Think mortgage rates are high? Connie Strait remembers starting her real estate career in the early 1980s and buyers competing with rates three times higher.
Strait recalled a couple who were relieved when they locked in a 30-year fixed-rate mortgage at 19% in September 1981. The couple told him they hoped to close on the new home before the rates went up.
“They were so happy to close at 19%,” said Strait, who now works for William Raveis Real Estate in Danbury, Connecticut. “They said, ‘We got it under the wire, it’s going to 20% next week!'”
The following month, October 1981, the average weekly interest rate on 30-year fixed-rate loans hit an all-time high of 18.6%, according to Freddie Mac. It is based on a survey of conventional home loan borrowers with 20% down on average mortgage rates and excellent credit. But many buyers pay even more.
This week, the 30-year fixed-rate mortgage rate averaged 6.70%. While it may come as some cold comfort to someone who let the 3% rate slip through their fingers just seven months ago, today’s interest rates are still historically quite low.
“Unfortunately, people today don’t remember how Baby Boomers were 10%, 12% and higher in most of the 1980s,” Strait said. “Meanwhile, our kids 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 fallen somewhat, and financing had become more affordable, although rates remained close to 10%.
But a lot has changed since the 1980s.
With wage growth, high home prices and rapidly rising interest rates, housing today is the most affordable it has been in 35 years.
Mortgage rates were high in the 1980s, but home prices were also much more expensive.
In October 1981, a typical home cost $70,398. But with mortgage rates averaging 18.45 percent that month, the $870 monthly payment represented about 55 percent of the median income at the time, according to mortgage data company Black Knight.
In October 1986, rates dropped to 9.97% and a typical home was $91,488. That brought the monthly payment down to $640, just 30% of the median income.
“If you cut interest rates by 8.5%, you double your purchasing power,” said Andy Walden, Black Knight’s vice president of corporate research.
Today the typical home costs $434,978 and with rates above 6%, the monthly mortgage payment of $2,061 eats up more than 36% of the median monthly income, according to Black Knight.
“When we lower interest rates, home prices grow much faster than incomes,” Walden said. “It allows people to buy more housing with the same income. So a 1% drop in interest rates allows people to buy 10-12% more housing with the same amount of money.”
Interest rates have been below 5% for the past 11 years, and the weekly average was a low of 2.65% in January 2021. That’s part of the reason home prices are so high today.
As affordability worsens, house prices diverge significantly from income levels.
In the last five years, although the average house price has increased by 60%, the average income has increased by less than 15%.
“We now have the highest home price-to-income ratio we’ve seen in the last 50 years,” Walden said. “We have data from 1970 and it’s the highest we’ve seen so far.”
Historically, home prices were three to four times the median income, a ratio that was consistent from 1975 to 2000, according to Black Knight. In 2000, as interest rates began to fall below 8%, the ratio began to rise, and in 2005 house prices were nearly five and a half times the median income.
It was largely fueled by the remarkable surge in 2005 It expanded credit in the mortgage market, Walden said, because mortgages were offered based on the buyer’s unverified income and through products like interest-only, adjustable rate and negative amortization. loans
“This allowed buyers to purchase more homes than their incomes would have traditionally allowed,” he said. It also created a bubble that led to the 2008 housing crash.
Today, the typical home price is six times the median household income of about $71,000.
Another reason rates were so high in the 1980s was that less credit was available, making it harder and more expensive for buyers to secure a mortgage. Banks had to charge higher rates for taking on the risk. But today’s mortgages are often bundled and sold into investment products. This secondary market makes it profitable for lenders to lend to more people, and at lower interest rates.
“In the early 1980s, rates were in the mid-teens,” said Pete Miller, senior vice president of residential policy for the Mortgage Bankers Association. “Part of the reason was that the supply of mortgage loans was more limited. We didn’t have the liquidity of the secondary market 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 is historically a very good interest rate.
“I remember interest rates going into the single digits and saying, ‘I thought that would never happen.’