Rates Historically Low Despite Recent Hikes, Affordability Better Than 40yrs Ago
Think mortgage rates are high now? Let's look back to the 80s when rates were in double digits! The average 30-year rate in Oct of 81 was over 18% --down from 19% the prior month. Keep in mind that this average mortgage rate was based on a survey of conventional home purchase loans for borrowers who put 20% down and had excellent credit. Many homebuyers at that time paid even more.
In comparison, this week's 30-year fixed-rate mortgage averaged 6.33%, down from 6.49% the week before, according to Freddie Mac. While this is a 3% jump from just a few months ago, today's interest rates are still, historically speaking, relatively low.
It's About Home Affordability - Then vs. Now
While home prices were reasonably moderate in the 80s, large down payments (averaging 24%) and ultra-high rates made homeownership challenging --even more so than it currently is.
Surprised? Let's look deeper into why home affordability is better now than in the 80s and double-digit rates.
In October 1981, the average home cost was about $70,000, and the average take-home pay was $870 monthly. Now, considering the month's rate at 18.45% that month, we're looking at a mortgage payment that took up about 55% of the median income.
Let's look at how it breaks down in October of '86 when that average rate had dropped to 9.97%, but the typical home cost increased to over $91,000. The monthly mortgage payment decreased to $640, taking up just 30% of the median income.
What about affordability in 2022 and beyond?
Considering the average home price of about $435,000 and mortgage rates over 6%, we're looking at a monthly payment hovering just over $2,000 or about 36% of the median monthly income.
More Good News: Credit Availability Has Increased
One of the main drivers of high-interest rates in the 80s was the lack of available credit. This made it more difficult and costly for buyers to secure a mortgage, triggering banks to charge higher rates for taking on the risk.
But today, mortgages are often bundled and sold into investment products. This secondary market makes it less risky and more profitable for lenders, allowing them to provide more loans and offer lower interest rates.
And with GSEs expanding their underwriting and credit assessment requirements, homebuyers who had been previously shut out can now enter the housing market, purchasing a home at a historically low rate and improved affordability.