The average interest rate on a new 30-year mortgage in the United States this week is 7.4 percent, a number so high it makes many would-be buyers wince.
But for decades, that number would have seemed perfectly normal, even low. Before Americans got used to mortgage rates below 5 percent, sometimes even below 3 percent, rates were consistently well above 7 percent for decades, from the 1970s through the 1990s.
How did the parents and grandparents of today’s home buyers manage to buy houses in that high-rate environment, when today’s young adults are struggling? In some ways, they struggled too. But that long-ago era of 7 percent mortgages was meaningfully different from today’s new 7-percent mortgage era.
For a 30-year period from mid-1971 through 2001, rates dipped below the 7-percent mark in only 5 percent of all weeks, and never went lower than 6.45 percent.
Then the U.S. housing market entered a very different chapter. Starting in 2003, rates never once hit 7 percent for 20 years. The average across those two decades was 4.68 percent. At the all-time low, the national average rate for a 30-year mortgage was in the 2-percent range for much of 2020 and 2021.
Those days are gone. And for would-be buyers, today’s old-is-new-again rates are painful, sometimes even prohibitive.
Although interest rates look similar to the late 20th century, the home prices don’t.
Alexander Hermann, a researcher at Harvard’s Joint Center for Housing Studies, said median homes used to cost three times median income or less in 75 of the nation’s largest 100 housing markets in 1990.
Today, that’s true in only 3 out of 100 markets.
According to data provided to The Washington Post by the Harvard center, the average price-to-income ratio of homes shot up in the 2000s when interest rates were low. Amid today’s high rates, it hasn’t come down. It’s much harder to afford a house with a high interest rate when the house itself is far pricier.
“By price-to-income and other metrics, homebuying was a lot more affordable, even if interest rates were high,” Hermann said, noting that even a low rate that makes the monthly payment manageable wouldn’t help prospective buyers who can’t afford the down payment on a house five times their income.
“The difference between now and the ‘70s and ‘80s … is that prices were definitely lower then, and the supply challenges were not the same,” Hermann said.
That era had 30 straight years of high rates, meaning people’s reluctance to give up their low-rate mortgages and sell their homes wasn’t constraining inventory the way it does today.
Lawrence Yun, chief economist of the National Association of Realtors, said some people looking at the housing market miss the substantial differences between the past and the present.
“Realtors always tell me — people a long time ago purchased homes back then. Why are people complaining today? People should consider this a normal time to get into the market.” Yun responds: “Home prices were still manageable 30 years ago for people to be able to get in.”
He points to the number of home sales per year as evidence of the difference. Today’s rate of 4 million homes sold per year is similar to rates in the late ’80s and early ’90s, when there were far fewer households.
“Four million home sales back then is a lot different from four million home sales now. There was a larger percentage of people that could get into the market then,” Yun said.
All of that is to say: The high-rate environment of the late 20th century was less painful in some ways.
On the other hand, interest rates do matter. A lot. And other data shows the similarities between the past and present, not just the differences.
The National Association of Realtors calculated what the monthly payment would have been for a median-priced home purchased every month since 1980, assuming a 10 percent down payment and the average interest rate that month. Then they divided that estimated monthly payment by the median American wage at the time.
In the early ‘80s, a median-income family would have had to spend more than 30 percent of its income each month, sometimes even more than 40 percent, to make that monthly payment. When interest rates fell, those percentages got far better, falling into the teens in the 2000s.
The moment rates climbed, those numbers climbed too. In 2023, with interest rates above 6 percent, that median-income family would again have to spend more than 30 percent of its income on a mortgage payment for the first time since 1985.
The organization did a similar calculation to assess whether a median-income family at any given time could expect to qualify for a mortgage on a median-priced house. For much of the 1980s, the answer was no.
At the worst points, a median-income household had less than 65 percent of the income needed to qualify, putting homeownership far out of reach. But by the late ‘80s, with rates coming down, average families could qualify for average house payments.
The balance eventually improved so much that in 2009 and 2010, shortly after the housing crash, a median-income family had about 175 percent as much income as it needed to qualify for that house; by 2012, that family was earning more twice as much as needed.
The return of high mortgage rates once again scuttled that progress for families. In June 2022, with the average rate at 5.6 percent and climbing, an average family earned too little to qualify for an average house for the first time since 1989.
Some real estate agents have been recalling the history of mortgage rates to reassure their clients: Today’s 7 percent rate shouldn’t stop them from buying, they say, because it’s just a return to historic norms, the same rates that would have seemed unremarkable to their parents if they were buying 40 or 50 years ago.
But three straight decades of high rates is quite different from the drastic swing between ultralow rates just five years ago followed by quarter-century highs now — both psychologically and economically. In terms of buyers’ mindsets, it just feels worse to take on a 7 percent mortgage when your neighbors have a 3 percent rate, a feeling that nobody buying in 1990 had to contend with.
And that feeling shapes the whole housing market. Owners don’t want to sell if it would mean moving to a new home with a much higher rate. Builders are hesitant to build, knowing that purchasers might balk if rates keep rising. It all leads to fewer houses on the market, and frustrated people who wish they could buy them.
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