New Home SalesCENSUS
750K
U.S. Housing Market · 1986
U.S. Housing Market in 1986
1986 peakTax Reform ActS&L stress
Existing SalesNAR
3.47M
Median PriceNAR
$80,300
30Y MortgagePMMS
10.19%
1986 was a quiet peak. Total sales reached 4.22M, the highest since 1979, before the savings-and-loan crisis and tax reform began an eight-year drift lower in the late-1980s housing market.
Median existing-home prices hit $80,300, up 6.4% YoY — pace would moderate sharply over the next four years. The Tax Reform Act of 1986 eliminated several real-estate-favorable provisions and removed the deductibility of consumer interest, redirecting some demand toward home equity. Meanwhile, the savings-and-loan industry was beginning a slow-motion collapse that would take down 1,043 institutions by 1995.
Macroeconomic Context
Nineteen eighty-six was a year of dramatic disinflation driven by two simultaneous shocks. Oil prices collapsed from over $25 per barrel in January to below $10 by April, as Saudi Arabia abandoned production restraint and flooded global markets. Consumer price inflation fell to approximately 1.9% — the lowest since the early 1960s — as energy costs cascaded through transportation, utilities, and manufacturing. Real GDP grew about 3.5%, unemployment edged toward 7.0%, and the combination of cheap energy and still-falling mortgage rates created a substantial boost to household purchasing power.
The Tax Reform Act of 1986 was the most significant restructuring of the federal tax code since World War II. It eliminated many real estate investment tax shelters by introducing passive activity loss rules and lengthening depreciation schedules for commercial and rental property. While owner-occupied housing retained the mortgage interest deduction, the act removed many of the marginal incentives that had fueled speculative real estate investment in the early 1980s. In the near term, the act accelerated distress-selling of commercial real estate — a significant contributing factor to the S&L crisis — while having a more neutral effect on owner-occupied markets.
Thirty-year mortgage rates fell sharply to approximately 10.19% — the first time since 1979 that rates had broken below 11%. This crossing of a psychological threshold, combined with real income gains from cheap oil, produced a significant improvement in housing affordability. New and existing home sales rose in response. The market was healing, though the full extent of the S&L insolvency problem lurking beneath the surface would not become apparent until 1988–89.