VALUED INSIGHTS

Invaluable Valuation Knowledge for the Real Estate Stakeholder

SERIES:
The Savings and Loan Crisis of the 80s:
A Primer for Navigating Today’s Risk
CHAPTER
  1. Reflections On The S&L Crisis: Lessons From The Valuation Profession
    (Published: June 26, 2024)

  2. Overview Of The Savings & Loan Crisis – A Real Estate Appraiser’s Perspective
    (Available: July 17, 2024)

  3. Deregulation’s Role
    (Available: July 24, 2024)

  4. Interest Rate Volatility
    (Available: July 31, 2024)

  5. Regional Real Estate Impacts of the S&L Crisis
    (Available: August 7, 2024)

  6. Regulatory Failures & Inaction in the S&L Crisis
    (Available: August 14, 2024)

  7. The Resolution Process: Cleaning Up the S&L Wreckage
    (Available: August 21, 2024)

  8. Legislative & Regulatory Reforms After the S&L Debacle
    (Available: August 28, 2024)

  9. Striking Parallels to the 2008 Financial Crisis
    (Available: September 4, 2024)

  10. Corporate Governance Meltdown in the S&L Debacle
    (Available: September 11, 2024)

  11. Conclusion: Safeguarding Valuation Integrity to Prevent the Next Crisis
    (Available: September 28, 2024)

SERIES:
The Savings and Loan Crisis of the 80s:
A Primer for Navigating Today’s Risk
CHAPTER:

Regional Real Estate Impacts of the S&L Crisis

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Author: Reagan Schwarzlose, FRICS | MAI | CRE | CCIM
Published: August 7, 2024

While the savings and loan (S&L) crisis ravaged the entire U.S. financial system and real estate industry in the 1980s, certain regions across the country experienced devastatingly disproportionate impacts. Areas like Texas, California, Arizona and others in the Southwest found themselves at the epicenter of the meltdown due to their concentration of S&L lending activities and overheated housing markets. This confluence of factors triggered a wave of foreclosures, plummeting property values, and severe economic dislocations that reverberated for years.

As S&Ls rapidly expanded into new lending areas in the years preceding the crisis, they poured billions into financing speculative real estate developments, particularly in booming Sunbelt markets. However, this overbuilding, combined with loosening underwriting standards, set the stage for a spectacular bust once the music stopped. The impacts were profoundly felt at the regional level through distressed property dispositions, residential foreclosures, and spillover job losses.

Reagan R. Schwarzlose
FRICS I MAI I CRE I CCIM
CEO | Managing Director
+1-480-440-2842 EXT 06

Texas: Ground Zero

No state experienced the brunt of the S&L crisis quite like Texas. With its heavy economic ties to the oil & gas industry and a large number of S&L institutions, Texas represented ground zero for the real estate fallout as the 1980s progressed.

According to data from the Federal Deposit Insurance Corporation (FDIC), by the late 1980s, over half of all deposits held by Texas-based S&Ls were tied up in risky commercial real estate loans and investments. This represented an enormous concentration of exposure as property markets across the state became increasingly overheated, particularly in major metro areas like Dallas, Houston, and San Antonio.

“The commercial real estate mania in Texas was being fueled by a frenzy of construction lending by S&Ls looking for higher-yield investments,” said William K. Black, an expert on the crisis. “But the underwriting was abysmal with rampant fraud, and there was no geographical diversification.”

When the inevitable downturn hit, it triggered a cascade of failures at Texas S&Ls. Nine of the ten largest bank/S&L insolvencies resolved by the FDIC between 1986-1992 were Texas-based institutions, representing over $89 billion in assets.

The economic toll was immense, with Texas losing over 400,000 jobs during the crisis years, according to the Bureau of Labor Statistics. Scores of vacant office towers, unfinished residential developments, and distressed properties littered the state’s major cities.

By 1990, over 25% of all commercial properties in Dallas were in delinquency or foreclosure proceedings, according to data from Trepp LLC. Residential foreclosure rates in Houston skyrocketed over 400% from 1986 to 1989, based on FDIC data.

California Chaos

While Texas bore the brunt, California and other Western states were not spared from the real estate chaos unleashed by the S&L crisis either. Rapid overbuilding combined with loosening lending standards created a bubble dynamic, particularly in residential markets across California.

According to a 1988 study by the National Association of Realtors, the median home price in Los Angeles had surged over 120% in just five years from 1983-1988 as S&Ls flooded the market with easy mortgage financing. Similar trends played out across the state and in markets like Phoenix, Las Vegas and Seattle.

However, this price appreciation proved unsustainable once the S&L insolvency crisis precipitated a severe credit crunch. Home prices in Los Angeles plunged over 25% from their peak by 1997, based on data from Case-Shiller. Foreclosure rates skyrocketed, with California S&Ls accounting for nearly 40% of all foreclosed properties nationally by 1996, according to the FDIC.

The impacts rippled through the state’s economy, with California losing over 600,000 construction jobs from 1990-1995 based on Bureau of Labor Statistics data. The real estate bust combined with defense industry contractions triggered a severe recession.

Broader Economic Spillovers

Beyond the real estate sector itself, the regional impacts of the S&L crisis and its precipitous effects on local housing markets produced damaging spillovers into other sectors of the economy in hard-hit areas. As property values plunged and foreclosures mounted, it created a self-reinforcing cycle of job losses, declining consumer spending and business contractions.

“The real estate crash basically choked off economic growth in places like Texas, California and New England for several years,” said economist Mark Zandi of Moody’s Analytics. “You had massive wealth destruction and unemployment that severely impacted household finances and consumption.”

In Texas, the oil & gas industry downturn combined with the real estate bust to create a “double-dip” recession according to the Dallas Federal Reserve. Economic output in the state contracted for three consecutive years from 1986-1988.

In California, the aerospace and defense sectors were already experiencing cutbacks and base closures when the real estate market imploded, creating a “perfect storm” that cost the state over 600,000 jobs according to the UCLA Anderson Forecast.

Even states not directly at the center of the S&L crisis felt spillover effects through reduced spending, investment, and economic migration from impacted regions. According to data from the Bureau of Economic Analysis, personal consumption expenditures declined in 42 states from 1986-1991 as the regional recessions rippled outward.

Lasting Impacts

While most regional economies eventually recovered through the 1990s as the S&L crisis was resolved, the impacts permanently reshaped many areas through industrial shifts, population movements, and long-term housing market dynamics.
In Texas, the rise of technology and service sector hubs in cities like Austin helped offset declines in oil & gas and manufacturing, according to the Dallas Fed. However, the state’s residential and commercial real estate markets remained depressed for over a decade.

California’s economy rebounded more quickly but experienced a permanent acceleration in outbound migration patterns to areas like Nevada, Arizona, and other Western states, according to census data analyzed by the California Policy Lab.

And across the hardest hit regions, a general repricing of real estate values and more disciplined lending standards took hold in the aftermath of the crisis, according to the National Association of Realtors. Excesses and speculation became far more muted compared to the pre-crisis boom periods.

The regional devastation served as a humbling lesson on the interdependencies between the real estate sector, local economies, and the risks of overheated asset price dynamics combined with excessive leverage. As the nation’s financial system and regulatory oversight were overhauled, these impacts became a focal point in efforts to prevent a similar meltdown from reoccurring.

The next chapter examines how regulatory failures and inaction worsened the Savings and Loan Crisis. We’ll explore oversight deficiencies, delayed responses, and problematic deregulation efforts that intensified the crisis, highlighting lessons learned and their implications for today’s financial regulatory landscape.

Sources:
FDIC – History of the Eighties Vol 1
Federal Reserve Bank of Dallas – The Texas Construction Crisis
Bureau of Labor Statistics – State/Regional Employment Data
Trepp LLC – Legacy CMBS Delinquency Report
National Association of Realtors – Regional Housing Studies (1988-1996)
FDIC – Managing the Crisis: A Historical Reprint
Case-Shiller Home Price Index – Los Angeles Data
UCLA Anderson Forecast – California Recessions Report
Bureau of Economic Analysis – Personal Consumption Expenditures by State
U.S. Census Bureau – Population Estimates & Migration Data
California Policy Lab – Domestic Migration Analysis
Quotes from William K. Black (regulator), Mark Zandi (Moody’s Analytics)