Historical Perspective for Interest Rates
We were reading the economics blog The Big Picture yesterday and were particularly struck by this chart of corporate bond rates between 1830 and the present. The data, which comes from Charles Nenner at Cycle Forecaster, does provide some perspective for those deciding what kind of mortgage to get and those predicting interest-rate driven Armageddon….
We were reading the economics blog The Big Picture yesterday and were particularly struck by this chart of corporate bond rates between 1830 and the present. The data, which comes from Charles Nenner at Cycle Forecaster, does provide some perspective for those deciding what kind of mortgage to get and those predicting interest-rate driven Armageddon. As the blog points out, “This looks like one giant mean reverting system.”
Corp Bonds 1830-2005 [The Big Picture]
the range on this graph is ludicious.
why are there any numbers below 0 anyway? if you cut the range from 0-15%, the diff would be dramatic. 15% is 300% higher than 5%. hardly looks like that when you have the range from here to eternity.
graph that same data from 1975-2005 and from 0-15% and see what you get.
This chart is really funny. Maybe men will all go back to wearing top hats as well?
I agree — the chart is useless because it doesn’t deal with post-inflation rates.
Thanks bkborn. I’m not into economics at all and had no idea what this chart was supposed to signify! Apparently, nothing:)
Econ-ignorant.
To Econ Ignorant:
I think this just illustrates that the low interest rates of recent years are not as unusually low as we may have thought. Since housing prices should reflect both current rates and expectations about future rates, price watchers might see this trend as postive for housing prices.
A major caveat to this chart is that these are nominal rather than real interest rates. Real interest rates express how costly interest payments are relative to other goods (or alternatively, earnings). If interest payments, regardless of the rate, are high relative to the prices other goods, consumers will demand less housing and prices will fall. Similarly, if interest payments are high relative to earnings, prices will fall.
If the rate of inflation (or average wage growth) were substracted from the rates in the chart, the curve would be much flatter, but also show less movement toward a long-term trend. In particular, when rates were peaking in the 1970s, so was inflation, so real rates were actually relatively low.
In recent years, interest rates have falen, but inflation has also been historically low. This has meant that real interest rates, while low, are not at unprecedented levels.
The question for housing price watchers is whether real interest rates will rise in the future. The chart above is not that helpful for answerring this question.
Interesting but to be fair the above chart should be accompanied with a graph showing the historical government and consumer borrowing/debt along with the historically low savings rate. All factors that should cause rates to rise above this long term mean. Besides does anything before 1945 really have any significance in our modern economy?
Econ-ignorant – can someone explain a little more?