Mortgage Rates Hit 18% in 1981 -- and It Was Still Easier to Buy a Home Than It Is Now

If you're having a hard time affording a home today, it may be because mortgage lenders are charging pretty high interest rates at a time when home prices are also up. But while today's rates might seem exorbitant, they're nowhere near as high as mortgage rates were back in the early 1980s.

In 1981, mortgage rates peaked at around 18%. By contrast, over the past several months, they've held steady in the 7% range. But even though mortgage rates were so much higher back in the early 1980s than they are at present, it was still easier to buy and own a home 40-ish years ago. 

Home prices have soared -- but wages haven't

During the third quarter of 2023, the median U.S. home sale price was $431,000. During the third quarter of 1981, it was $69,200.

So now, let's run some numbers. Let's assume that a buyer in 1981 was looking at a home worth $69,200 at an 18% mortgage rate for a 30-year loan. With a 20% down payment, that translates to a monthly mortgage payment of $834 for principal and interest. 

Now, let's look at a home worth $431,000. At 20% down and a 7%, 30-year mortgage, the monthly payment for principal and interest is $2,293. 

All told, it costs almost triple to own a median-priced home today than it did in the early 1980s. The problem, though, is that wages haven't tripled. Not even close.

During the third quarter of 1981, the median usual weekly real earnings were $309. During the third quarter of 2023, they were $365. Based on this, we can draw the conclusion that although the median U.S. home was probably not affordable for a median earner in 1981 just as it's not affordable for a median earner today, homes were still more affordable 42 years ago.

How to know if you can afford a home today

As a general rule, it's a good idea to keep your housing costs to 30% of your take-home pay or less. But that 30% shouldn't just include your mortgage payment. It should also account for additional recurring costs like property taxes and homeowners insurance. 

So, let's say you're looking at a monthly mortgage payment today of $2,293, but when you add in property taxes and insurance, you're up to $2,600. That means your monthly take-home pay would need to be $8,667 for a home costing that much to be affordable.

Of course, you may be able to find a home that's far less expensive than the median home today. And you might live in an area where property taxes and homeowners insurance are not very costly.

The point, however, is that it's hard to buy a home today on a typical wage -- even harder than it was 42 years ago. And it's important not to stretch your budget to buy a home because spending more than 30% of your take-home pay on housing could put you at risk of losing your home and/or falling behind on other bills. 

Hopefully, in time, home prices and mortgage rates will come down. But even so, unless wages manage to pick up, a lot of people are, unfortunately, likely to find themselves continuously priced out of homeownership.