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Wednesday, April 05, 2023

Update: Comparing the Current Housing Cycle to the 1980 Period

by Calculated Risk on 4/05/2023 10:41:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Update: Comparing the Current Housing Cycle to the 1980 Period


A year ago, I wrote: Housing: Don't Compare the Current Housing Boom to the Bubble and Bust
It is natural to compare the current housing boom to the mid-00s housing bubble. The bubble and subsequent bust are part of our collective memories. And graphs of nominal house prices and price-to-rent ratios look eerily similar to the housing bubble.

However, there are significant differences. First, lending has been reasonably solid during the current boom, whereas in the mid-00s, underwriting standards were almost non-existent (“fog a mirror, get a loan”). And demographics are much more favorable today than in the mid-00s.

A much more similar period to today is the late ‘70s and early ‘80s. House prices were increasing sharply. Demographics were very favorable for homebuying as the baby boomers moved into the first-time homebuying age group (similar to the millennials now). And inflation picked up from an already elevated level due to the second oil embargo in 1979, followed by the Iran-Iraq war in 1980, driving up costs.
Here is an update to several of the graphs I posted comparing the current situation to the 1980 period.
Although mortgage rates are much lower than in the 1980 period, it is the Change in Monthly Payment that Matters! Monthly payments include principal, interest, taxes, insurance (PITI), and sometimes HOA fees (Homeowners Association). We could also include maintenance, utilities and other costs.

Year-over-year change in PaymentsThe following graph shows the year-over-year change in principal & interest (P&I) assuming a fixed loan amount since 1977. Currently P&I is up about 30% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).

The peak YoY change in P&I was similar to 1979.
I’ll have much more on the lessons from the 1980 period, and what this likely means going forward for housing.
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