It’s Never Been this Bad Before. How home buyers got it done in 1981

Housing market is in dire straits. The housing market is in dire straits. People long to purchase but are prevented from doing so by rising mortgage rates, unaffordable houses and a shortage of properties available for sale.

It is good news that America has already been through this — in 1981 — and it got better. It is sad to report that the housing market of the 1980s remained viable despite some factors that are not as prevalent this time. This mess will require us to find a way out.

These similarities start at the generational level: In 1981, when baby boomers were still in their thirties, they were 35 years old. That cohort was also full of homebuyers. In 1981, the first millennials were born. The next-largest generation of millennials has been diligently looking for homes in recent decades.

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  The average interest rate for a 30-year fixed-rate mortgage was 18.63% in October 1981. It had increased almost 5 percentage points in just 12 months. In 1980, rates had risen almost twice as fast.
  

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  The 30-year mortgage rate reached 7.08% in November. It had risen 4.1 percent in the past 12 months. (All percentages taken from Freddie Mac’s weekly survey going back to 1971. )
  

The rapid rise in mortgage rates caused potential home buyers to flee the market. According to historical data from National Association of Realtors, existing home sales fell 22.3% year-over-year in 1980 and another 18.6% in 1981. According to the NAR, this year’s pace for existing home sales fell 28.4% over the 12 months ended October.

The final era was characterized by “rate lock-in”. This is when homeowners decide to keep their homes off the market in order to retain their low-rate mortgages.

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  March 1981: A realty executive stated to The New York Times, that home sales are being slowed because “Nobody wants their low-interest mortgage.” ”
  

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  September 2022: Lawrence Yun, chief economist at NAR, stated that “some homeowners are reluctant to trade up/down after locking in historically low rates mortgage rates in recent decades.” ”
  

Despite the many similarities between 1980s and present, there are some key differences. One of these is “assumable loans,” which were common in the 1980s but are scarce today.

Many mortgages could be assumed at the beginning of the 1980s. Assumable mortgages allow the buyer to not only take over the seller’s loan but also get ownership of the house. Imagine you are trying to purchase a house with mortgage rates in the double digits. A home seller offers an assumable loan at a single digit interest rate. The home might be affordable if the loan can be repaid. However, it may not be feasible to pay a double-digit rate of interest.

In classified ads, home sellers highlighted their assumable loans. Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center, says that if you had an 8-percent loan in a 14% marketplace, it would make your home more desirable. He claims that “a lot” of mortgage assumptions were made in the early 1980s.

In 1982, Congress closed the door to assumable loans. Only a small percentage of mortgages can be assumable now: those that are insured or guaranteed by the Federal Housing Administration and the Department of Veterans Affairs, and the Department of Agriculture’s Rural Housing Service. According to data from the Urban Institute, FHA, VA, and USDA loans together accounted for 18% of the mortgage origination volume during the second quarter 2022.

Assumable loans were a way to keep home sales from stalling in the 1980s, when mortgage rates were extremely high. These loans also provided the basis for “creative financing”, which bridged the gap between the purchase price of the home and the assumed mortgage balance.

Most cases of creative financing involved loans from sellers to buyers. For example, a promissory notice for a set amount would be paid monthly by the buyer to the seller. The buyer could also take out a second mortgage for any remaining purchase price. These arrangements were known by various names, including “contract for deed,” and “wraparound loan.” According to a Washington Post article, creative financing was responsible for more than half of all 1981 home sales in many areas of the United States. ”

It’s been more than 40 years since 1980, and creative financing in the 1980s style isn’t returning. Lenders were not happy with the ad-hoc transfer of loans that they had made, and wanted to issue new loans at current interest rates when properties changed hands. Advocates for consumers warned that sellers and buyers of unconventional and informal schemes could be left with a non-supportable payment arrangement or a contract worthless.

Will banks, Silicon Valley and home sellers be able to come up with 2020s-style creativity if 1980s-era creative finance is no longer available? It might take some ingenuity to keep home sales from crashing and burning. It might be something already in existence, but not yet popular, like wider adoption of accessory dwelling units or 3D-printed homes, or groups of friends joining together to share the ownership of homes.

No matter what happens, predictions made in the future will be foolish. Think back to the 1980s, when the 30-year mortgage was over 15%. He said that “chances are” that home mortgage interest will never fall into the single-digit range. ”