Housing Market: 1981 vs. 2009

Have people forgotten how bad the real estate market crashed in the early 1980s? Apparently so. Here's a brief overview:

Mortgage rates (30-year fixed) peaked in October 1981 at 18.45%, see chart below:

What effect did historical high mortgage rates have on the housing market and housing affordability? The graph below (courtesy NY Times) tells the story: Housing Affordability dropped to an all-time low of around 62 in the early 1980s as mortgage rates soared to record-high levels.

Bottom Line: As bad as the troubles in today's real estate market are, they were certainly just as bad, if not worse back in the early 1980s. A Housing Affordability Index of 62 means that the typical American household in the early 1980s had only 62% of the income necessary to qualify for a mortgage to purchase the median-priced home. The record-high mortgage rates of 17-18% simply priced most Americans out of the housing market, and depressed home sales for years.

Between 1978 and 1981, existing-home sales fell by -50%, from 3.986 million homes in 1978 to 1.990 million homes by 1981 (data here), and new home sales and building permits fell by similar amounts. Unemployment rate for construction workers peaked at 22.6% in October 1982. Simply put, the housing market crashed under the weight of the 17-18% mortgage rates.

In contrast, mortgage rates are at record-low levels and housing affordability is at all-time historical high, factors that will hopefully provide a foundation for recovery in the real estate market and overall economy.