Highs and Lows: Inflation and Mortgage Rates in the US during the 1970s and 1980s
The 1970s and 1980s were a period of significant economic challenges for the United States. Americans faced a one-two combination of high inflation and high interest rates, combined with slow economic growth. One of the most dramatic effects of these economic conditions was the impact on mortgage rates, which rose to unprecedented levels during this period.
The Inflation Onslaught
Inflation in the United States had been relatively low and stable throughout the 1950s and 1960s. However, the Arab oil embargo of 1973 kickstarted a rapid rise in inflation, largely as a result of increases in oil prices. The inflation rate peaked at 13.5% in 1980, before gradually declining throughout the 1980s.
The high inflation rate had a significant impact on mortgage rates, which rose to historic highs during this period. In 1979, the average 30-year fixed mortgage rate was 11.20%. By 1981, it had risen to a peak of 16.63%. This made it much more difficult for Americans to afford homes, as the cost of borrowing was prohibitively high. For context, a 30-year fixed mortgage on a $100,000 home at that peak rate would result in a total of $321,953.72
interest paid over the life of the loan!
The impact of high mortgage rates was particularly acute for first-time homebuyers, who often had limited savings and income. The high cost of borrowing made it difficult for many to qualify for a mortgage, and those who did often had to settle for a smaller or less desirable home.
The Federal Reserve, which is responsible for setting monetary policy in the United States, responded to the inflationary pressures by raising interest rates. This helped to control inflation, but also contributed to the rise in mortgage rates.
30 Year Fixed Mortgage Rate - Historical Chart
Repercussions of High Rates
The high mortgage rates of the 1970s and 1980s had a lasting impact on the U.S. housing market. Homeownership rates declined during this period, and many Americans were unable to purchase a home until the late 1990s or early 2000s, when mortgage rates finally began to decline.
The impact of high mortgage rates was also felt in the broader economy. As Americans spent more money on housing, they had less money to spend on other goods and services. This contributed to a period of slow economic growth, which lasted throughout much of the 1970s and early 1980s.
The Federal Reserve eventually succeeded in bringing inflation under control by the mid-1980s, through a combination of tight monetary policy and other measures. This led to a decline in mortgage rates, which fell to an average of 10.32% in 1986, before continuing to decline throughout the 1990s and 2000s.
Ultimately, the high inflation and mortgage rates of the 1970s and 1980s had a significant impact on the United States economy and housing market. The cost of borrowing was prohibitively high, which made it difficult for many Americans to purchase a home. This contributed to slow economic growth and declining homeownership rates. However, the Federal Reserve eventually succeeded in bringing inflation under control, which led to a decline in mortgage rates and a more stable economic environment in the years that followed.