Comparing the Current Housing Market to the 1978 to 1982 period

In March, 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.

And I suggested we compare the current situation to the 1978 to 1982 period, and I discussed a few similarities between the periods (no comparison is perfect):

1. Demographics were similar

2. House prices had been increasing rapidly.

3. Inflation picked up, partially as a result of a spike in oil prices.

4. The Fed raised rates to bring down inflation.

5. House payments increased sharply

Demographics were Similar in Both Periods

In the 1978 to 1982 period, demographics were very favorable for homebuying as the baby boomers moved into the first-time homebuying age group (similar to the millennials now).

This graph shows the longer-term trend for three key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap). This graph is from 1960 to 2060 (all data from Census: current to 2060 is projected).

We can see the surge in the 20 to 29 age group last decade (red). Once this group exceeded the peak in earlier periods, there was an increase in apartment construction. This age group peaked in 2018 / 2019 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak around 2023.

For buying, the 30 to 39 age group (blue) is important. The population in this age group is increasing and will increase further over this decade.

When we look back at the 1978 to 1982 period, the 30 to 39 age group (blue) was increasing even more than today.

House Prices had been Increasing Rapidly

The three periods over the last 50 years when house prices were increasing the fastest were 2021/2022, 1978 and during the housing bubble (around 2005). The housing bubble period was very different in many ways, so the comparison to 1978 to 1982 seems more appropriate.

Inflation picked up, partially as a result of a spike in oil prices

The graph below shows the year-over-year change in inflation since 1959. The black arrows point to the pickup in 1979 and 2022.

The next graph shows expenditures on energy goods and services as a percent of total personal consumption expenditures. In general, energy expenditures as a percent of PCE has been trending down for decades. The huge spikes in energy prices during the oil crisis of 1973 and 1979 are obvious. As is the increase in energy prices during the 2001 through 2008 period.

In April 2022, energy expenditures as a percentage of PCE were at 4.6% of PCE, however oil and gasoline prices have increased significantly since April.  Although energy as a percent of PCE is much lower than in the late ‘70s, it is the relative price that impacts the economy.

Note that inflation was already elevated prior to the oil shock in the late ‘70s. This time inflation picked up due to the impact of the pandemic, and more recently due to the Russian invasion of Ukraine.

The Fed Raised Rates to Bring Down Inflation

Here is a long-term graph from FRED showing the effective Fed Funds Rate over time.

The effective Fed Funds Rate increased from around 6% in 1977 to over 17% in 1980. Currently the FOMC is just starting on a tightening cycle and started close to zero.

House Payments increased Sharply

It is the change in monthly payments that impacts housing. Monthly payments include principal, interest, taxes, insurance (PITI), and sometimes HOA fees (Homeowners Association). We could also include maintenance, utilities and other costs.

The 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 46% year-over-year for a fixed amount (this doesn’t take into account the change in house prices).

This is about the same percentage increase as in 1979.

Note: This graph includes the spike in 30-year mortgage rates over the last few days to 6.18%.

If we add in the year-over-year in house prices, payments are currently up about 66% year-over-year, almost exactly the same as in 1979.

This article was just to summarize some of the reasons why I’m looking to the ‘78 to ‘82 period for lessons, as opposed to the housing bubble. I’ll have more soon on the likely impact on housing from the increase in rates.