Back in the early 1980s, Fed Chair Paul Volcker made the gutsy decision to do whatever it took to tame the inflationary run that had started in the ’70s—even if it came at a great economic cost.
Volcker ultimately achieved his goal but only after spiking mortgage rates—which climbed to 18% in 1981—created a housing market downturn so sharp that it drove the economy into a recession. However, while home sales and building levels both cratered in 1981, national home prices actually remained fairly stable throughout the downturn.
Fast-forward to 2023, and the U.S. housing market is once again amid a housing downturn as the Fed works to tame another inflationary run.
Across the country, home sales have tanked as buyers and sellers alike are turned off by a big rise in mortgage rates. As of last week, mortgage purchase applications are down a staggering 41% on a year-over-year basis.
While housing transactions in 2022 crashed in 1981-like fashion, the story on the home price side isn't the same. Through November, U.S. home prices as measured by the seasonally adjusted Case-Shiller National Home Price Index have fallen around 3% since peaking in June 2022.
That said, some regional housing markets are seeing something very similar to the 1981 housing downturn.
Among the nation's 400 largest housing markets tracked by Zillow, 276 markets have seen local home prices fall from their respective 2022 peak. That includes 32 markets, like Boise and Reno, where home prices are down over 5% from their 2022 peak.
Meanwhile, 124 major housing markets still remain at their peak. While the spike in mortgage rates did see housing transaction volumes crash in those 124 markets, home prices in those places have remained stable. Simply put: Those 124 housing markets are weathering the home downturn (so far) similar to how markets weathered the 1981 housing slump.
To better understand why the housing market downturn remains bifurcated, let's take a closer look at the data.
View this interactive chart on Fortune.com
Through January, the vast majority of sharp home price corrections have occurred in markets located either in the Pacific West or the Southwest. One reason is affordability: Many West Coast housing markets were already strained affordability-wise, and spiking mortgage rates simply pushed those markets over the edge. There's another reason: A higher share of homes in overheated Western housing markets are owned by iBuyers and homebuilders. Unlike primary homeowners, investors and builders are more likely to slash prices if sales stop.
Among the 124 major housing markets weathering the home price correction in 1981 fashion (i.e. a transaction crash but no home price decline), they're primarily concentrated in the Northeast, Midwest, and Southeast. That includes major markets like Des Moines, Little Rock, Miami, Philadelphia, and Hilton Head Island, S.C.
Why haven't these 124 major markets (see the places shaded blue in the map above) slipped into correction mode? Well, many of these places, including markets like Des Moines and Philadelphia, didn't see local home prices soar as much during the Pandemic Housing Boom. Being closer aligned to local fundamentals meant that markets like Des Moines and Philadelphia were better positioned to absorb last year's mortgage rate shock.
View this interactive chart on Fortune.com
While the ongoing housing downturn isn't an exact replica of the 1981 housing downturn, it also pales in comparison to the 2000s housing crash, which saw a 26% peak-to-trough home price decline between 2007 and 2012.
"It is natural to compare the current housing boom to the mid-00s housing bubble. The bubble and subsequent bust are part of our collective memories. And graphs of nominal house prices and price-to-rent ratios look eerily similar to the housing bubble," wrote housing analyst Bill McBride in his economics blog Calculated Risk back in March 2022. "However, there are significant differences. First, lending has been reasonably solid during the current boom, whereas in the mid-00s, underwriting standards were almost non-existent...and demographics are much more favorable today than in the mid-00s."
History never repeats itself, but it does often rhyme. When it comes to the overall story in 2022 and 2023, it rhymes more with 1981 than 2008.
"A much more similar period to today is the late ‘70s and early ‘80s. House prices were increasing sharply. Demographics were very favorable for homebuying as the baby boomers moved into the first-time homebuying age group (similar to the millennials now). And inflation picked up from an already elevated level due to the second oil embargo in 1979, followed by the Iran-Iraq war in 1980, driving up costs," wrote McBride in Calculated Risk. "In 1979, the Volcker Fed responded by raising rates, and combined with inflation, this pushed up mortgage rates sharply. Now the Powell Fed is embarking on a tightening cycle and mortgage rates have already increased significantly."
As mortgage rates spiked in 2022, it became clear to McBride that the ongoing housing downturn would deviate a bit from the 1981 downturn and that falling home prices were on the table. Heading forward, McBride expects national home prices to decline by around 10% from peak-to-trough. If he's right, it would mark a mild correction—not a full-blown crash like 2008.
"Although the current dynamics are similar to the 1979 peak, house prices are more out of line with fundamentals than in 1979," wrote McBride in October. "Since national house prices increased very quickly during the pandemic—up over 40%—it seems likely that some of the usual “stickiness” will not apply. I think the most likely scenario now is nominal house prices declining 10% or more from the peak."
View this interactive chart on Fortune.com
This data does raise an obvious question: Will these 124 housing markets dodge any future home price declines?
It's hard to say.
During the last cycle, Phoenix peaked in June 2006, or about six months before Miami. So it's certainly possible for now stable markets to follow in the footsteps of their declining peers.
Then again, this isn't the 2008-era story. What happens next will depend on how long mortgage rates stay elevated and whether or not the economy avoids a recession. (You can find Moody's and Zillow's regional home price forecasts here).
Want to stay updated on the housing market? Follow me on Twitter at @NewsLambert.
