I was with a Realtor® friend of mine this past week, and we discussed what the real estate market is going through at present with inflation, rising prices, shortage of available properties, and increasing interest rates affecting the market. We have been practicing real estate in the lakes region since the mid to late 70s. So we were comparing some of the similarities from the late 70s to early 80s to what we’re experiencing now.
Back in 1980-1981, I was 31 years old, and I guess I was born at the peak of the baby boom generation. That generation was in its full homebuying stage. Additionally, the millennial generation was just starting that year. Interestingly, both of these generations have been affected by similar patterns…swiftly rising interest rates and, in both instances, caused by several rate hikes by the Federal Reserve to fight inflation.
I can remember the 1980s vividly. Huge inflation and a recession in the late 70s triggered the Federal Reserve to do the unthinkable. The 30-year fixed rate mortgage reached an all-time high of just over 18% in October of 1981. I was marketing Broadview Condominiums in Gilford at the time, and it decimated the real estate market for a short period. It was pretty scary back in 1981 because the rates had increased almost 5 points in only 12 months. Before that, the rates went up considerably in 1980 to compound the increase.
Broadview Condominiums in Gilford, New Hampshire on Lake Winnipesaukee
Those massive increases in interest rates pushed many potential homeowners away from purchasing a home and creating havoc here in the Lakes Region with the second home market. I remember back in 1980, home sales decreased by 20-22%, and then again in 1981, sales dropped another 15-18%.
It becomes interesting when you look at today’s market. We have experienced a similar trend as the 80s, but not to that grand scale. According to the National Association of Realtors® existing home sales have dropped 28.4% for the last 12 months ending in October 2022. It’s starting to look on a smaller scale, like in 1980, because interest rates have increased by 4.1 points in 12 months, like in 1980. (In November 2022, the rates peaked at 7.08%) keep in mind that 1980-1981 prices were much lower. For example, a Broadview Condominium back then was priced at $117,000-$121,000, a big difference from today’s prices at $675,000 (and that’s for an upper-level unit, not a waterfront unit.) That’s almost 6 times the price paid in 1981 compared to today. But remember, the interest rates in those days were 2.5 times higher than todays.
Fortunately, as inflation ebbed in the 1980s, US mortgage rates gradually slid downward and kept sliding well into the 21st century. For example, the average fixed rate was 12.43% in 1985, 10.13% in 1990, 7.13% in 1995, 7.86% in 2000, 5.93% in 2005, 4.86% in 2010, 3.99% in 2015, 4.13% in 2019, 3.38% in 2020, 3.15% in 2021 to a record low of 2.65% in January 2021.
However, when you look at the average 30-year mortgage rate in the US from 1971 until 2022, it averaged 7.76%. The record high was 18.63% in 1981, and the low was 2.65% in January 2021.
If you look at today’s 12/8/2022 national current average rate for the benchmark 30-year fixed mortgage, it’s at 7.32%, up 15 basis points over the last week, according to Mortgage News Daily and Freddie Mac. Today’s rate is still lower than the 50-year average rate of 7.76%. Where rates will go from here is anyone’s guess. The chief economist for the National Association of Realtors® said, “it may be another year or two” before mortgage rates begin to fall. Whereas the Mortgage Bankers Association has a more optimistic view, with rates for the 30-year fixed mortgage dropping to 5.4% by the end of next year.
In any case, I feel we have been spoiled with record low-interest rates and huge stimulus since the great recession in 2008, and today’s interest rate of 6.32% is not crazy.
Another similarity comparing the 1980s to today’s market is that I see homeowners not putting their homes on the market as often as in the past because they don’t want to lose their low-rate mortgages. Back in 1980, sales were slowed down because nobody wanted to give up their low-interest rates and move on to a higher rate, close to 18%. We are starting to see this occur again in the Lakes Region. Many families are locked in a very attractive rate around 2.75% and it’s hard to give that up and take on a new rate of 6.4%.
However, back in the 1980s, we did all kinds of creative financing to keep the original mortgages in place. Some of the loans were a “contract for deed” or a “wraparound mortgage,” and sometimes, we put together “leases with an option to buy.” It was not a fun time; it was a complicated period to get through…so much different from today.
So yes, we have seen soaring prices with rising interest rates and the inventory of available houses on the market remaining at a historic low (although we are starting to see an uptick.) Capital Economics predicts that housing affordability will be at its worst in 2023 since 1985. The company also predicts prices will fall 8% next year, but the group feels mortgage rates will hold close to 7% over the majority of the next year, and they projected rates will go back down to 5.75% by the end of 2023.
Year to date in the Lakes Region in 2022, the median sales price for a single-family home is $425,000. In New Hampshire statewide, it’s at $440,000. During 2021 in the Lakes Region, the median sales price was $353,000; in New Hampshire statewide, it was $395,000. These are pretty steep increases to absorb, considering the year before saw similar increases, and the cost of financing has pretty much doubled in the past year.
Boston, Massachusetts where the median single-family home price is $698,900
We’re still lucky living in the Lakes Region when you compare the median price of $425,000 to the median price in San Jose, California, at $1.69 million, San Francisco at $1.3 million, Boulder, Colorado, at $826,900, Naples, Florida at $746,000 and Boston at $698,900.
If you look at price growth, Florida by far experienced the largest year-over-year price growth ranging from 18.8% in Tampa to a 23.8% increase in Sarasota.
In summary, we know the Federal Reserve is waging war on inflation with the goal of achieving 2% inflation. We are not experiencing the exuberant levels of interest rates we saw in the 80s. The banking system is on solid ground. We are not seeing the leverage and overbuilding we experienced during those years stimulated by the Economic Recovery Act in 1981 and the deregulation of the saving and loan industry, allowing thrifts and commercial bankers to lend out more aggressively. We are on much more solid footing, and history tells us that the housing market will improve, even if we go through rocky times on the way to recovery.