The current housing market has a distinctly retro feel to it, First American Financial Corp. chief economist Mark Fleming opined in a new report.
Specifically, Fleming observed that the housing dynamics of today closely mirror conditions in the late 1970s and early ’80s, which may offer some insights into where the current market goes from here.
“Existing home sales in August were just above a 4 million [-unit] seasonally adjusted annualized rate (SAAR), but leading indicators, such as purchase mortgage applications, signal that sales may dip below 4 million for the first time since the depths of the Great Financial Crisis, between July and October 2010,” Fleming said.
“But the housing market today is very different from the housing market during the aftermath of the previous housing boom. Today’s housing market isn’t anything like the housing market of the mid-2000s – the housing market today is not overbuilt, nor is it driven by loose lending standards, subprime mortgages or homeowners who are highly leveraged. However, the current housing market is similar to the market of the 1980s. History doesn’t repeat itself, but it often rhymes.”
For one thing, Fleming pointed to the demographic similarities shared by the early ’80s and today. In the late ’70s and early ’80s, baby boomers were reaching prime homebuying ages, igniting a surge of demand in the same way that millennials are today. For another, today’s housing market is also grappling with a housing recession kindled by inflationary woes, mirroring the environment of 40 years ago when the economy dealt with the tail end of “The Great Inflation.”
“Sound familiar?” Fleming quipped. “As a result of tighter monetary policy and higher inflation, mortgage rates increased to a peak of 18% in 1981. As mortgage rates reached levels unseen before or since, homes became significantly less affordable and home sales fell. By October 1982, inflation had fallen to 5%. The Fed allowed the federal funds rate to fall back down to approximately 9% by the end of 1982, and the 30-year fixed mortgage rate fell alongside lower inflation and a lower federal funds rate.”
Consequently, existing home sales plunged by nearly 50% from their peak in 1978 to their valley in 1982 before normalizing via mortgage rate stabilization. At the same time, home prices ballooned by more than 14% in 1978 before experiencing a big slowdown, culminating in growth of 1% by 1982. Again, this draws a parallel to the current market, where home sales are depressed but home prices continue to swell. Existing home sales have plummeted almost 40% from their recent peak early last year, yet home prices jumped almost 17% year over year in 2022, according to Federal Reserve economic data.
So, what, if anything, can be gleaned from these congruities more than 40 years apart?
With the Fed telegraphing that interest rates are set to remain “higher for longer,” buyers appear to be cornered into wrestling affordability issues for the foreseeable future. How inflation reacts to the Fed’s policy, and how long the central bank sticks to that policy, will be crucial.
“The housing market did rebound from the 1980s, but it took some time. Inflation and mortgage rate stabilization were key,” Fleming said. “Because mortgage rates have increased further in October, we expect the housing recessionary conditions to linger in the near term.
“However, industry forecasts predict that mortgage rates will moderate if the Federal Reserve stops further monetary tightening and provides investors with more certainty. Mortgage rate stability, even if the stabilization occurs with rates at a higher level, is the key to an eventual housing recovery.”