In 1987 my wife and I bought our first house, a vinyl-sided starter home off Cedar Bluff Road. We felt almost like mortgage thieves, borrowing 30-year money for a mere 10.15 percent. Clearly, the credit gods had favored us.
In 1987, I was focused on the previous few years, especially when mortgage rates had reached 16.3 percent in 1982. But the world didn’t begin in 1982, nor was it about to end in 1987. Or even in 2014.
High quality US mortgage rates averaged 5.1 percent in 1900, or only slightly more than today’s average 30-year rate of 4.30 percent For most of the first 65 years of the 20th century, mortgage rates remained between five and six percent.
But what if we look just a little further back in history?
Sidney Homer’s book, “A History of Interest Rates,” (1963) is a fascinating and entertaining look at the history of interest rates since inception of recorded mankind. Homer’s research found that in 3,000 BC, Sumerian farmers would loan seed to each other collateralized by farmland, with the required repayment to equal twice the number of seeds borrowed.
A rate of 100 percent makes my ten percent mortgage look downright cheap, even in today’s environment.
A little more than 2,000 years later, Babylonian and Roman officials were the first to create usury laws, limiting the interest a lender could charge. The ancient Greeks did not decree a maximum rate of interest, but prohibited borrowers from pledging individuals as collateral.
Babylonian men could still pledge their wives, concubines, children or slaves as loan collateral, but only for a maximum of three years.
Although the records are spotty, for the 500 years between 400 BC and 100 AD, the few available Greek real estate loan documents indicate interest rates between six and twelve percent.
Roman rates were much more volatile, but the system of determining them was beginning to develop more sophistication. Roman loans in this period ranged from four to the legal limit of twelve percent, depending on a crude variation of a loan-to-value ratio.
Homer’s book offers a few simple generalities. The available Sumerian and Babylonian rates from 3000 BC to 500 BC are regularly the highest recorded interest rates of the past 5,000 years.
For the thousand years from the fifth century BC until the fifth century AD, normal interest rates were generally lowest in Rome, perhaps because of its more advanced form of credit assessment. Rates were always higher in the Asian portion of the Roman Empire than in Roman Europe, sometimes by a factor of three.
Legal rates were a constant battle between the church and government (when separate) and businessmen.
And compared to the history of history, a current mortgage rate anywhere between five and ten percent is about normal.