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Forget 8%. Mortgages with 18% interest rates? Here’s when and why these aren’t the “worst of times.”

HARRISBURG, Pa. (WHTM) – The headlines read, “These are the worst of times.”

That could be true today. But Styx sang that line in a song in 1980. And he borrowed the line from Charles Dickens a century earlier. It turns out that people often thought they were living in the worst of times.

They couldn’t all be right. But it could this – right now – really be the worst of times?

After all, interest rates for 30-year mortgages are 8%. Food is significantly more expensive than it was a few years ago. Health care costs have driven some families into bankruptcy.

The answer? In some areas of life, probably less. In other areas, no.

The areas where pessimists are right, according to Jay Shabat, author of “American places“: A Profile of the Local Economy in the U.S.” – Shabat calls “the three Hs” of health care, higher education and housing. This is particularly the case with healthcare costs Driving millions of families into bankruptcy.

The reason? Because these are parts of the economy, he says, that have not benefited from forces that have, for example, reduced the cost of consumer goods like electronics that can be made in countries like China, where wages are far lower than in America.

That “simply doesn’t apply to housing, health care and higher education,” Shabat said. “You can’t get anyone to do your surgery or build your house in Shanghai. It’s just something that has to be local.”

This is especially true for goods such as televisions, which previously required months of family savings to purchase, but which can now be purchased with the money that many people earn in just one day.

“These types of products are areas where there has been deflation rather than inflation,” Shabat said.

This popular representation by Visual Capitalist shows which types of goods and services cost significantly more than before and which ones cost less. This calculator shows how much something that cost a certain amount of money in the past should cost today relative to average inflation. A $1,000 large-screen TV in 2000 would have cost more than $1,800 today; Instead, far better TVs — now thin, smart, and with 4K images — can cost less than $300. But health care and higher education costs have risen far faster than overall inflation.

Also high: interest rates. The average 30-year mortgage rate was 7.76% last week, up from just 2.65% in 2021. Interest rates haven’t been this high since some of today’s first-time homebuyers were born.

But in 1981, 30-year mortgages averaged 18.63%.

Bill Rothman, one of the founders of RSR Realtors based in Lemoyne, Pennsylvania, was already selling houses at the time and still remembers that time well.

“It was a time to be creative — very creative — if you wanted to sell real estate,” Rothman said. “We had things like: The owner would finance the sale.”

Sure enough, in this report In 1981, the reporter speaks of a home builder so desperate to offload new homes that he “offers all sorts of discounts. He will reduce the interest rate to a comfortable 12%.”

Hard to understand – sure – but 12% Was comfortable when prevailing interest rates were 18%.

Shabat pointed out that even high interest rates hold a glimmer of hope for some people, such as those seeking risk-free returns from their savings. Two years ago, FDIC-insured savings accounts paid less than 1%; Today some pay almost 5%.

In one respect, however, he said that today’s 8% mortgage rates (and the corresponding, much higher credit card rates) are even more painful than the 18% rate in 1981. Back then, the increase had been gradual over the last decade. This time, he noted, “the pace of change was unprecedentedly rapid… That in itself caused some unease.” [and] some strains on people’s budgets.

But Rothman said high interest rates present an opportunity here, too: They have put downward pressure on home prices, meaning fewer people buying are likely to pay slightly lower purchase prices than they would have paid two years ago. The cheaper purchase price is currently being offset by higher interest rates.

That was also true in the early 1980s, he said. But people who bought homes refinanced their mortgages as interest rates fell, meaning they got the best of both worlds: a cheaper home and — ultimately — a lower mortgage rate.

No one can say with certainty if and when current mortgage rates will fall.

But if and when they do, what people did in the 1980s “will be what everyone will do,” Rothman said. “People aren’t going to hold on to these higher-interest mortgages.”

James Brien

James Brien is a WSTNewsPost U.S. News Reporter based in London. His focus is on U.S. politics and the environment. He has covered climate change extensively, as well as healthcare and crime. James Brien joined WSTNewsPost in 2023 from the Daily Express and previously worked for Chemist and Druggist and the Jewish Chronicle. He is a graduate of Cambridge University. Languages: English. You can get in touch with me by emailing: charlesjones@wstnewspost.com.

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