Expectations.

The Kansas City Chiefs were the odds-on favorite to make history Sunday night against the Philadelphia Eagles by becoming the first team ever to win three consecutive Super Bowls. And then they didn’t.

Whether rooting for the Chiefs or for the Eagles, almost everyone I talked with leading up to the Super Bowl had expectations that the Chiefs would win. The Chiefs, after all, have dominated the NFL and have been to the Super Bowl five out of the last six years, so why would this year be different?

Expectations are a funny thing. We tend to become used to something and then start to think it’s always going to continue. And when that “something” that we’ve become used to changes, it can be frustrating until we eventually adjust our expectations.

We’ve experienced something similar with mortgage interest rates over the past three years. 2020 and 2021 brought us historically low interest rates in the 2’s and 3’s, which started to become expected and accepted as the new normal. So when rates eventually rose back into the 6.0%-7.0% range in 2022 and have continued to stay there, there’s been frustration that mortgage rates have become painfully expensive and have caused many potential homebuyers and sellers to sit on the sidelines and wait for rates to come back to “normal”.

Perspective.

Let’s look back at history. Mortgage rates hit a historic record high of 18.53% in 1981. In comparison, the median 30-year mortgage rate since 1971 is 7.37%, which is pretty on par with our current rates.

Of course, you can’t talk about the history of mortgage rates without also comparing other things like the price of homes and incomes. The median price for a new single-family home in the U.S. in 1981 when mortgage rates reached that record high was $68,900 according to Census Bureau data. The monthly principal & interest (P&I) payment on that home in 1981 with an 18% mortgage rate would have been about $830 assuming a 20% down payment. The median household income in 1981 was $22,390 per the Census Bureau, or $1866 per month. So P&I on that home would have made up about 45% of an average borrower’s gross monthly pay.

Now let’s compare that to today’s world. The P&I payment on a $427,000 home (the median new home sales price as of August 2024 per the Census Bureau) with a 6.75% rate and a 20% down payment would be roughly $2200. The average household income in the U.S. in 2023 was $80,610 per the most recent census, or $6,718 per month, so P&I for that home makes up about 33% of an average borrower’s gross monthly pay. Taxes and insurance are undoubtedly higher now than in 1981, but to circle back to perspective, housing affordability right now is actually fairly similar to what it was back in the 80’s. In other words, the same challenges that homebuyers are currently facing are just as challenging as what homebuyers faced in the 80’s. We just have much lower rates now.

So the takeaway is that, yes, homes are expensive and rates are higher than one would like, but if we adjust our expectations and apply some perspective, it’s still just as great a time to buy now as it was in 1981.