Forty years ago today, US mortgage rates hit 18.5%.
This astonishing October 16, 1981 reading of the 30-year fixed-rate average mortgage came during a period of soaring inflation. A bold move by the Federal Reserve used economic shock therapy to freeze consumer prices that rose 14%.
The Fed’s hard-love tactic worked and inflation cooled, with homeowners benefiting greatly. How many?
Home prices in California have appreciated 546% since 1981, going from $ 117,500 to $ 759,200. My trusty spreadsheet analyzed 40 years of home values in California using a Federal Housing Finance Agency price index, average mortgage rates, and inflation trends.
The price increases that followed were the product of economic growth, a growing population, and various home buying incentives. In other words, four decades of declining rates gave home hunters a 252% increase in their lending power.
Yes, about half of the price increases after 1981 may be related to cheap money.
For people who had what lenders want – a stable paycheck, a solid bill payment history, and a decent down payment – this long-term drop in rates was usually a financial blow. But in the future, difficult questions arise. Inflation today, at its 13-year high in September, will force mortgage rates to rise significantly? Will housing remain a generator of wealth as buyers can no longer expect continued falling interest rates?
Let’s see how the housing market got to this point, with my spreadsheet reviewing some quarterly home buying data…
1976-81: The prelude
A booming US economy in the late 1970s collided with an oil embargo and inflation took off.
The Fed then reduced the money supply, and all interest rates jumped on the little loans made. The ensuing economic turmoil helped Ronald Reagan oust Jimmy Carter from the White House.
California homes have appreciated 112% in those five years, with annualized fluctuations ranging from 27% gains to 8% declines. But given the superheated inflation – which averaged 9.6% during this period – the “real” price gains were only 32%.
Note that the notional payment for a buyer’s house has almost quadrupled. Why? Rates fell from an average of 8.9% in the fourth quarter of 1976 to 17.7% at the end of 1981.
1981-91: Bust then boom
These high rates led to a severe recession that cured national cost of living headaches.
Inflation has only averaged 4.3% over these 10 years. The resulting drop in interest rates boosted the California economy and real estate market.
Creative loans – especially variable rate mortgages – helped secure housing during this wild era. Not to mention the government’s decision to let the major mortgage creditors of the day – savings and loans – stay in business even though soaring mortgage rates practically bankrupted most of them.
California prices rose 95%, in a yo-yo period with annualized gains of 23% and declines of 10%. The buyer’s house payments have only increased 3% in 10 years because the rates went from 17.7% to 8.7%.
1991- 2001: From discomfort to madness
The fall of the Soviet Union and the S&L were a double whammy for California’s economy and real estate markets.
Well-paying aerospace jobs have been lost as defense spending plummeted. S&L went bankrupt, costing U.S. taxpayers at least $ 125 billion and virtually wiping out California’s friendliest housing lenders.
A sluggish economy and weak real estate marked much of the first half of this decade, when the seeds of the next boom and bust cycle began.
During that time, home prices only rose 38%, ranging from 14% gains to 6% declines. Mortgage payments only rose 15%, with rates rising from 8.7% to 6.9%.
2001-11: Easy money
California real estate ignored the collapse of dot-com technology around the turn of the century and then created its own bubble fueled by easy-to-obtain loans.
The fallout from this mortgage madness has devastated not only housing, but the global economy as well. It was a roller coaster of home prices, with the California market dropping from 29% annual gains to 23% declines.
At the end of the carnage, California prices were still up 22% during those 10 Roaring Twenties. You can thank the low interest rates used to boost housing after the bubble burst.
A buyer’s payments actually fell 10% during that time, with rates dropping from 6.9% to 4%.
Back then, buyers saw historically low mortgage rates on top of suddenly affordable home prices due to the dramatic depreciation of the burst bubble. These two factors helped pull the housing out of its self-inflicted debacle.
The post-Great Recession economic rebound has given housing even more support. Until the coronavirus cools the global economy. Yet surprisingly, homeownership has become the new “must have” item in the era of the pandemic.
Mortgage rates also played a role, pushed to a new all-time low of 2.65% in early 2021.
Since the anger that burst the bubble a decade ago ended, house prices in California have jumped 97% – and for the state, it has been a relatively quiet period with price changes dropping 16%. % per year at 6%.
A buyer’s payment only rose 61%, thanks to a Federal Reserve focused on keeping mortgages cheap and fluid. The support included adding $ 1.1 trillion in home loans to its holdings since the virus hit.
It’s hard to ignore the cost of living, especially when the inflation rate of over 5% this year is higher than mortgage rates. This kind of economic anomaly has not happened since 1980.
What does this mismatch mean for borrowers and the “who could afford what?” »Housing chatter.
Yes, significant and prolonged economic growth and bigger paycheques could help ease the affordability crisis for homebuyers in California. A demographic bump in young adults of home buying age could stimulate demand. And house building faster could create more supply, too.
Let me focus on the known quantities. Like the 14% annual inflation rate of October 1981 which degenerated into real deflation surrounding the Great Recession. And mortgage rates, from top to bottom, have fallen almost 16 percentage points.
On October 40, the hypothetical California buyer hypothetically mortgaged a typical home for $ 1,397 per month, assuming a 20% down payment at peak mortgage rates.
In 2021, a similar real estate hunter writes a check to the bank for $ 2,560 each month for the mid-priced home at this year’s nearly unprecedented low rates. Yes, the payments are 83% higher for housing six times the price.
Does anyone expect a rehearsal?
Jonathan Lansner is an economics columnist for the Southern California News Group. He can be contacted at [email protected]