One of the major market-changing events in the recent
history of real estate is the construction boom and bust of the 1980’s. Dr.
Harold Hunt—a researcher at the Texas A&M University Real Estate
Center—came and presented to our class about the history of mortgage credit; part
of his presentation covered the political and market environment that
propagated the failure. Below is a summary taken from the powerpoint notes he
gave in his lecture.
In the early 1980s the U.S. government permitted Savings
& Loan Associations to originate adjustable rate mortgages and lend
directly to consumers and commercial entities (including commercial real
estate).
Depositors’ caps on interest payments were phased out
by 1982 increasing the cost of funds. Also, deposit insurance was raised from
$40k to $100k resulting in depositors returning to S&L’s in high numbers;
however the S&L’s operations weren’t being monitored.
In general, regulations were relaxed as accounting
standards were lowered, the number of field auditors was reduced, capital
requirements were decreased, etc.; S&L’s were thought to “grow” themselves
out of any problems
There was a win-win situation for lenders: make money
and win if everything goes right or “lose” (win) if the account fails and let
deposit insurance cover any loss.
At the same time, the 1981 Economic Recovery Tax Act
caused a real estate supply boom as savvy investors could find tax breaks by
putting their money into infrastructure whether or not the demand existed.
Tax Shelter – Real Estate discussion
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