Skip to main content

1981: The Past Gives Us a Good Present

For those of us who are complete nerds and sat on the edge of our seats to see if The Fed would decide to raise the overnight lending rate again in their most recent meeting, we were both let down and excited –no change, of course.  For those of us who aren’t quite so nerdy but do, in fact, care about what interest rates are doing and will be doing, I wanted to take this moment and interject a little . . . calm.  Let’s take a look at a handful of things, okay?

While interest rates today are creeping in the upper 4s to lower 5s, please remember that back in 1981 (yes, I realize many of you were not even born, but I’m not asking for a show of hands) interest rates peaked just over 18.5%.  Yes, you read that correctly –about FOUR TIMES the rate we’re dancing with at the mortgage disco today.  

The average price of a new home back in 1981 was $83,000.  On a fixed-rate, 30-year mortgage for such a house, the principal and interest payment at 18.5% would be approximately $1,285/month.  (I went straight off $83K as my loan amount –I didn’t account for a down payment.) Using a handy-dandy app on my phone, I see that $1,285 in 1981 would be equal to approximately $3,485 today. Using a 30-year fixed mortgage at an interest rate of 5%, anyone want to take a guess at the loan amount that $3,485 (principal and interest) in today’s dollars would get you?  Anyone?  Bueller?  The correct answer is approximately $650,000.  Yes, you read that correctly, too.  Let’s look at all this from another direction.  

Using that same nifty app on my phone, I see that $83,000 in 1981 is equal to approximately $225,000 in today’s money. That amount –$225,000 –isn’t going to buy you a mansion (or a moderately sized cardboard box on the beach), but it will certainly start you off in the right direction in building equity, not paying rent to pay someone else’s mortgage, and give you a nice tax deduction.  On a 30-year fixed mortgage at 5%, anyone want to guess what the principal and interest would be on a $225,000 loan?  For anyone who said $1,208, you’re correct –big gold star on your forehead!  

There are two takeaways from this little exercise:
  1.        Rates ARE going to go up.  How high?  No one knows, but there’s A LOT of room between 5% and the 18.5% seen back in 1981. You can afford a lot more house these days –revel in that and relax!
  2.        Because rates are primed to rise rather than fall, when you get the chance to lock the rate on a current mortgage, you’re usually better off to do it at that time than to “wait and see if it’ll come back down.” Like body weight, it goes up much easier than it comes down.

And remember, 1981 wasn’t ALL bad –it was the year that first gave us MTV, a cable channel that played actual music videos –we needed something to distract us from rising interest rates!

Comments

Post a Comment

Popular posts from this blog

The Definition of Insanity (in Real Estate)

More than a couple of years ago, I witnessed something that makes me laugh and cringe at the same time.  Having lunch at a local restaurant, I spied a real estate agent and a loan originator having what I would characterize as a “first date”. I couldn’t help but overhear little snippets of their conversation, and as far as I could tell, things were going relatively well . . . at least until the agent asked the LO this question: “So, do you like to sit at open houses with agents?”  I immediately looked to the LO’s face awaiting the response.  I didn’t need to hear another single word coming out of the LO’s mouth because his face said everything:  you would have thought the agent had asked him if he enjoyed bobbing for apples in a pool of acid judging by the look on his face.  While his face was communicating complete revulsion, his lips said, “Yes, of course.”  And that’s when I looked over at the agent’s face to see, ...
Post a Comment
Read more

Time for a New York-Style Housing Fix

Previously, I’ve written about a man who works in our office who lived in New York City back in the late ‘80s and early ‘90s – let me assure you that while that does seem like a very long time ago, it’s not nearly as far bac k as when the wheel was invented and humankind learned to harness the power of fire. If you’ve been to New York City recently and blissfully walked around Harlem to get chicken and waffles at Sylvia’s on Malcolm X Boulevard between 126 th and 127 th Streets or stopped in at Keybar on 13 th Street between First Avenue and Avenue A to wedge yourself into a cozy corner next to their notable fireplace, you wouldn’t get a sense that these areas were once . . . not as welcoming and glitzy as you now see them. Our office mate has told some fairly interesting stories of living in those and other areas of New York City that give a much different sense.   In the late ‘80s/early ‘90s, no matter how many great things you heard about Sylvia’s food, 127 th Str...
Post a Comment
Read more

Change: the Only Sure Thing

Which headline is better for grabbing your attention and prompting you to read the article to which it’s attached: “Credit Reports to Exclude Certain Negative Information, But Read on to See if This Even Applies to You” or “ Credit Reports to Exclude Certain Negative Information, Boosting FICO Scores”?   Obviously, the former is less than tantalizing while the latter makes you say, “Tell me more!”   I was in the “tell me more” camp, and the folks at The Wall Street Journal sucked me into their vortex. The development, set to go into practice on July 1 st , is certainly a departure from how the Big Three (Experian, TransUnion , and Equifax) have done things in the past, but it’s not going to wave a magic wand and make bankruptcies, foreclosures, short sales, etc., go away.   It’s sort of a bittersweet development.   Let me explain: Many tax liens and civil judgments will be removed from people’s credit reports if they don’t include a complete list of a...
Post a Comment
Read more