A Walk Down “Memory Lane”: The 1987 Mortgage Rate Soar and Its Economic Impact
The recent surge in mortgage rates has sparked memories of a similar event that occurred in 1987, when rates experienced their largest one-week jump since that time. The average 30-year fixed-rate mortgage from a survey by Freddie Mac revealed that rates soared to 5.78% on June 16, up 0.55 percentage points from the previous week.
Taking a stroll down memory lane, we are reminded of the events that shaped 1987. The Iran-Contra scandal, Iraqi missile strikes, and scandalous revelations involving prominent figures like Jim Bakker and US Sen. Gary Hart dominated the news. Locally, the Whittier Narrows earthquake rattled the San Gabriel Valley.
In the cultural sphere, Beverly Hills Cop II ruled the box office, Bon Jovi’s “Livin’ on a Prayer” topped the charts, and the first Panera Bread opened its doors. The Los Angeles Lakers also clinched the NBA championship during this time.
The economic landscape in 1987 was influenced by a massive federal tax cut initiated by President Ronald Reagan, coupled with the Federal Reserve’s efforts to combat inflation by lowering interest rates. The result was a booming economy, with unemployment hitting a seven-year low and the stock market experiencing significant gains.
However, the euphoria of the time led to a surge in inflation, prompting the Fed to raise interest rates rapidly. Mortgage rates followed suit, reaching above 11% by October 1987. The infamous “Black Monday” crash in October 1987 saw stocks plummet by 20% in a single trading session.
The lessons from 1987 serve as a cautionary tale for the present day, highlighting the cyclical nature of the economy and the importance of prudent financial management. Just like in 1987, the current economic boom may be tempered by the Fed’s actions to prevent overheating. As history has shown, all good things eventually come to an end, and it’s essential to be prepared for the inevitable downturns.
Jonathan Lansner, the business columnist for the Southern California News Group, reflects on the parallels between 1987 and the present day, emphasizing the role of the Federal Reserve in maintaining economic stability. As we navigate the current economic landscape, the lessons from the past can provide valuable insights into managing the uncertainties of the future.