January Article of the Month: The due-on time bomb

This article warns of the impending era of due-on-sale enforcement that will befall the real estate market in the approaching age of rising interest rates.

Interest rates — WWII to Reagan and back

At the dawn of America’s postwar economy, interest rates were at historic lows. In 1951, the 30-year fixed rate mortgage (FRM) hovered around 4%, as it did for most of that decade. The personal savings rate was also historically low.

Despite the fact that personal wealth was still recovering from the body blow of the Great Depression, jobs were in great abundance. The advent of the military-industrial complex Eisenhower so distrusted (WWII to Vietnam), coupled with the need to restore America’s crumbling infrastructure led to surging employment, booming gross domestic productThe market values of all goods and services produced within a country calculated over a set period of time. (GDPThe market values of all goods and services produced within a country calculated over a set period of time.) and a seemingly unquenchable demand for houses, goods and services.

By 1965, the constricted money supply set interest rates on a long upward trajectory, and inflationThe price changes over time in consumer goods and services, quantified in the consumer price index (CPI). started to soar under the wartime economy. Almost a quarter of all the savings and loan associations (S&Ls) in California were in serious financial turmoil. The S&Ls had lent on anything to everyone during the booming early ‘60s, and had done so at rates that did not adequately cover the risk of future inflationThe price changes over time in consumer goods and services, quantified in the consumer price index (CPI)., eventually causing their total demise by the early ‘90s.