Forty years ago today, US mortgage rates hit 18.5%.
That breathtaking reading of the average 30-year fixed rate mortgage reading on October 16, 1981 came during a period of steep inflation. A bold move by the Federal Reserve used economic shock therapy to freeze consumer prices, which rose 14%.
The Fed’s tough love tactic worked and inflation cooled, with homeowners benefiting greatly from it. How much?
California property prices have increased 546% since 1981, rising from $ 117,500 to $ 759,200. My trusted spreadsheet analyzed 40 years of California real estate values using a Federal Housing Finance Agency price index, average mortgage rates, and inflation trends.
The resulting price increases were the product of economic growth, a growing population, and various home buying incentives. In other words, four decades of falling interest rates gave home hunters a 252% increase in lending power.
Yes, about half of the price increases after 1981 can be associated with cheap money.
For people who had what lenders wanted – a steady paycheck, solid billing history, and decent down payment – that long-term drop in interest rates was usually a financial homerun. But looking ahead, some difficult questions arise. Will today’s inflation – at a 13-year high in September – drive mortgage rates soaring? Will residential real estate remain a generator of prosperity when buyers can no longer expect constantly falling interest rates?
By reviewing some quarterly home buying data in my table, let’s reflect on how the real estate market got here at this point …
1976-81: The start
A hot US economy collided with an oil embargo in the late 1970s and inflation picked up speed.
The Fed then restricted the money supply, and all interest rates rose on every little loan. The economic turmoil that followed helped Ronald Reagan to fire Jimmy Carter from the White House.
Over those five years, California homes grew 112% in value, with annual fluctuations ranging from 27% increases to 8% decreases. But taking into account overheated inflation – which averaged 9.6% over this period – the “real” price gains were only 32%.
Note that a buyer’s theoretical home payment has almost quadrupled. Why? Interest rates rose from an average of 8.9% in the fourth quarter of 1976 to 17.7% at the end of 1981.
1981-91: bankruptcy then boom
These high rates resulted in a severe recession that cured the national cost of living headache.
Inflation averaged only 4.3% over these 10 years. The resulting falling interest rates juiced the economy and the California real estate market.
Creative lending – especially variable rate mortgages – helped get real estate through this savage era. Not to mention the government’s decision to keep the top mortgage lenders in business these days – savings and loans – even though the surge in mortgage rates essentially bankrupted most of them.
California prices rose 95% in a yo-yo period with 23% annualized gains and 10% declines. Buyer’s home payments only increased 3% in 10 years as rates fell from 17.7% to 8.7%.
1991-2001: indisposition to madness
The fall of the Soviet Union and S & Ls were a double blow to the California economy and real estate markets.
Well-paying aerospace jobs were lost when defense spending plummeted. S&Ls went out of business, costing U.S. taxpayers at least $ 125 billion and virtually eliminating California’s friendliest lenders.
A weak economy and weak real estate marked much of the first half of this decade – as the seeds for the next boom-to-bust cycle began.
During that time, home prices rose only 38% – between a 14% gain and 6% decline. Mortgage payments only rose 15% while interest rates fell from 8.7% to 6.9%.
2001-11: Easy money
California housing construction ignored the technology’s dot-com bankruptcy at the turn of the century, only to then create its own bubble fueled by easy-to-get credit.
The consequences of this mortgage madness have not only weighed on housing construction, but also on the global economy. It was a roller coaster ride for home prices, with the California market spinning from 29% annual gains to 23% declines.
When the carnage was over, California prices were still up 22% in those insane 10 years. You can thank the low interest rates used to stimulate housing construction after the bubble burst.
A buyer’s payments even decreased by 10% during this period, as rates rose from 6.9% to 4%.
At the time, buyers saw historically low mortgage rates on top of suddenly affordable home prices due to the dramatic devaluation of the burst bubble. Both factors helped pull housing construction out of the self-inflicted debacle.
The economic recovery after the Great Recession gave housing construction even more support. Until the corona virus cooled the global economy. Surprisingly, however, home ownership became the new “must-have” in the pandemic era.
Mortgage rates also played a role, having been pushed to a new record low of 2.65% at the beginning of 2021.
Since the end of the bubble-popping anger a decade ago, California house prices have risen 97% – and it’s been a relatively tame time for the state, with price changes falling from 16% a year to 6%.
A buyer’s payment only rose 61% thanks to a Federal Reserve focused on keeping mortgages cheap and flowing. The support included adding $ 1.1 trillion to its holdings in home loans since the virus broke out.
It’s hard to ignore the cost of living, especially when this year’s inflation rate is over 5% higher than mortgage rates. This type of economic anomaly has not occurred since 1980.
What does this discrepancy mean for borrowers and the “who could afford what?” Apartment chatter.
Yes, significant and extensive economic growth and fatter paychecks could help ease the California homebuyer ‘s affordability crisis. A demographic increase in young adults in their prime when buying a home could Increase demand. And faster house building could also create more offer.
Let me focus on known sizes. Like the 14% annual inflation rate in October 1981 that turned into actual deflation around the Great Recession. And mortgage rates fell almost 16 percentage points from the top to the bottom.
Prior to October 40, the hypothetical California buyer had mortgaged a typical home for $ 1,397 a month, assuming a 20% down payment at the highest mortgage rate.
In 2021, a similar house hunter will write a check for $ 2,560 every month for the mid-range home at the nearly unprecedented low prices this year. Yes, the payments are 83% higher for apartments that are six times as expensive.
Is anyone expecting a repeat?
Jonathan Lansner is a business columnist for the Southern California News Group. He can be reached at [email protected]