The US housing market is no stranger to fluctuations, with its history marked by booms and busts. Many experts are drawing parallels between today's housing market and that of the 1980s, a period characterized by high inflation, surging mortgage rates, and pent-up demand. A recent release from Bank of America shed light on these similarities, “looking back at previous housing recessions, we think the 1980s are a better analogy for today’s market than the 2008 housing crash” 1. While we may agree with this analogy, we also believe that the level of housing inventory is impacting this in a new way, adding an intriguing layer to the complex narrative of the current housing market.
Similarities between the 1980s and Today's Housing Market
One of the most striking similarities between the 1980s and today's housing market is the economic backdrop. Starting in 1964, inflation soared throughout the 1970s and into 1980.2 Mortgage rates doubled from around 9% to a staggering 18% by 19813. Additionally, the baby boomer generation was entering its prime home-buying years, leading to strong demand for housing.
Fast forward to 2023, and we find ourselves in a situation with uncanny parallels. In this inflationary cycle the average 30-year fixed mortgage rate has doubled from approximately 3% to above 7%4, not nearly the hike of the ‘80’s but still a drastic shift for this time period. Furthermore, millennials are now driving pent-up demand for homes as they enter their prime home-buying age, much like the baby boomers did in the 1980s.5
Impact on Housing Prices
What do these similarities mean for the future of housing prices? According to Bank of America, the expectation is that prices are unlikely to rise from here and could even slightly fall. However, this decline is not expected to be as severe as the crash experienced in 20086. Others, like Barbara Corcoran, are warning that prices could continue to rise if and when mortgage rates fall. “The minute those interest rates come down, all hell’s going to break loose, and the prices are going to go through the roof,” she said. “[Right now, sellers are] staying put. But they’re not going to stay put if interest rates go down by two points.”12
The challenge, though, is how long today's consumers can tolerate high mortgage rates. High rates make homeownership less affordable for many millennials, potentially affecting the overall housing market. Bank of America points out that "persistently high mortgage rates should make the decision of purchasing a home more challenging in the near term. Indeed, favorable demographics were not enough to hold up the market in the 1980s and will likely not be enough to stimulate the market this time around".7
Beyond inflation and mortgage rates, there are other noteworthy comparisons between the 1980s and today's housing market. Home prices surged by over 16% in 19798 but then they essentially flatlined, with year-over-year growth slowing to just 0.5% in 1982. Additionally, existing home sales fell a staggering 54% from peak to trough.9
Another crucial factor affecting existing home inventory are the low mortgage rates of 2020 and 2021. Redfin reported that 91.8% of U.S. homeowners with mortgages have an interest rate below 6%.13 We believe these low rates have locked potential move-up buyers into their home further tightening housing supply.
Factors Influencing the Housing Market's Future
The current situation in the housing market is complex, with multiple factors at play. There is currently no sign of excess housing development, and household mortgage debt represents roughly 65% of U.S. consumers’ disposable income in the second quarter, compared to 100% before the Great Financial Crisis, according to Bank of America11. However, Bank of America warns that there may still be a bumpy road ahead as prospective homebuyers struggle to keep up with soaring mortgage rates.
We believe that the limited inventories and high prices could persist for some time; however, the good news is that single-family building permits have held up for several months13. The Federal Reserve's potential rate cuts in the future may also improve affordability, leading to a more stable and healthy housing market.
The housing market's resilience in both eras can be attributed, in part, to demographics. In the 1980s, baby boomers were entering their prime homebuying age, and today, millennials are in a similar position. It is our position that this demographic support, combined with solid home sales to millennials and low inventory of existing homes, could help maintain some stability in housing prices.
The current state of the U.S. housing market shares remarkable similarities with the 1980s, marked by high inflation, surging mortgage rates, and pent-up demand. But, the high mortgage rates of the 1980’s started their descent in 1983 after they peaked at 18% in 1981. If history repeats itself, buyers could be coming back to the market a year from now. Demographics, low inventory, and potential future rate cuts may help provide stability, but the impact of persistently high mortgage rates remains a key concern. As we navigate this uncertain terrain, it's crucial for prospective homebuyers and investors to remain vigilant and adaptable, preparing for potential turbulence while keeping an eye on the eventual path to a more stable and healthy housing market.