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How people bought homes in the 1980s when mortgage rates were 18%

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The housing market is in a difficult situation. People are eager to buy but are hampered by rising mortgage rates, affordable housing and a shortage of real estate for sale.

The hopeful news is that America has experienced this before (1981) and things have finally improved. The sobering news is that the housing market in the early ’80s survived this time thanks to some factors that are largely non-existent. A new path must be built out of this mess.

How 2022 will look like the early 80’s

The parallels between now and then begin generationally. In 1981, the oldest baby boomer was 35, and her cohort was in full-on homebuying mode. The first millennials were born that year, and the next largest generation has been eagerly looking for a home in recent years.

both generations Mortgage rates soaring Following a series of rate hikes by the Federal Reserve to fight inflation:

  • When the average 30-year fixed-rate mortgage rate hit an all-time high of 18.63% in October 1981, it was up almost 5% in 12 months. Interest rates rose at about the same rate during his 1980 period.

  • This year, when the 30-year mortgage rate hit 7.08% in early November, it was up 4.1% in 12 months. (All percentages are from Freddie Mac.
    FMCC,
    -1.91%

    Weekly surveys dating back to 1971. )

Rapidly rising mortgage rates forced homebuyers to retreat from the market. Historical data from the National Association of Realtors show that pre-owned home sales fell 22.3% in 1980, and fell another 18.6% in 1981. This year, the pace of existing home sales fell 28.4% in the 12 months to October, according to the NAR.

finally, “rate lock-in” accompanied both times. That’s when homeowners want to hang on to low-interest mortgages, thus pushing properties off the market.

  • March 1981: A real estate owner told The New York Times that home sales were being held back because “nobody wants to lose their low-interest mortgages.”

  • September 2022: “Some homeowners are reluctant to trade up or down after maintaining historically low mortgage rates in recent years,” said NAR chief economist Lawrence Yun. increase.

more: Home prices will fall in 2023, but affordability will be worst since 1985, research firm says

The Big Difference: The Role of Loans

For all the similarities between the 1980s and today, there are important differences. One of them is the “assumed mortgage”, which was plentiful at the time and now in short supply.

In the 1980s, homebuyers used arrangements such as “deed agreements,” “wraparound mortgages,” and “leases with an option to purchase.”

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In the early days of the 1980s, many mortgages were conceivable.When Assumed mortgage, the buyer not only takes ownership of the house, but also takes over the seller’s mortgage. Imagine yourself trying to buy a house when the mortgage rate is in the double digits for him. He found a home seller who had an assumed loan with interest rates in the single digits. If you can pass on the loan, the house can be affordable. Double-digit interest rates may be out of reach.

Home sellers spotlighted supposed loans in classified ads. “In a 14% market he takes out an 8% loan and your home will be differentiated in terms of sellability,” says Ted Tozer, an adjunct fellow in the Urban Institute’s Center for Housing Finance Policy. say. He said a “massive” mortgage assumption was made in the early ’80s.

However, Congress closed the door on the supposed loan in 1982. Currently, only a subset of mortgages is readily conceivable. They are insured or insured by the Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture’s Rural Housing Service. In the second quarter of 2022, FHA, VA, and USDA loans together accounted for about 18% of mortgage originations, according to data collected by the Urban Institute.

Also Read: My landlord wants to sell my house for $30,000 less than the list price. what should i do?

The Age of Creative Fundraising

In the early 80’s, when mortgage rates were ridiculously high, mortgages stagnated home sales. They also served as the basis for so-called “creative financing” that bridged the gap between the purchase price and the assumed mortgage balance.

In most cases, creative financing took the form of loans from sellers to buyers. For example, in the form of a fixed amount promissory note, the buyer may pay the seller monthly and the buyer may put the remainder of the purchase price into her second mortgage. The arrangements had names like “Deed Agreement,” “Wraparound Mortgage,” and “Lease with Option to Purchase.” According to a June 1981 Washington Post article, “In many parts of the United States he accounted for more than 50% of all home resale in 1981” by Creative Finance.

More than 40 years later, 1980s-style creative fundraising hasn’t returned. The lender frowned on the ad-hoc transfer of the original loan and wanted to take out a new loan at the current interest rate when ownership changed. Consumer advocates warned of the risks to buyers and sellers of informal and unconventional schemes, where either party could retain worthless contracts or commit to untenable payment structures. .

Related: The median income required to buy a typical home is over $88,000, $40,000 more than pre-pandemic

Need for new solutions

With 1980s creative fundraising out of sight, will banks, Silicon Valley, or home sellers be 2020s-style wit? may need some refinement. Maybe it will be something that already exists but is not yet widespread. Expanding the spread of ancillary dwelling unitsa 3D printed home, or a group of friends banding together to share ownership of a home.

No matter what happens, any prediction will look silly in hindsight. Consider the Dallas real estate agent he spoke to D Magazine in 1980 whose 30-year loan was over 15% of his. “Mortgage rates probably won’t go back to single digits again,” he said.

read: Remember the Tiny House movement? How are you doing?

Thankfully, mortgage rates eventually fell into the single digits and have been since 1991. Not only that, but last year alone many people took advantage of his 30-year mortgage at less than 3% interest. History tells us that the housing market will get better, even if it goes through difficult times on its way to recovery.

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Holden Lewis writes for NerdWallet. Email: [email protected] Twitter: @HoldenL.

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