7% Mortgage Rates: Historical Data Shows Limited Economic Risk

Mortgage rates have exceeded 7%, a level that has occurred in only one-third of all quarters since 1990. The Federal Reserve recently raised its benchmark interest rate, marking the first increase in three years. This shift has raised questions about the potential impact on employment and the housing market.

Data from GN auto markets/housing: mortgage rates shows that periods with rates above 7% typically result in softer home price appreciation. However, the broader economy does not face an immediate crash. The job market tends to firm up in the twelve months following such rate spikes, although volatility increases compared to periods with lower rates.

Employment Trends During High Rate Periods

In California, the median job growth in the year after rates exceeded 7% was 2.1%. This figure is higher than the 1.5% median growth seen when rates were below the 7% threshold. However, the risk of job losses is higher during high-rate periods. Thirty-three percent of these high-rate intervals saw a decline in total employment over the subsequent twelve months.

Nationally, the pattern is similar but less volatile. The median job gain in the year following rates above 7% was 2.2%. Employment declines occurred in 20% of these periods. When rates were below 7%, job growth cooled to a 1.5% median pace, but employment drops were also seen in 21% of cases. The data suggests that high rates are associated with moderate hiring gains and higher uncertainty.

Housing Price Performance Under 7% Rates

High mortgage rates significantly curb home price appreciation in California. The median annual gain in the year following rates above 7% was only 1.9%. Prices actually dropped in 43% of these periods. In contrast, when rates were below 7%, California homes appreciated at a median rate of 6.5% annually. Despite the higher growth, price declines still occurred in 24% of those lower-rate periods.

Nationwide, home prices rose at a median pace of 3.8% in the year after rates exceeded 7%. No price declines were recorded in these high-rate intervals. When rates were below 7%, the median annual gain was 5%. Price drops happened in 20% of these lower-rate periods. The data indicates that while high rates suppress price growth, they do not necessarily trigger immediate national price collapses.

Thresholds for Economic Cooling

Historical data reveals distinct thresholds for economic stress. In California, job cuts were preceded by median mortgage rates of 7.1% in the prior year. Home price declines followed rates of 6.9%. Nationally, job cuts were associated with prior-year rates of 6.7%. National price drops followed rates of 5.5%. These figures suggest that the California economy requires higher interest rates to experience significant cooling compared to the national average.