Housing News

18% Mortgage Rates?! Buying a Home Used to Be Even More Challenging

For the last few years, the housing market has been challenging for many would-be buyers.  

Many of today’s homebuyers wistfully think back to record-low mortgage rates during the pandemic, when rates fell into the 2% range. Those lower rates made monthly mortgage payments a lot less expensive and made it easier to buy a home.

However, even with mortgage rates now squarely above 6%, this is hardly the most difficult it’s ever been to afford a home. It was even more difficult to achieve homeownership several decades ago, when double-digit interest rates were the norm.

In early October of 1981, rates hit a high of 18.63% for a 30-year, fixed-rate loan, according to Freddie Mac data. No, that’s not a typo.

Meanwhile, the median sale price was $66,000 for existing homes, according to the National Association of Realtors. Sure, home prices were lower—but so were salaries.

The typical buyer would have spent nearly half—about 44%—of their $22,390 annual family income that year on their mortgage. (This assumes buyers put 20% down and doesn’t include taxes, insurance, or other costs. Income data is from the U.S. Census Bureau.)

Today, rates are averaging about 6.2% and home prices were a median $411,322 as of Sept. 30, according to Freddie Mac and Zillow data. That would cost the typical household, earning $83,730 in 2024, nearly 29% of their annual household income. (Income data is the most recent available from the Census Bureau.)

“Borrowers today might be feeling a bit of frustration around their prospects to achieving homeownership. However, historical context matters,” said Ryan Schoen, the principal market analyst at New American Funding. “Homeownership was even harder 40+ years ago. In fact, households spent a much bigger chunk of their income on their mortgage back then than they would today.”

The reason why many buyers bristle at the higher rates and home prices of today is because buying real estate is considerably more expensive than it was just a few years ago.

In the 2010s, mortgage rates in the 3% and 4% ranges were the norm. 

In early January 2021, rates bottomed out at 2.65% and home prices were $330,300, according to Freddie Mac and Zillow data. Those who purchased a typical home in that month spent about 18.1% of their income on their mortgage payments, not including taxes, insurance, or other fees.

The U.S. Federal Reserve lowered its benchmark interest rates during the pandemic to stimulate the economy, eventually dropping its rates down to near 0%. That put downward pressure on mortgage rates, which are separate from the Fed’s rates.

What most homebuyers don’t realize is those were historically low rates.

“Mortgage rates [today] are normal,” said Mosi Gatling, senior vice president of strategic growth and expansion at New American Funding. When she bought a home in 2000, she did so with an 8.25% mortgage rate.

“What’s abnormal is a global pandemic that requires the Federal Reserve to take action on interest rates,” said Gatling. She is also a Las Vegas-based loan officer.

In the second half of the 1980s into the early 1990s, rates hovered around 10%. They moved around 7% to 9% for much of the 1990s.

In the run-up to the Great Recession in the early 2000s, rates hovered around 6%. They didn’t drop below 4% until late 2011.

Eventually, rates bottomed out in 2021, before starting to rebound as the economy improved. Over the next couple of years, rates rose and peaked at nearly 8% in 2023.

That much of an increase impacted prospective homebuyers, who were forced to dedicate more of their income to their home loan.

Just two years ago, when rates were at 7.79%, just about a third of what homeowners earned went toward housing. (This used the Zillow median home price of $393,300 in October 2023.)

“Remind yourself, 3% rates were a once-in-a-lifetime anomaly, not the norm,” said Schoen. “Six percent is actually normal by historical standards.”

Those rates are also easier to stomach than an 18% mortgage interest rate.