Considering that Millennials are reliving their parents’ housing journey in the 1980s, it might be time for them to ditch the “well, boomer” mentality.
While current mortgage rates (which hit 8% this week) are similar to those in the early 2000s, the overall housing market is actually more reminiscent of the 1980s, according to one agency. new report Presented by Chief Economist at First American, a Fortune 500 financial services company.
“Today’s housing market is nothing like the housing market of the mid-2000s,” First American chief economist Mark Fleming said in a note Tuesday titled ” Deja Vu in the 1980s Real Estate Market. Of course, Fleming dismisses the specter of the 2008 housing crash, which triggered the financial crisis when subprime mortgages and other shoddy lending practices were common. Today’s situation is fundamentally different, he writes: “Today’s housing market is not overbuilt, nor is it driven by lax lending standards, subprime mortgages, or highly leveraged homeowners.”
“However,” he adds, there’s another precedent: “Today’s real estate market is similar to the market in the 1980s.” That may be a tough pill to swallow for Millennials, who are growing up in The inability to buy a home in today’s market is largely blamed on baby boomers, who are holding on to their homes longer out of fear of high mortgage rates and are jumping in with everyone else. – Cash discounts unmatched by younger peers.
Fleming cited three key aspects of today’s economy and housing market that seem to “rhyme” with the 1980s, noting that both periods were characterized by high inflation, rising interest rates and a surge in adult homebuyers. Fleming believes these three factors could result in a “housing recession” similar to the one four decades ago—a frozen, unaffordable market in which home sales remained low but home prices stagnated.
“History does not repeat itself, but it often rhymes,” Fleming wrote in an essay. Mark Twain-style prosperity.
Demographic changes
In the late 1970s and early 1980s, demographics helped sustain the housing market even amid stubborn inflation and steep interest rate hikes by then-Federal Reserve Chairman Paul Volcker. Millions of baby boomers are entering home-buying age, leading to a wave of steady buying demand during the decade.
Now, in a strikingly similar pattern, millions of millennials are entering their prime home-buying years this decade, which Fleming believes could help support home prices.
“With a severely limited supply of homes for sale, demographic demand continues to set the floor for lower home prices, but sales are suffering as potential buyers are priced out and existing homeowners have no incentive to sell,” he wrote on Monday. “
Millennials are now “Home buying pie”, as Redfin said, in the past few years, about 60% of homes were purchased with a mortgage.
and as wealth As previously reported, Fleming is not the only one to conclude that the demographic wave should support home sales and prices despite rising mortgage rates. Fleming’s statement is nearly identical to that of U.S. economist Jeseo Park of Bank of America Research, who wrote earlier this month that “some sales activity should be supported by millennials who are reaching their prime home-buying age. And single-family building permits have been growing steadily. That could help the housing market maintain some momentum without collapsing.”
Inflation and high interest rates
After Federal Reserve Chairman Paul Walker took office in August 1979, he raised interest rates sharply to control inflation, causing the average 30-year fixed mortgage rate to soar to a peak of about 18% at the end of 1981. Soaring borrowing costs caused housing affordability and sales to plummet in the early 1980s. After years of rising home prices, the housing market has stalled, but not collapsed — in large part due to demographics.
During Volcker’s tenure as Fed chairman, the median home sales price in the United States was $64,700. Even after mortgage rates nearly doubled, that number rose to $69,400 by the second quarter of 1981.
Likewise, the Federal Reserve has rapidly raised interest rates over the past 18 months to combat inflation after hitting a four-year high of over 9% last year. Even as inflation falls rapidly this year, Bank Chairman Jerome Powell said it remains “too high” and therefore interest rates may need to remain higher for longer.
“While inflation has declined from its peak, a welcome development, it remains too high,” Powell said in late August. “We are prepared to raise rates further if appropriate and intend to keep policy within limits. levels until we are confident that inflation will continue to fall to meet our objectives.”
Because of Powell’s hawkish tone, some economists and housing experts worry that mortgage rates could remain at or above 8% this year and early next year.
The impact of rising mortgage rates on the housing market is reminiscent of the 1980s. Both then and now, housing affordability and existing home sales have plummeted due to rising borrowing costs and high home prices.
For example, Existing home sales drop nearly 50% Between 1978 and 1982, according to the Office of Policy Development and Research.And today, at the current pace, total existing home sales are expected to be 4.1 million According to the National Association of Realtors, home sales will drop significantly in 2023 from more than 6 million units in 2021.
Soaring mortgage rates have pushed up the average monthly payment for a moderately priced U.S. home by $670, or 38%, in the past 12 months alone, according to calculations by Morgan Stanley.
According to First American, today’s housing market faces a potential recession similar to that seen in the early 1980s. real estate recession indicators. However, this does not necessarily mean that house prices will fall significantly. Experts expect the housing market to freeze further and then potentially experience a crash similar to the 2008 disaster.
First American uses factors such as average hourly earnings for construction workers; the total number of people employed in residential construction and real estate leasing; the number of single-family housing starts; existing home sales; and more to determine whether the housing market is currently in a recession.
Fleming concluded based on recession indicators: “With mortgage rates rising further in October, we expect housing recessionary conditions to persist in the near term.” He noted, “The housing market did rebound from the 1980s, but inflation It will take some time for mortgage rates to stabilize which is key.”
In addition to Park and Fleming, a Morgan Stanley team led by strategist James Egan also warned in a research note on Tuesday that if mortgage rates remain high for an extended period of time and housing inventory rises slightly, it could lead to a decline in home prices5 % By the end of 2024, a bearish scenario will emerge.
“If interest rates remain at 8%, the long-term impact on demand should not be ignored,” he wrote.
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