Why Were Mortgage Rates So High in the 80s: A Look Back at the Volcker Era and Beyond

The 1980s was a wild time for mortgage rates. The prime rate, which is the rate at which banks lend money to each other, was a whopping 20.5% in 1981.

This high prime rate had a ripple effect on mortgage rates, making it difficult for people to get a mortgage. The average 30-year fixed mortgage rate in 1981 was around 18.9%.

As a result, many people were priced out of the housing market.

The 1980s were a tough time for home buyers, with mortgage rates reaching a sky-high 18.45% in October 1981.

In that era, the Federal Reserve was waging a war with inflation, driving interest rates higher to tame double-digit inflation. This had a negative effect on the housing market, pricing most Americans out of the market.

The average cost of a home in 1981 was $82,500, and with an interest rate of 18.45%, buying a home was expensive, with a monthly payment of $1,019 after putting 20% down.

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A 20% down payment wouldn't have made a big difference, as 82% of your payments over 30 years would still go towards interest alone. That's a lot of money going towards interest, rather than actually owning a home.

The total payments after 30 years would have been about $1.43 million, with roughly $1.18 million of that going towards interest alone.

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Runaway inflation was the primary cause of high interest rates in the 80s. The Fed funds rate, which is the rate banks charge each other for overnight loans, hit 20 percent in 1980, and 21 percent in June 1981.

Rising oil prices were a significant contributor to this inflationary spiral. The general price of goods and services increased, which is the definition of inflation.

Government overspending and rising wages also played a role in pushing prices higher.

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In the 1980s, the Federal Reserve, led by Paul A. Volcker, raised interest rates to combat high inflation, which had a devastating impact on the economy.

The average interest rate on a 30-year mortgage in 1981 was a staggering 18.45%, making it nearly impossible for many Americans to afford a home.

The average cost of a home in 1981 was $82,500, and with an interest rate of 18.45%, a monthly payment would have been $1,019 after putting 20% down.

This is equivalent to $2,500 today, adjusting for inflation, and doesn't even include property taxes, home insurance, and other expenses.

The total payments after 30 years would have been about $1.43 million, with a whopping $1.18 million going towards interest alone.

Today, home buyers can lock in much better interest rates, between four and five percent, making homeownership much more affordable.

The average cost of a home today is $322,700, and with a 4.35% interest rate, the monthly payment would be $1,247, with total payments over the life of the loan equaling $449,075.

Only about 43% of your total payments would now go to interest, a significant decrease from the 82% during the Volcker era.

The total interest payment on a $322,700 home at 18.45% would be over $900,000 more than a loan at today's rate, enough cash to buy an additional house.

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This highlights the importance of low interest rates in making homeownership more affordable and the significant consequences of high interest rates on the economy.

In the 1980s, Volcker's aggressive interest rate hikes led to two recessions, soaring unemployment, and a volatile stock market.

However, for those with the patience and resources to ride out the storm, the Volcker era ushered in awesome bull markets in both stocks and bonds.

This serves as a reminder that short-term trading can be hazardous, especially when market conditions are opaque and treacherous.

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Events like the Arab oil embargo in 1973 can cause crude-oil prices to quadruple, leading to higher inflation and interest rates. This has a ripple effect on the economy, making it harder for people to afford homes and other big-ticket items.

In 1975, the Canadian government introduced wage and price controls under the Anti-Inflation Act, a desperate attempt to curb inflation and stabilize the economy. This move had a mixed impact, but it's clear that drastic measures are sometimes needed to address economic crises.

The Shah of Iran's overthrow in 1979 led to a significant drop in oil production, causing oil prices to soar. This event had a major impact on global markets and led to a period of high inflation.

In the early 1980s, the U.S. Fed chair Paul Volcker pushed up interest rates to fight inflation, which had a devastating effect on the Canadian economy. The Canadian five-year mortgage rate peaked at over 21 per cent in 1981, making it nearly impossible for people to afford homes.

The North American economy began to improve in 1982, and inflation started to slip. This marked a turning point in the economy, and interest rates began to fall.

The Asian financial crisis in 1998 led to a global economic downturn, but the U.S. Fed chair Alan Greenspan intervened by cutting interest rates to keep the U.S. economy stable. This move helped to prevent a worse economic outcome.

The Y2K bug in 1999 caused uncertainty in global markets, but it didn't have a lasting impact on interest rates. However, it's a reminder that even minor events can cause economic fluctuations.

The global financial crisis in 2008 had a significant impact on interest rates, leading to a period of low rates. The Bank of Canada was the first G7 central bank to raise rates in 2010, but only slightly.

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Remember When? Mortgage rates were a whopping 18.5% in 1981, making it nearly impossible for people to afford homes.

The Federal Reserve raised interest rates to combat inflation, which had reached 14.8% that same year.

High inflation and interest rates made the 80s a challenging time for homebuyers.

The average price of a new home was around $79,000, but with mortgage rates that high, the monthly payment would have been a staggering $1,400.

Many people had to wait until their incomes increased or until mortgage rates dropped to afford a home.