It was a time of creative financing—particularly a type of loan that helped keep home sales stumbling along even when mortgage rates were extraordinarily high
The housing market is in grim shape. People yearn to buy but are thwarted by rising mortgage rates, unaffordable homes and an inadequate supply of properties for sale.
The hopeful news is that America has been through this before — in 1981 — and things eventually got better. The sobering news is that the early-’80s housing market stayed alive courtesy of some factors that barely exist this time around. We will have to construct a new path out of this mess. The rapid climbs in mortgage rates forced would-be home buyers to skedaddle out of the market. Year-over-year existing home sales plunged 22.3% in 1980 and then another 18.6% in 1981, according to historical data from the National Association of Realtors. This year, the pace of existing home sales dropped 28.4% in the 12 months ending in October, according to the NAR.
A big difference: The role of assumable loans For all the similarities between the 1980s and today, there are key differences. One of them involves “assumable mortgages,” which were plentiful then and are in short supply now. But Congress slammed the door on assumable loans in 1982. Now only a subset of mortgages are readily assumable: those insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service. Together, FHA, VA and USDA loans accounted for around 18% of mortgage origination volume in the second quarter of 2022, according to data gathered by the Urban Institute.
In most cases, creative financing took the form of loans to buyers from the sellers; for instance, in the form of a promissory note for a certain amount the buyer would pay the seller every month, with the buyer possibly taking out a second mortgage for the remainder of the purchase price. The arrangements had names such as “contract for deed,” “wraparound mortgage” and “lease with an option to buy.
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