In April of 1980 mortgage rates hit an unheard of 15%. Alongside this spike in rates, came an unemployment rate of around 7% which was high.
But nothing compared to what was to come.
That summer, a sharp 4% drop in mortgage rates made Americans feel slightly optimistic, but it was the calm before the storm.
Barely more than a year later, interest rates skyrocketed to nearly 19%, the highest people had ever seen them before.
By 1982, unemployment had exploded to 11%. Still not as high as the Great Depression era unemployment, which was near 25%. But aside from the Great Depression, 1982 was the highest unemployment of the century.
People must have been wondering if it would be another Great Depression.
The housing market ground to a halt, and it would be four more years before mortgage rates got out of the double digits.
From the 1980’s to 2023
What does this have to do with today’s housing market and mortgage rates?
Last week, Redfin released their commentary on the recent Federal Reserve meeting, saying that high interest rates are going to drag on into 2025.
But there’s a clue in their next statement.
The Fed had expected to cut rates 4 times next year, and now they are saying, only to expect 2 rate cuts because the economy just isn’t cooperating. The Fed has been continuously very surprised by how uncooperative the economy has been to their rate hikes. I think they are overlooking something big.
In the news this morning was this headline: “Oil Could hit $150 sending shock through the system, says top shale CEO.”
In 1980, skyrocketing oil prices WERE the inciting cause of that interest rate spike and the housing market freeze that resulted.
And the truth is, there are a ton of similarities between today’s housing market and the housing market of the early 1980s.
We are going to look at the 3 elements that caused the interest rate spike of 1980 and we’re going to look at the effects it had on the housing market. We’re also going to see which of those 3 elements are happening in today’s economy and the new elements that exist now (and have never existed before) that are at the root of inflation’s stubborn resistance to the Fed’s rate hikes.
And all that information will let us see how likely it is that interest rates will get as high as they did back in 1982.
3 Elements of 1980s Crash VS Pandemic Economy
1. Oil prices push everything up
The economic crisis of the 80s began when OPEC stopped selling oil to some western countries, the US included.
We weren’t producing enough of our own oil and were dependent upon the exports of those middle eastern countries.
The OPEC embargo of 73 and 74 caused fuel prices to spike.
Gas lines were hours long as people waited to fill up their gas tanks. How many of you remember this? Only being allowed to get gas on certain days of the week, only being allowed to get a certain amount of gas?
This sent shock waves through our economy.
This fuel shortage and price spike had a direct and immediate impact on the price of goods, because goods are all shipped on trucks and airplanes, which all use fuel. Fuel was more expensive, so was everything else.
So the government did something. Imagine that.
Government Reacts
In December of 1975, President Ford signed the Energy Policy Conservation Act, which created a crude oil reserve as a safeguard against spiking fuel prices. If there was ever again a shortage of oil or a disruption in oil production, prices would be stabilized during the disruption.
In every significant economic event, the country has put in safeguards like this to prevent a similar event from happening again.
After the Great Depression, we created stop gaps to prevent markets from spiraling too quickly out of control.
After the 2008 housing crash, regulations were formed to prevent fraudulent loans from being made to people who couldn’t afford them.
But something happened with the 1980s creation of the crude oil reserve and I don’t think people realize that this is one of the key issues having an impact on our current inflation situation.
It isn’t just the Pandemic. It’s Oil.
What most people believe is that the pandemic caused our current economic situation. And it did get things started. But the further we get away from 2020, the more weight these other issues carry in our economy.
By mid 1983 the US had about 350 million barrels of oil in reserve. That reserve grew to 695 million barrels by 2017, but it’s been on the decline ever since. We currently have about the same number of barrels in reserve as we had in 1983 – about 350 million.
This graph of gas prices from energy.gov is controlled for inflation. It ends in 2015, but you can see the spike in 1980 during the oil crisis and then another much higher spike in the mid-2000’s that remained high through the end of the graph. The reserves were there in the mid-2000’s but you’ll notice we didn’t tap into them to keep gas prices low for whatever reason.
And this is why food prices remain high even though shipping disruptions have stabilized. The simple fact is when oil and gas prices are high, so is almost everything else. So what happens when prices for goods go up? It leads us to the next piece of the puzzle that must be in place for interest rates to spike.
2. Wage Price Spiral
As prices inflated into the 1980s, there was pressure on wages.
Workers needed more money to afford to live in a time when everything was so much more expensive.
So to get the workers, companies had to increase wages, but that also meant increasing the prices of the goods those workers produced so the company could afford the increased wages.
So wages increased…and then prices increased more.
And wages increased, and prices increased.
This is called the Wage Price Spiral. You can see why it’s called that.
And you are correct that this is exactly what we have seen in the economy today.
If you compare the consumer price index to the Employment Cost Index, you’ll notice that they are increasing at about the same angle. And if you run the numbers (I did it for you) you’ll see that prices increased 16% over the same time that employment costs increased 13%. So it’s not exactly the same, but pretty close.
Which leads us to the third piece of the puzzle: Monetary policy
3. Monetary Policy – the Fed raised rates
In the 1980s The Fed raised interest rates to combat inflation, which caused people to stop spending money.
When people stop spending money, stop going out to dinner, stop shopping at the mall for new clothes, stop buying new cars, stop buying new furniture…. all this slowing of purchases has an impact on the jobs market.
Because the people making the food, clothes, cars and furniture and delivering the food, clothes, cars and furniture aren’t needed when nobody is buying.
We all know the Fed has once again embarked on an aggressive rate hike policy.
In his latest statement, Fed Chairman Jerome Powell said that GDP growth has been better than expected, but they expect it to cool even more going into next year, and that “Recent readings on consumer spending have been particularly robust.”
So, unlike in the 80s when people stopped spending money when rates went up, the economy is still growing, albeit slowly, and consumers are still spending.
This is why Redfin and the Fed have said that rates aren’t coming down anytime soon. But will they go up even more? Are we headed to those double digit mortgage rates?
And this brings me to the final piece of the puzzle and the one thing that is different in today’s market than in the 1980’s.
Differences Between 1980’s and Now
Automation, Internet, Tech based economy
In the 1980’s 680,000 manufacturing jobs were lost in the recession.
These were in machinery manufacturing, car manufacturing, electrical and electronics manufacturing.
In 1980, 22% of Americas workforce was employed in manufacturing. Today, it’s only 8%.
So while these same industries are currently experiencing slowdowns in demand, the direct impact on jobs in America is much less. While we are spending less, those job losses aren’t concentrated in the US. They are spread out among manufacturing jobs all over the world.
Because the job losses are spread outside of the US, we don’t experience the decreasing spending in the same way we have in the past when jobs were centralized here.
Also, since 1980, many of the job losses that were born by Americans back then, and would be more likely to be lost during a recession (lower-wage service based jobs) have already been lost to automation.
But the workers needed to create and manage that automation have increased.
Automation reduces the number of necessary low-skill workers, but increases the number of necessary high-skill workers and many of those high skill workers will not be laid off during a recession.
Service Jobs Down, Tech Jobs UP
Let me give you an example.
In 1980 on Friday afternoons, there would be a line wrapped all the way around the local bank.
The bank would be full of tellers waiting on each person to take their paper paycheck into the bank so the teller could give them cash in exchange for it.
Then, let’s call her Ashley, Ashley took that cash to the grocery store.
At the grocery store the checkout person took Ashley’s cash in exchange for groceries.
Then Ashley went to the gas station.
At this time, most service stations were still full service and somebody else pumped her gas for her.
Ashley then paid them cash for it.
We all know this is not how it works now, but have you really thought about what this means for the economy? We get our direct deposit into our online bank account. And those online bank accounts require many more varied and skilled employees than bank tellers. Tellers have been replaced by computer programmers, computer engineers, cyber security professionals, online banking service representatives, graphic designers, web developers, and many more jobs.
The Grocery store clerk has been replaced by scan it yourself cashiers, but the technology required to support those self scanners looks relatively similar to the jobs supporting the bank: all tech positions.
And because people don’t stop going to the grocery store or filling their car with gas or checking their bank balance online, even in an economic downturn, these jobs aren’t lost.
People might spend less at the grocery store, they might have less in their bank account and they might fill their tank half full instead of all the way. But the technology needed to run these systems remains the same. And requires the same amount of labor.
Tech creates more jobs than it kills
People have already been rerouted to jobs that are more resilient to economic downturns. According to management consulting firm, Mckinsey, 3.5 million jobs were lost since 1980 due to the rise of computing and the internet.
At the same time, millions of jobs were created in industries that are less susceptible to downturns such as semiconductor manufacturing, software development, app developers, computer scientists and then all the supporting roles like call center reps, you know when the technology isn’t working, you need someone to call.
And those reps all need hardware and software as well.
Mckinsey estimated 19 million jobs were created from the technology that caused the 3.5 million lost jobs.
I’m not saying there aren’t ever tech layoffs. We’ve all heard of the Google and Facebook layoffs. But grocery stores, farms, doctors and hospitals, schools, just about every industry in the US, depends on technology.
I am saying that there are so many fields that are interconnected that compared to 1980, many of the people who would have been laid off, have already been absorbed by other industries.
And generally speaking in the US, the new story is we simply don’t have enough workers.
Are interest rates going to spike?
What’s the same in today’s economy as 1980 is that gas prices are high and causing inflation.
The thing that is different is that technology has fundamentally changed our labor market, making it much more resilient than we have ever seen.
The Fed is having more trouble than expected getting people to stop spending money, because the layoffs they were expecting haven’t happened.
Because the job market is so resilient, the Fed is going to have to keep raising rates to get people to stop spending money.
It’s the only thing they have the power to do.
If the government bolsters our oil reserves, gas prices will stabilize and that will help get costs under control to a degree. If not, I think it’s impossible to know how high rates will go, because we have never been in this situation before, with this double whammy of a resilient economy and high gas prices.
But I do think they will go higher than anyone expects. So what does that mean for the housing market?
What About the Housing Market?
Local housing markets are always about supply and demand.
Home prices have remained stubbornly high.
In the 1980’s the response to high rates was very similar to what we are currently seeing in the housing market.
Everything came to a screeching halt and sales dropped by half. People stopped buying and selling, but prices didn’t decline.
This is why. Sellers are buyers, and without massive layoffs, sellers don’t sell and that means buyers don’t buy.
