jobs fall.
there are sooo many jobs AI cannot yet automate--things like service sector work, blue collar jobs, or individualized services. Many white-collar jobs involve coordination and dealing with edge cades. Things like insurance or advertising require having to meet clients' unique needs or have to deal with counterparties, like with law. An insurance company does not pay out--you are not going to resolve this with AI.
Most job growth for the past several years has been in the private education and health services, leisure and hospitality, and construction sectors. Removing these sectors makes job growth negative for 2024 and 2025, and wipes out the majority of job growth in 2026. See https://www.deloitte.com/us/en/insights/topics/economy/spotl... . These sectors are harder to automate with AI compared to white collar office jobs, which have seen major losses.
The unemployment rate today is divorced from the reality of how hard it actually is to get a job. Before 2009, †he average unemployed person spent less time unemployed before their next job at a 10% unemployment rate, than the average unemployed person today at 4.2% unemployment. https://www.niskanencenter.org/the-bridge-for-workers-act-ge...
If doing a gig app job full time doesn't count you as unemployed, I think that's a decent explanation for those numbers. Those jobs can be gotten by anyone with a car, but a job with a formal employment agreement and benefits is still difficult to get.
The US economy grew at a blistering 3.4% last quarter.
Anyone who knows even a smidgen about economics knows this is indeed robust growth. The fact that there are some trolls here suggesting otherwise is interesting. There is more than one.
What is their incentive? I’d think they’re pushing some narrative, but why?
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[ 1.7 ms ] story [ 42.5 ms ] threadThe long-term, as in multi-century, trend has been for interest rates to fall as capital becomes more comfortable with trusting returns to come in over longer horizons.
[0] https://ia800605.us.archive.org/14/items/TheWorldIsFlat/Mone...
[1] https://centaur.reading.ac.uk/16784/1/16784.pdf
a prolonged high interest rate is a sign of something structurally wrong.
Once reality sets in we will start to see prices slowly adjust.
National average construction cost per square foot is $160. $160 * 2000 square feet is $320,000 sans the land which we can assume is 25% the cost of the home constructed on it. So we've magically hit the $400k number.
The only way home prices 'decline' is with population decline, coercion, a recession, or significant regulatory, cultural, and financial shifts.
https://wolfstreet.com/2026/01/03/locked-in-homeowners-never...
"Data from the Federal Housing Finance Agency's National Mortgage Database analyzed by the Realtor.com® economic research team shows that millions of homeowners are locked in to lower rates, with almost half (49%) holding a fixed rate below 4%."
https://www.realtor.com/news/trends/outstanding-mortgage-rat...
These low rate mortgages will drain from the system over time.
I don’t like this framing because since 1990, 5% is on the higher end of the interest rates. [1] That is the entire lifetime for an entire generation of people, Millennials and everyone after. We can’t point to the “golden old days” and pretend that once upon a time interest rates were high so, it’s okay and people need to “remember” things were different. The entire economy has restructured since 1990.
Also, the Volkner move in itself was a deviation from the norm, not the norm itself.
[1] https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
Yes we have much higher interest rates in the 1980s and 1990s but house prices as a function of wages have doubled in that time [1]. Here's another view: mortgage debt service as a ratio to personal income [2].
Whichever way you look at it, the current situation is significantly worse and significantly more expensive in real terms so 10%+ interest rates of the past were actually better in real terms.
The real problem is that housing is too expensive. And that's because it's become an investment, people's retirement funds. It should be absolutely impossible for people to hoard housing.
[1]: https://www.longtermtrends.com/home-price-median-annual-inco...
[2]: https://fred.stlouisfed.org/graph/?g=fXwf
A risk-free rate of 5% (and rising) means “yields of CCC-rated borrowers — the lowest rung of junk debt — have climbed rapidly to more than 21 per cent in Europe and 18 per cent in the US as prices have plummeted, up from about 16 per cent and 15 per cent at the beginning of the year” [1].
[1] https://www.ft.com/content/fdc9a85d-d2c4-465f-99ca-609d68b6d...
> that 5% is approximately the mean rate over the past 70 years.
Besides a few years in the 90s it was always either significantly higher or lower than that.
We are years too early to determine if AI is removing jobs. AI still hasnt really decided what it wants to be yet. Were just in LLM land with bolt ons currently. Once we get hyperfocused models based on industry specific tasks that can run locally then we start to see the jobs fall.
The unemployment rate today is divorced from the reality of how hard it actually is to get a job. Before 2009, †he average unemployed person spent less time unemployed before their next job at a 10% unemployment rate, than the average unemployed person today at 4.2% unemployment. https://www.niskanencenter.org/the-bridge-for-workers-act-ge...
Maybe it’s job sector rotation.
What you're reading in this Bloomberg report is an expectation of an employment gain of -57,000 to +187,000.
https://www.bls.gov/news.release/empsit.tn.htm
A rate hike seems like a strong possibility. The specter of higher inflation looms.
Anyone who knows even a smidgen about economics knows this is indeed robust growth. The fact that there are some trolls here suggesting otherwise is interesting. There is more than one.
What is their incentive? I’d think they’re pushing some narrative, but why?
https://tradingeconomics.com/united-states/gdp-growth