The present housing market is exhibiting a distinct resemblance to the trends of the late 1970s and early 1980s, according to the insights of Mark Fleming, chief economist at First American Financial Corp. In a recent report, Fleming suggested that understanding the dynamics of that era could shed light on the trajectory of the current market.
August’s existing home sales slightly exceeded a 4 million-unit seasonally adjusted annualized rate (SAAR). However, leading indicators, such as purchase mortgage applications, hint at a potential dip below 4 million, a scenario not witnessed since the aftermath of the Great Financial Crisis between July and October 2010, as per Fleming.
Despite these parallels, Fleming emphasized the differences between the present housing market and the aftermath of the mid-2000s housing boom. Unlike the mid-2000s, today’s market is not characterized by overbuilding, loose lending standards, subprime mortgages, or highly leveraged homeowners. Instead, the current housing market shares similarities with that of the 1980s. As Fleming emphasizes, “History doesn’t repeat itself, but it often rhymes.”
One noteworthy similarity highlighted by Fleming is the demographic aspect. In both the early 1980s and the present day, there is a surge in demand driven by baby boomers reaching prime homebuying ages and millennials, respectively. Additionally, today’s housing market grapples with a housing recession sparked by inflation, echoing the scenario of “The Great Inflation” four decades ago.
Fleming draws attention to the tightening monetary policy and higher inflation of the 1980s, leading to a peak mortgage rate of 18% in 1981. The subsequent fall in inflation and the federal funds rate, alongside a decline in the 30-year fixed mortgage rate, resulted in a gradual stabilization of the housing market. Existing home sales dropped nearly 50% from their peak in 1978 to the valley in 1982, while home prices experienced a slowdown, growing only 1% by 1982.
This historical parallel is mirrored in the current market, where existing home sales have decreased by almost 40% from their recent peak, yet home prices have surged nearly 17% year over year in 2022, according to Federal Reserve economic data.
The question arises: What insights can be gleaned from these parallels spanning over 40 years? With the Federal Reserve signaling a commitment to “higher for longer” interest rates, buyers find themselves grappling with affordability challenges. The trajectory of inflation in response to the Fed’s policy and the duration of the central bank’s commitment will be pivotal.
Fleming points out that, although the housing market rebounded from the challenges of the 1980s, it took time. Mortgage rate stabilization and inflation control were key factors. Anticipating continued housing recessionary conditions in the near term due to increased mortgage rates in October, Fleming notes that industry forecasts suggest a potential moderation if the Federal Reserve halts further monetary tightening and provides investors with greater certainty. According to Fleming, stability in mortgage rates, even at higher levels, is the linchpin for an eventual housing recovery.
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