The current housing market looks a lot like the market during the early 1980s, according to First American Data & Analytics.
“The housing market today also faces a recession very similar to that of the late ‘70s and early ‘80s… In the late ‘70s and early ‘80s, interest rates soared as the Federal Reserve fought to rein in the ‘Great Inflation.’ Sound familiar?” said Mark Fleming, chief economist at First American.
In addition to high inflation and mortgage rates, baby boomers were entering their prime homebuying years at that time. Just like millennials are today.
What happened during that period? Fleming reminds that during the late 70s and early 80s, tighter monetary policy and higher inflation caused mortgage rates to jump to 18%.
Existing home sales dropped nearly 50% from the 1978 peak to the 1982 trough, he said. In today’s market, they’ve fallen almost 40% from the January 2022 peak to August 2023. In 1978, home prices jumped over 14%. Similarly, in 2022, they jumped 17%. By 1982, price growth slowed to 1%. Likewise, by Q2 2023, growth dropped to 5%.
“As mortgage rates reached levels unseen before or since, homes became significantly less affordable and home sales fell,” he said. “By October 1982, inflation had fallen to 5 percent. The Fed allowed the federal funds rate to fall back down to approximately 9 percent by the end of 1982 and the 30-year, fixed mortgage rate fell alongside lower inflation and a lower federal funds rate.”
First American Data & Analytics’ updated Potential Home Sales Model for September 2023 shows that:
- Potential existing home sales decreased to a 5.37 million seasonally adjusted annualized rate (SAAR), a 0.03 percent month-over-month decrease.
- This represents a 53.9 percent increase from the market potential low point reached in February 1993.
- The market potential for existing home sales increased 0.3 percent compared with a year ago, a gain of 14,700 (SAAR) sales.
- Currently, potential existing home sales is 1,424,000 (SAAR), or 21.0 percent, below the peak of market potential, which occurred in April 2006.
Fleming warns that existing home sales may fall below 4 million SAAR for the first time “since the depths of the Great Financial Crisis.” October’s near-8% mortgage rates are reducing affordability and further incentivizing homeowners with low rates to refrain from putting their homes on the market. That combo will likely continue to suppress home sales, he said.
August’s existing home sales were just above a 4 million SAAR.
“But the housing market today is very different from the housing market during the aftermath of the previous housing boom,” he said. “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, sub-prime 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.”
He reminds that the 1980s housing market did rebound. But it took a while.
“Inflation and mortgage rate stabilization were key,” he said. “Because mortgage rates have increased further in October, we expect the housing recessionary conditions to linger in the near-term… Mortgage rate stability, even if the stabilization occurs with rates at a higher level, is the key to an eventual housing recovery.”
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