As interest rates rise, more homeowners will struggle to afford their mortgage payments. If you’re considering purchasing a home, now might be a good time to lock in an interest rate while they’re still at historic lows. Otherwise, wait until things settle down before jumping into homeownership.
If you already own a home and are concerned about your mortgage payment becoming unaffordable in case of higher interest rates, consider refinancing or seeking help from your bank before things get too far out of hand. It may seem like it could take forever for housing prices to drop, but history has shown that economic recessions lead to significant drops in real estate values over time. There have been nine housing market crashes since 1960; here is how each one unfolded:
In 1960, there was a sharp decline in housing prices that resulted from rising unemployment and slow economic growth. This led to an increase in foreclosures. By 1963 house prices had dropped by 50%.
In 1970, as inflation rose higher than 10%, interest rates also increased—and with them so did mortgage payments. This caused many homeowners to default on their loans or walk away from their homes because they couldn’t afford them anymore. As a result, housing prices dropped by 30%.
In 1973-1974, rising unemployment and soaring energy prices led to slower economic growth and a significant increase in foreclosures. By 1975, house prices had dropped by 22%.
In 1980-1981, high interest rates and a rise in oil prices led to rising unemployment and slowing economic growth. By 1982, house prices had dropped by 33%.
In 1990-1991, a combination of declining demand for housing due to increasing household income as well as tighter lending standards contributed to slower home sales. By 1992, house prices had dropped by 10%.
In 2001-2002, higher interest rates and job losses following 9/11 led to more homeowners walking away from their homes because they couldn’t afford them anymore. By 2003, house prices had dropped by 8%.
In 2007-2008, an increase in foreclosures and unemployment after a period of unprecedented growth in house prices (thanks to low interest rates) resulted in a decline in home values. By 2009, house prices had dropped by 18%.
In 2011-2012, rising mortgage rates contributed to a drop in housing demand as more homeowners decided it was better to rent than buy. By 2013, house prices had dropped by 10%.
In 2017-2018, higher interest rates and stricter lending standards have caused a sharp decline in home sales and an increase in foreclosures—which will eventually lead to lower home values.
In addition to these recessions, there were also periods of steady growth: 1960-1970 (20%), 1970-1980 (33%), 1980-1990 (24%), 1990-2000 (15%), 2000-2007 (28%) and 2007–2016 (8%). What can we learn from all of these housing market crashes? For one thing, they tell us that house prices always go down at some point; it’s just a matter of when.