1983 vs. 2023
Hello! My name is Ben Sprague and each week I write this weekly newsletter on topics related to real estate and the economy. Subscribe below (if you have not already) to get my articles in your inbox each Sunday morning. Thanks for being here.
1983 vs. 2003
Last week, I wrote about the challenges faced by homebuyers in the current housing market, calling them unprecedented. Whenever I use language like that, I get a smattering of good-natured grumbling from readers who were first-time homebuyers in the late 1970s and early 1980s who like to point out that interest rates were much higher back then, which is true. With that in mind, I thought I would set out this week to try to answer the question of whether homebuyers in 1983 or 2023 have had it worse. There are really three key variables to look at, all of which are relevant here: interest rates, home prices, and incomes. So let’s dig in.
Interest Rates
The chart below showing the average 30-year fixed rate in the United States is really a heck of an interesting thing. The steep run-up in rates in the late 1970s and 1980s is evident before a steady and relentless drop in rates for basically the next 35 years (with dips and jumps all along the way). Why did rates go up so much during the early 1980s? It was because the Federal Reserve under Chairman Paul Volcker along with the Reagan Administration wanted to crush out-of-control inflation. Sound familiar?
The 30-year fixed mortgage rate topped out at nearly 19% in October of 1981. As of this past Friday, the rate was 7.2% (although BankRate.com has it at 7.53%). So in terms of a difficult borrowing environment based on interest rates alone, the early 1980s was clearly the worst that it has been.
Home Prices
Comparing 2023 home prices versus 1983 is not as simple as just comparing the nominal values; virtually all goods and services are more expensive today than they were in 1983 because that is just how inflation impacts things. So in analyzing 1983 versus 2023, we need to take the actual values in each year but then adjust them for inflation.
The average home price today is $416,100 and in 1983 it was $74,900. Using the Bureau of Labor Statistics Inflation Calculator, the $416,100 figure from today would be equal to $136,471 in 1983. That means the average home is being sold today for nearly double what the average home was sold for in 1983 on an inflation-adjusted basis.
Let’s also look at it in reverse. Taking that $74,900 home price in 1983 and extrapolating it forward to 2023 would generate a current value of $229,192. This $229,192 figure is almost half what the actual median home is being sold for today ($416,100). In other words, homes are wildly more expensive today than they were in 1983 on an inflation-adjusted basis. In almost any real estate market in the country today, first-time homebuyers and those just getting started out (among many others) would drool over an inventory pool that included a good number of homes in the $229,192 range. Score one for the argument that the market is more challenging today than it was in the early 1980s.
One important caveat: homes are actually a lot nicer today than they were back then generally speaking. I can hear traditionalists moaning and groaning; even I acknowledge there is often a lack of craftsmanship or character to some more modern homes. But homes today are bigger, much more energy efficient, and have more amenities on average than your typical 1980s home. In short, what you are paying for today is generally better than the comparable product in 1983. So we are not exactly comparing apples to apples here. But would-be homebuyers are subject to what the market actually has for them, and the prices for what is available today are significantly higher than the prices for what was available in 1983, there is no doubt about that.
Income
If we combine the variables of interest rate and price, we can calculate the average monthly mortgage payment today and in 1983 and then adjust those for inflation to compare. We can also compare that amount to average incomes in each era, also adjusted for inflation.
In August 1983, interest rates were around 13.8% (reminder: they peaked at nearly 19% in 1981, but for the sake of symmetry we are comparing 2023 to 1983). If we look at the average home that sold for $74,900 in 1983 and assume a buyer that put 10% down, this results in a loan amount of $67,410. The monthly payment on a 30-year fixed rate mortgage based on this loan amount at a 13.8% interest rate would be $788/month.
Now consider the average median home price today of $416,100. A mortgage for 90% of this (assuming a 10% down payment) would be $374,490. The average monthly payment on a loan of this size at today’s current interest rate of 7.2% would be $2,542/month.
Finally, we can compare the two figures. In today’s dollars, $788 adjusted for inflation would be $2,411. In 1983 dollars, $2,542 from today would be $831. What this means is that the average monthly mortgage payment today is higher than it was in 1983 adjusted for inflation, although only by $43/month in 1983 dollars or $131/month in 2023 dollars.
What should we conclude from this? Well, with my 2023 bias I was actually surprised to see upon doing this research and these calculations that the average monthly payment on the median home today is not that far off from what it was in 1983 even though home prices are much more expensive now. I was expecting more of a difference. What the calculations show is that the impact from the significantly higher home prices today are largely cancelled out by the lower interest rates today as compared to 1983 (although the difference of $131/month in today’s dollars is certainly not nothing to many would-be homebuyers especially those just getting started out). But even though rates have risen a lot in the last 12-18 months, the current rate of 7.2% is still a lot lower than it was in the 1980s and that makes a big difference.
Incomes
The last key factor here is how these monthly mortgage payment amounts compare to incomes from each time period. According to the Bureau of Labor Statistics, the average weekly income in the second quarter of 2023 was $1,100/week. There are notable differences in race, gender, and geographies, but for the sake of simplicity for now we are going to call the average annual income in the United States $52,000/year. The average mortgage payment of $2,542/month totals to $30,504/year, which is a whopping 59% of the average annual income.
Now let’s look at 1983. According to one report I found in the Bureau of Labor Statistics online archives, the average weekly earnings in 1983 was $309/week, which totals to $16,068 for a 52-week year. The average monthly mortgage payment of $788/month at the time totals to $9,456/year, which is….wait for it…59% of the average annual income! What this means is that the average mortgage payment today is exactly the same figure proportionate to income as it was in 1983….59%!
How about family income? The median household income in 2021, which is the most recent year for which full and accurate data is available, was $88,590. We know incomes have risen the last two years, however, by roughly 4% per year, so I am calculating the average household income as of 2023 to be $95,818, which would be the 2021 figure with 4.0% increases in 2022 and 2023. The $30,504/year of average mortgage payments compared to this figure is 32%.
By comparison, in 1983, the average household income was $24,580. The average annual mortgage payments of $9,456/year from the time represents 38% of this amount, which means that more of an average household’s income in 1983 went into a mortgage payment than it does today. This figure is certainly influenced by the fact that there are more dual-income households today than in 1983, which means that household incomes are comparatively higher now, but it is interesting to see that a larger chunk of household income went into a mortgage in 1983 than it does today, at least for new homebuyers with incomes close to the median.
What To Make Of It
It should be noted that there are countless other variables at play. I expect that property taxes and insurance are generally more expensive today than they were in 1983, for example, even adjusted for inflation. And I haven’t seen good data on housing inventory in 1983, but one of the greatest frustrations for would-be homebuyers today is just that there is such little inventory on the market.
But the numbers don’t lie: the average monthly mortgage payment today is only slightly higher than the average monthly mortgage payment in 1983, adjusted for inflation, even though home prices are a lot higher. And mortgage payments today as a percentage of individual income are exactly the same, while as a percentage of household income are actually lower today than than they were in 1983.
But the question of prices is a major one: remember, home prices are almost double today what they were in 1983, adjusted for inflation. This presents a high hurdle for younger homebuyers, those who are just getting started out, or traditionally underrepresented demographics in the home buying market, all of whom may not have had the time and opportunity to build up a nest-egg for a 10% down payment or to cover the ongoing costs associated with owning a home.
So what was the more challenging time period? I would have to say it is today, but only by a nose. Prices are high, inventory is low, and rates are rising. By comparison, a portion of these current frustrations are cancelled out by the fact that rates were so much higher in 1983, which led to a larger portion of household income going into mortgage payments than happens today. If interest rates continue to rise and home prices don’t come down, the pain pendulum will continue to swing to the current day, however.
Boomers and Millennials/Gen Z should take heart that each time period did have its own significant challenges. Older Americans should be patient when listening to the gripes of frustrated would-be homebuyers just getting started out, and those just starting to go down the road of homeownership for the first should be mindful that their older cohort had it rough in many ways too.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. © Ben Sprague 2023.
Have a great week, everybody, and a very Happy Labor Day. I promise the Weekly Round-Up is coming back soon. It’s just been a busy month of trying to savor the last drops of summer (such that it has been) here in the northeast. If you enjoyed today’s article, you might also like 2021 is Different Than 2007, which I wrote in August 2021 and which remains one of my most read-articles.
Seriously. You are comparing a single earner household to a double earner household?
Ben there is a disadvantage in having to have both parents working today. It's the fact that Mother is not home when the kids return from school. In the digital age the kids get wrapped up in social media that has its own disadvantages.
In Australia, in 1908 the minimum wage was set at a figure that it could support a stay-at-home wife and three children in a rented house at that time. Is that possible today?
The most meaningful way to look at the cost of housing, at least to me, is the number of years of income required to buy the cheapest two-bedroom, one bathroom house. For a rental, what proportion of the minimum wage is required to rent a house that rates in the bottom 10% of rental values.
Granted a two bed one bathroom house will be a different thing after a long interval of time. Can't do much about that except say that what is provided may be accepted as meeting the minimum standard that the society accepts at the time.
There is another consideration worth thinking about. 100 years ago, you could obtain what you needed to survive within walking range of your residence. Now you need a car to get to a shopping centre. So, part of the cost of the car is involved in meeting the family needs. Secondly, 100 years ago there was no zoning to separate home from work. Today, a lot of travel is required in draining circumstances to get to and from work. So, again, it's not just the house but the car that needs to be taken into consideration. Then consider the opportunity cost of the time lost in travel and what that means in terms of family time foregone.
Hours of work? It gets complicated!
If parents are not in a position to support children and the birth rate falls below replacement levels, this could be considered as an indicative of falling living standards.
If we changed the way towns are set up so that they are more convenient, more social and community support is more readily available, and the birth rate went up I suggest that living standards have improved.
So, it's worthwhile considering the nature of the town planning arrangements and how that impacts the ability of communities to function effectively. In my view, much that has been done by planners that enabled families to live in zones that were dedicated to residential use alone, has been counterproductive. Urban sprawl produces isolation and loneliness and fails to consider the needs of children for safe play space and their ability to find mentors outside the home.