Think mortgage rates are high now? Homebuyers in the 1980s paid 19%

CNN “Do you think mortgage rates are high now?” Connie Strait remembers when she was starting her real estate career in the early 1980s and buyers were facing rates three times higher.

Strait recalled a couple who were genuinely relieved when they took out a 30-year fixed rate mortgage at 19% in September 1981. The couple told him they hoped to close on their new home before the rates do not increase.

“They were so thrilled to close at 19%,” said Strait, who now works at William Raveis Real Estate in Danbury, Connecticut. “They said, ‘We did it right under the wire, next week it’s going to go 20%!'”

The following month, October 1981, the average weekly interest rate for a 30-year fixed-rate loan hit an all-time high of 18.6%, according to Freddie Mac. The average mortgage rate is based on a survey of conventional home purchase loans for borrowers who have a 20% stake and excellent credit. But many buyers pay even more.

This week, the 30-year fixed rate mortgage rate averaged 6.70%. While that may be cold consolation for someone who let a 3% rate slip away just seven months ago, today’s interest rates are, historically speaking, still relatively low.

“Unfortunately, people don’t remember how baby boomers were getting 10%, 12% and higher rates for most of the 1980s,” Strait said. “Meanwhile, our children are 6% shocked.”

These ultra-high rates made home ownership less affordable in the early 1980s than it is today. By the mid-1980s, however, mortgage rates had come down somewhat, making financing more affordable, even with rates approaching 10%.

But a lot has changed since the 1980s.

With rising wages, sky-high house prices and rapidly rising interest rates, today’s homes are the least affordable in 35 years.

Housing affordability has deteriorated

Mortgage rates were high in the 1980s, but house prices were also much cheaper.

In October 1981, a typical house cost $70,398. But with mortgage rates averaging 18.45% that month, the $870 monthly payment was about 55% of median income at the time, according to Black Knight, a mortgage data company.

By October 1986, rates had fallen to 9.97% and a typical home cost $91,488. This brought the monthly payment down to $640 and was only 30% of median income.

“If you cut interest rates by 8.5%, that doubles your buying power,” said Andy Walden, vice president of corporate research at Black Knight.

With a typical home currently costing $434,978 and rates above 6%, the monthly mortgage payment of $2,061 eats up more than 36% of median monthly income, according to Black Knight.

“When we lower interest rates, it allows house prices to grow much faster than incomes,” Walden said. “It gives people the opportunity to buy more house with the same amount of income. So a 1% drop in interest rates allows you to buy 10% to 12% more house, with exactly the same amount of money.

Interest rates have been below 5% for the past 11 years, with the weekly average hitting an all-time low of 2.65% in January 2021. This is part of the reason house prices are so high today.

Revenue does not follow

To compound affordability, house prices are dramatically out of whack with income levels.

Over the past five years, while the average house price has increased by 60%, the average income has increased by less than 15%.

“We now have the highest house price to income ratio we’ve seen in the last 50 plus years,” Walden said. “We have data going back to 1970 and this is by far the highest we’ve seen.”

Historically, house prices ranged between three and four times the median income, a ratio that remained constant from 1975 to 2000, according to Black Knight. In 2000, as interest rates began to drop below 8%, the ratio began to rise, reaching a point in 2005 when house prices were nearly five and a half times median income.

The surge in 2005 was largely fueled by credit expansion in the mortgage market, Walden said, with mortgages offered on the basis of the buyer’s unverified income, and through products such as Interest-only, adjustable-rate, negative-amortization loans.

“It allowed those who shopped to buy more homes than their income level would traditionally allow,” he said. It also created a bubble that led to the housing crash of 2008.

Today, the price of a typical home is six times the median household income of around $71,000.

Credit availability has increased significantly

Another reason rates were so high in the 1980s was that there was less credit available to borrow, making it harder and more expensive for buyers to get a mortgage. Banks had to charge higher rates to assume the risk. But today’s mortgages are often bundled and sold into investment products. This secondary market allows lenders to lend to many more people and at lower interest rates.

“In the early 1980s, rates were in the mid to upper teens,” said Pete Miller, senior vice president of residential policy at the Mortgage Bankers Association. “Part of the reason was that the supply of mortgage credit was more limited. We didn’t have the secondary market liquidity that we have today.”

Miller — who bought his first home in California in the mid-1980s with a 13% adjustable-rate mortgage — said 6% for a 30-year fixed-rate mortgage is historically a very good interest rate.

“I remember when interest rates went into single digits and I said, ‘I thought this was never going to happen. “”

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