The housing market is following a similar playbook from the 1980s when mortgage rates doubled. Here's what it could mean for homebuyers today.
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- The US housing market is showing parallels to the 1980s, when mortgage rates doubled.
- Bank of America highlighted that both periods had strong pent-up demand due to demographic trends.
- Here's what this could mean for the housing market today, according to Bank of America.
There are striking parallels between today's housing market and the housing market of the 1980s, according to Bank of America.
High inflation, surging mortgage rates, and pent-up demand for homes from a growing demographic boom are just a few of the similarities between today and four decades ago.
"We think the 1980s are a better analogy for today's market than the 2008 housing crash," Bank of America said in a Thursday note.
Inflation soared throughout the 1970s and into 1980, mortgage rates doubled from about 9% to 18% by 1981, and baby boomers were entering their prime home-buying age.
Fast forward to 2023: inflation has surged, the average 30-year fixed mortgage rate has doubled from about 3% to above 7%, and millennials are driving pent-up demand for homes as they enter their prime home-buying age.
So, what does this mean for the housing market going forward?
It means that prices are unlikely to rise from here, and could slightly fall, but not as much as they did during the 2008 housing crash, Bank of America said.
The question is how long can today's consumers stomach high mortgage rates, as that pushes affordability for many millennials to unobtainable levels.
"Persistently high mortgage rates should make the decision of purchasing a home more challenging in the near term. Indeed, favorable demographics were not enough to hold up the market in the 1980s and will likely not be enough to stimulate the market this time around," Bank of America said.
There are other similarities between today's housing market and that of the 1980s, the bank added. Home prices surged by over 16% in 1979, then essentially flatlined as year-over-year growth slowed to just 0.5% in 1982. Additionally, existing home sales fell 54% from peak to trough.
After the COVID-19 pandemic, home prices jumped nearly 21%, before flatlining to 0% year-over-year growth in June. Meanwhile, existing home sales have plunged nearly 40%.
For now, there's no sign of excess housing development, and household debt is not much of a concern, BofA said but warned there should be more turbulence ahead as prospective homebuyers struggle to keep up with soaring mortgage rates.
"Limited inventories, high prices, and labor shortages can be headwinds for some time, but the good news is that single family permits have held up for the past several months... Affordability is likely to improve as the Fed cuts rates. At that stage, we should see a more stable and healthy housing market. Until then, hang tight, it may be a bumpy ride," Bank of America concluded.
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