New Home SalesCENSUS
688K
U.S. Housing Market · 1985
U.S. Housing Market in 1985
Volcker recoveryaffordability low12.43% mortgage
Existing SalesNAR
3.13M
Median PriceNAR
$75,500
30Y MortgagePMMS
12.43%
The Volcker housing recession ended in 1985. Mortgage rates fell to 12.43% — still high by modern standards but the lowest reading since 1979 — and existing sales rebounded to 3.13M.
The median existing home cost $75,500 that year — just 2.4× the median U.S. household income, the most affordable ratio in the modern record. New-construction sales reached 688K. The recovery was uneven: judicial-foreclosure states like Texas and the oil patch were entering their own regional downturn that would take until 1991 to resolve, while coastal markets enjoyed the start of what would become the late-1980s boom.
Macroeconomic Context
The mid-1980s expansion continued at a solid pace in 1985, with real GDP growing approximately 4.2% and unemployment declining toward 7.2%. Inflation remained well-controlled at about 3.6%, and the Volcker Fed held a steady hand, neither stimulating nor cooling the expansion significantly. The Plaza Accord of September 1985 — a coordinated G5 agreement to deliberately depreciate the U.S. dollar — marked a turning point in international economic policy, beginning a multi-year dollar decline that would eventually lift U.S. manufacturing competitiveness and narrow the trade deficit.
Mortgage rates fell meaningfully to approximately 12.43% — down more than one and a half percentage points from 1984 — as inflation expectations moderated and the Treasury yield curve shifted. Each percentage point of rate decline was meaningful for housing affordability; buyers who had been priced out at 13–14% rates could now qualify for mortgages that penciled out on their incomes. The adjustable-rate mortgage remained popular, but fixed-rate originations began recovering market share as buyers increasingly wanted to lock in what they hoped would prove to be a period of declining rates.
The Tax Reform Act of 1986 was being debated throughout 1985 and its anticipated passage shaped real estate investment decisions in advance. The prospect of eliminating many real estate tax shelter provisions — passive activity loss rules, depreciation changes — drove a rush of deal closings and property sales before enactment, contributing to real estate transaction volumes. For owner-occupied housing, the mortgage interest deduction survived intact, preserving the central tax advantage of homeownership that had anchored demand since the 1950s.