Are we reliving the 90s and the financial crisis that shaped the decade?


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Neon hats, Nike sneakers, Starter jackets without irony. When I look at today’s fashion, I can’t help but get a little nostalgic. It seems like enough time has passed since the 90s that we can now start thinking of it as cool again. But isn’t it just popular culture that seems to be reliving the decade that gave us the Internet, the European Union and Steve Urkel; there are also many parallels with our current economic situation.

Interest rates then were much higher than they are now, on January 1, 1990, the federal interest rate was 8%. Rates were set so high due to runaway inflation caused by artificially low rates set by the Nixon administration in the 1970s. Higher rates had helped slow the double-digit inflation that was common in the 1980s, but that was not enough to bring it back to the Fed’s 3% target, by the end of 1990 annual average inflation was around 5.4%. Despite the Fed’s aggressive maneuvers, inflation remained high, in part thanks to the near doubling of gasoline prices. (Is this starting to sound familiar?)

When it comes to real estate, the big difference between then and now was the institutions that lent money for mortgages. At the time, there were organizations called savings and loan banks, or Thrifts. They started out as alternative funding sources for mortgages, but have grown to rival commercial banks for mortgages. In 1980 there were over 4,000 savings and loan institutions with combined assets of $600 billion, of which $480 billion were mortgages, many of which were made at low interest rates set at an earlier era.

On March 31, 1980, President Jimmy Carter signed the Depository Institutions Deregulation and Monetary Control Act which gave economies many commercial banking capabilities without the same regulations as banks and without explicit FDIC oversight. This led to an explosion of lending by savers who increasingly leveraged themselves to compete for investment capital. Eventually, savings accounted for 50% of the entire US loan market.

As you may already know, the savings and loan industry eventually collapsed. When interest rates rose, they were forced to offer higher yields, but were locked into 30-year loans at lower interest rates. They ended up with portfolios of mortgages that no one wanted to buy on homes that were now losing value.

There was an agency set up to prevent the failure of what had by then become an important part of our financial industrial complex, the Federal Savings & Loan Insurance Corporation or FSLIC. But default reserves were only about $6 billion, while the cost of reimbursing insured depositors in failed institutions would have been about $25 billion. Without sufficient help to bail out these institutions, many survived despite their insolvency. The hope was that these “zombie banks” would eventually see their portfolios bounce back, but in reality it created a situation where they were lending on even riskier terms.

The collapse in savings and loans has finally come to an end thanks to federal stimulus measures and new surveillance. But before that, it wiped out a lot of money for investors, many of whom were just members of the bank. What is happening today is certainly very different from the savings and loan crisis, but the same forces that led to the collapse of these lending institutions are now at work.

As I wrote last week, much of the lending for commercial real estate loans is now done by private debt funds, which also have little oversight compared to banks. They also see their previous loans devalued thanks to the rise in rates. I don’t think large-scale insolvency is inevitable, but if interest rates continue to climb, we might all want to keep an eye out for unregulated lending institutions, lest we relive more than the fad of years 90.


The long-term view of rates

There are plenty of interest rate charts over the past few decades, but to really understand how incredible interest rates were in the 80s and 90s, you have to look at a longer timeline. I found this visualization really interesting. It graphs interest rates over the past 200 years and gives some of the significant events that have caused rates to fluctuate over the years.

must read

A student’s perspective on the future of the office

The real estate industry is crying out to understand what the next generation of office workers want to see in their work environment. To find out, Propmodo interviewed Harry Koeppel who is currently studying at NYU’s Schack Institute for Real Estate. We wanted to talk to Harry, not just because he represents new entrants to the job market, but because he just won his class’ final project, a real-life case study done in conjunction with the consultancy firm Ernst & Young.

Worth reading

Coming back to the office may be slow, but it turns out that one of our favorite times of the day at the office, drinks after workare already back in many places. (New York Times)

In a rare rebuttal to the shift to hybrid working, some people aren’t happy with the lack of flexibility ensured by a hybrid “3-2” working week. (Fast Society)

Despite all the technologies available for buildings to reduce their carbon footprint, few have actually made the effort. What should be done to encourage more sustainable investments? (The Economist)


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