What do the 1980s have to do with Austin’s real estate in 2024?

What do the 80s have to do with Austin/Georgetown real estate in 2024?

Last September, I wrote a blog entitled, “Is Real Estate Stuck in the 80’s?” Little did I know then how eerily close the parallels would continue to unfold from then until now.

When I suggest that 2024 looks strangely similar to the 1980’s, what do I mean? It has nothing to do with neon leggings, big hair, and MTV but everything to do with Paul Volcker and Jerome Powell. What? In the 1980s, then Chairman of the Federal Reserve, Paul Volcker, was tasked with taming runaway inflation. Current, Federal Reserve Chairman, Jerome Powell, shoulders the same mandate.

I pose this question today: How did their policies affect the real estate market?

Volcker viciously assaulted out-of-control inflation by vaulting the Fed Funds Rate to a staggering 17% in 1980 only to up it again to 19% the following year. Mortgage rates soared to a nose-bleeding altitude of 18.6% in October 1981 (details can be found here).

While not as meteoric as Volcker’s stratospheric inflation, nonetheless mortgage rates have doubled under Powell’s leadership. During the pandemic, rates dropped to 2.65% in January of 2021. This last week, the 30-year mortgage rate touched 7.17%.

Back then…

Under Volcker’s watch, did the U.S. housing market collapse? John Cunniff reporter for the Associated Press in the 1980s penned the following. “When mortgage money dried up and interest rates soared, housing prices generally refused to fall, and that has a lot of people disappointed and confused.” Why? “The basic factor is that the underlying need for housing hasn’t lessened at all. It has increased. What has changed is the supply and cost of credit. They have thwarted demand – but temporarily. Real estate people say, ‘Sellers have held their ground when they could. Rather than lower prices for quick sales they have chosen to delay selling until buyers are able to obtain financing.’” He added later in his piece, “For various reasons, the supply of housing hasn’t kept pace with the need.”

Amy Nixon, current housing economist and contributor at MacroEdge Research wrote the following, “A lot of people think what’s happening in the economy with inflation and the housing market is unprecedented – and it is, in terms of price to median income. But we went through something similar in the early 1980s, and back then, the price-to-median income ratios were also unprecedented.”

And the 2000’s?

In response to those who might add, “What about the mid-2000s? Isn’t today’s housing market similar to it?” In response to this analogy, Mark Fleming, chief economist at First American wrote the following. “Today’s housing market isn’t anything like the housing market of the mid-2000s – the housing market today is not overbuilt (though recent statistics point out that Florida and Texas are currently oversupplied) nor is it driven by loose lending standards, sub-prime mortgages, or homeowners who are highly leveraged. However, the current housing market is similar to the market of the 1980s. History doesn’t repeat itself, but it often rhymes.”

How so? “First, existing home sales fell nearly 50% from the peak of 1978 (when home prices surged by over 14%) to the trough in 1982 when sales growth slowed to 1%. Today’s market is similar. Home prices climbed nearly 17% in 2022 before slowing to 5% this year.” Second, Baby boomers (those born between 1946 and 1964) “were aging into their prime first-time buyer years.” As interest rates softened, their engagement fueled home-buying demand. “Since millennials are ‘an echo’ of the baby boomers and are currently aging into their prime home-buying years, the demographic picture of the early ’80s mirrors today’s housing market (more of Fleming’s blog can be found here).”

Past Performance…

Almost all investment literature must include the SEC-mandated disclaimer, “Past performance is no guarantee of future results.” The same applies to real estate. History does not repeat itself. But if Mr. Flemings's quip, “but it often rhymes” proves true, then a year from now we might jest (with apologies to Walt Whitman),

“O Captain! My Captain!

Our fearful trip is done.

Austin has weathered every hike,

Prevailed, and finally won…

Buyers and sellers both alike.

Then again, forget the rhyme. We’ll simply be happy with Austin’s past performance.

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