# Housing Math (6th grade stuff) . . . It's bad, & this truly has never happened before

In Jan 1980, the 30-year mortgage rate was a whopping 12.85%,
but the median home price was \$63.7k, so
first-year interest payments = \$6,548

By October 1981, the rate was 18.53%
And home prices had risen to \$69.2k , so
first-year interest payments =\$10,258 Wow! A whopping 56% increase in one year. That’s big!

Over the years, prices rose, interest rates rose-and-fell, but the annual interest payment always always always stayed between \$6,548 and \$13,000. (Even at the top of the circa 2008 housing bubble.)

Well, always always always . . . . until now.
Post pandemic, that number rose very quickly and currently sits at ~\$24,409 a 4-year 208% increase. As you can see on the chart below, this time really is different. This has never happened before, nothing like this has ever happened before.

So of course, we have to ask the obvious question.
How much did incomes rise during that time?

Well you old folks will be happy to know, incomes have risen faster,
just in a much different pattern.

Using 1972 as out base year (that’s as far as the charts go back)
some of our “Yeah well, I had it hard too, maybe worse” is correct.

Homes now actually cost less compared to income than they did in the late 70’s and all the 1980s. What’s different now, is the suddeness of change and the fact that in those days, we were in a recession. (Does anyone wish recession conditions on their kids?)
.
.
.
.
All of this raises two distinct possibilities
Either
a.) We had been doing it wrong (Fed kept rates too low etc.) for 30 years (1990-2020) and we are suddenly doing it right, now,
-or-
b.) We were doing it right all that time, we are now suddenly doing things wrong.

So basically… before 1978, a boy could drop out of high school, pick up a job in labor, and be a home owner by the age of 18 years old, driving himself around in a red Trans Am.

You know how I’m always saying I was born in the wrong timeline?

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It’s ironic I am considered old money at 38 years old from some at work because I bought a home in 2010. What’s not funny is they are making six figures and say they will never be able to buy a home, times changed ■■■■■■■ fast.

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LOL
yeah something like that.

Although in year 5 of working the mill closed down,
hopefully you had become a very handy person and could easily switch into another skilled job.

The period circled in red below really was rougher than things are now.
(the old foagies are right about that.)

But those were considered bad times, (no one wishes bad times on their kids.)

Plus given the suddenness of change, well, it’s kinda like falling.
It’s not the fall that hurts, it’s that sudden stop at the end that hurts!

Well I don’t know what home ya bought,
but if you did the typical thing, you bought during an extended sweet spot.

My parents were both in the Air Force at that time.

I joined the Army right as the housing market collapsed.

Straight from the tree I guess. lol

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The other important chart to consider is this one.
It does not include interest rates.

For a very long time home purchase prices, and home rental prices moved in tandem.
If you think buying is better than renting, well okay.
If you think buying an investment property is a good idea. Sure. I am not arguing

But “mean reversion” implies these two lines will meet again. Does anyone really think rents will rise that quickly?
Right now, the cost of buying is much higher than its long-term relationship with rent prices. (And if we added-in today’s interest rates, it would be much much higher than even this chart represents.)

In fact, if a person can sell a property without upending his lifestyle,
he should seriously consider doing it.

It sure looks like the FED tried to restrain market forces and only ended up dialing in a future rapid adjustment.

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That appears to be the case, especially post GFC.

If we look at the same chart from 1972 until the top of the housing bubble (circa 2006),
It looks like a relatively stabile picture. Mortgage payments were high vs incomes in the 80s, low vs incomes in the 90s, but the big gap between the lines did not become huge until the Fed responded to the circa 2006 crisis by (temporarily) making homes more affordable.

And then they floodgates opened,

The FED, like all organizations, started with neutral intellectuals in charge, but once established, eventually ended up populated with partisans in charge, with their partisan political objectives driving decisions and policy.

That certainly appears to be the case, although I don’t know if partisan is the right word.
We typically associate that with Dem vs GOP, or Lib vs Con etc…

In the Fed’s case it appears that the Fed was relatively restrained 1959-2010
and then became completely unhinged money-printers circa 2011.

I do believe they went from intentionally trying to be non-partisan (non-political) to populated with those who let their personal political values drive their decisions.

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That has clearly become the case at some of the lower echelons.

I am not 100% conversant with the Fed structure but when I see (on Twitter or on tv) that someone is a 'former Fed insider" eg Claudia Sahm, as often as not they are walking-talking political activists who either

• once served with the Fed hoping to reshape it to their interests, or
• once served with the Fed t pad their resume ultimately returning to their politically-oriented goals, career and lifestyle.

I attended a continuing training for Series 7 and Series 66 licensing that was provided by a very senior financial officer. As part of the training he gave an overview of the FED and how they used to work to avoid the appearance of timing decisions to influence elections. I haven’t seen the FED’s activities resembling the historic pattern he described in several election cycles now.

Perhaps,
but the bigger “partisanship” at the Fed (aside from the apparent rise of Claudia Sahm types) seems to be that it is thoroughly in the Keynesian/Neo-Keynesian school. No ideological diversity Uni-think.

Circular firing squad logic, government efforts to stimulate an economy can’t be allowed to become the long term driver of said economy.

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What was an average salary around then, and what is the median home price today?

Scroll back to post #2

It’s kinda like building a brick wall to hold back a river.

It works for awhile. Then ya run outta bricks and ya say something like
“Shucks! I shouldn’t a done that in the first place.”