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Average Housing Expenditures Doubled In the Early Eighties
Between 1980 and 1985, the average household spending on housing—mortgage or rent with utilities included—doubled based on Bureau of Labor Statistics (BLS) survey data.
Spending on housing generally increases each year with inflation, and over the last 40 years housing expenditures have tracked closely with the consumer price index.
Except for in the 1980-1985 era. Rather than increasing 2 to 3 percent a year, the average housing expenditure increased about 25 percent a year.
In comparison, between 2015 and 2020—a period when housing prices have increased substantially around the U.S.—expenditures increased approximately 4.4 percent a year.
The growth in housing expenditures may not be widely known but it appears in BLS economic reports. In a 1988 report on personal expenditures from 1972-1985, housing is listed as rising faster than the average, specifically for owners rather than renters.
A 2001 report on family budgets lists housing expenditures substantially increasing as a share of household costs in the late 70s to the early 80s, going from 29.3 percent to 33.7 percent of family consumption—the largest increase since the early part of the century. Since 1917, it had only been within 26-29 percent.
Inflation and Interest Rates
While the 1980-1985 period was known for high inflation—with 1980 being the historic high point at 13.5 percent—inflation doesn't completely explain it. At 13.5 percent in 1980, inflation was substantially below the 25 percent housing expenditure inflation. Inflation significantly dropped after that.
Besides inflation, the period is known for the sharp increase in the federal funds interest rate: part of a strategy led by Federal Reserve president Paul Volcker beginning in the late seventies to wring inflation out of the economy.
The funds rate—the interest rate at which banks borrow from the federal reserve—affects the interest rates of all U.S. loans, from mortgages to business loans.
The funds rate went from a tame 4.68 percent in 1977 to 19.10 in June of 1981. While 1981 was the high point, interest rates have steadily decreased since then. The current rate is .33 percent.
With both inflation and interest declining, home expenditures also dropped by 1990, and they have steadily tracked with the consumer price index since then.
While spending on housing increased, house prices weren’t increasing over the period. Home prices regularly increase with inflation—the only time they’ve really declined is in the aftermath of the 2007 housing crisis—but instead the U.S. Federal Housing Finance Agency home price index plateaued during the recessionary period.
Volcker’s Forced Recession
The decision to force a recession by increasing the rate was contentious at the time. It brought businesses that depended on affordable loans to a halt. Construction workers would send bricks to the White House to display their frustrations.
Based on data published in a paper from the FDIC on growing foreclosure rates, 1980 is when foreclosure rates, both conventional and FHA, would start a steady march upwards, going from 1 percent in 1980 to 2 percent in 1994, despite declining home appreciation rates.