Do you think mortgage interest rates are high now? Connie Strait remembers starting her career in real estate in the early 1980s. The buyer was vying for him three times the price.
Strait recalls one couple who felt real relief in September 1981 when they finalized a 30-year, fixed-rate mortgage at 19%. The couple had told her they wanted to close their new home before interest rates got any higher.
“They were very happy to close at 19%,” said Strait, who now works for William LaVeyse Real Estate in Danbury, Connecticut. reached 20% next week!”
The following month, in October 1981, according to Freddie Mac, the average weekly interest rate for 30-year fixed-rate loans reached a record high of 18.6%. The average mortgage interest rate is based on a study of traditional home purchase loans for high credit quality borrowers with a 20% down payment. But many buyers pay more.
30 year fixed rate mortgage rate this week Achieved an average of 6.70%It may be consolation for those who missed the 3% interest rate just seven months ago, but historically speaking, interest rates today remain relatively low.
“Unfortunately, people now don’t remember how baby boomers were achieving rates of 10%, 12% or higher for most of the 1980s,” Strait said. increase. “Meanwhile, our kids are in her 6% shock.”
These super-high rates made homeownership in the early 1980s less affordable than it is today. By the mid-1980s, however, mortgage rates had fallen somewhat, making loans more affordable, even with interest rates near his 10%.
However, many things have changed since the 1980s.
Given wage growth, soaring house prices, and rapidly rising interest rates, housing today isn’t the most affordable it’s been in the last 35 years.
Mortgage interest rates were high in the 1980s, but house prices were much lower.
The typical home price in October 1981 was $70,398. But mortgage rates averaged 18.45% that month, and the $870 monthly payment accounted for about 55% of median income at the time, according to mortgage data firm Black Knight.
By October 1986, interest rates had fallen to 9.97% and a typical home was $91,488. This resulted in a monthly payment of $640, representing only 30% of median income.
“A reduction in interest rates of 8.5% doubles purchasing power,” said Andy Walden, Black Knight’s vice president of corporate research.
According to Black Knight, a typical home now costs $434,978 and interest rates are over 6%, so monthly mortgage payments are $2,061, accounting for more than 36% of median monthly income. increase.
“Reducing interest rates allows home prices to rise much faster than incomes,” Walden said. “This allows people to buy more homes for the same income. So if interest rates drop by 1%, for the exact same amount he can buy 10% to 12% more homes.” increase.”
Interest rates have been below 5% for the past 11 years, and the weekly average hit an all-time low of 2.65% in January 2021. This is one reason why house prices are so high today.
Compounding the affordability problem is that housing prices are significantly out of line with income levels.
Over the past five years, average home prices have risen by 60%, but average incomes have risen by less than 15%.
“Today, the home price-to-income ratio is the highest it has been in over 50 years,” Walden said. “We have data going all the way back to 1970, and it’s the best I’ve ever seen.”
According to Black Knight, historically, home prices have been three to four times median income, a ratio that remained consistent from 1975 to 2000. In 2000, when interest rates began to fall below he 8%, this ratio began to rise, reaching a point in 2005 when home prices were almost 5.5 times median income.
The sharp rise in 2005 was mainly due to Walden said credit in the mortgage market has expanded, with mortgages being offered based on the buyer’s unverified income and offered through products such as interest-only, floating rate and negative amortization. loan.
“This has allowed shoppers to buy more homes than their traditional income levels,” he said. It also created the bubble that led to the 2008 housing crash.
Today, typical home prices are six times the median household income of about $71,000.
Another reason interest rates were so high in the 1980s was that less credit was available, making it more difficult and expensive for buyers to secure mortgages. Banks had to charge high interest rates to take the risk. However, today’s mortgages are often sold together as investment products. That secondary market makes it profitable for lenders to offer loans to more people at lower interest rates.
“In the early 1980s, rates were high in the mid-teens,” says Pete Miller, senior vice president of housing policy at the Mortgage Bankers Association. It was more restricted, we didn’t have the liquidity in the secondary market that we have today.”
Miller, who bought his first home in California in the mid-1980s on a 13% variable-rate mortgage, said 6% for a fixed-rate 30-year loan is historically a very good rate.
“I remember saying, ‘I never thought it would ever happen,’ when rates were in the single digits.”