The 1980s were dynamic and fun for many real estate professionals in the Lakes Region. The late '70s through early '80s led off with a recession, high unemployment, and business failures at the highest levels since 1932. The decade became known for its greed, with a lot of free and easy capital and higher doses of leverage. Leverage can magnify gains as well as losses. The result was the creation of one of the best buying opportunities I've seen in real estate, or one of the worst real estate depressions in history, depending on how you interpret it.
Imagine paying 18 percent interest on a 30-year variable rate mortgage with a 5 cap over the life of the loan. It's almost unthinkable. But that was reality for homebuyers in the Lakes Region in Oct. 1981. Unlike today, in the early 1980s, the Federal Reserve was waging war with inflation. In an effort to tame double-digit inflation, the Central Bank drove interest rates higher to levels topping out at 18.4 percent.
Because of the tough economic conditions, Ronald Reagan and Congress passed the Economic Recovery Act in 1981. As a result, real estate became a favorite tax shelter. At the same time, the Federal Reserve lowered the interest rates to stimulate activity. Deregulation of the savings and loan industry allowed thrifts to lend money in a more aggressive manner. At the same time commercial banks were feeling the effects of competition and increased their allocations to real estate, including leverage financing of residential developments and commercial projects. By the end of the decade, real estate amounted to 35 percent of commercial banks' assets.
This influx of money translated into incredible development activity surrounding Lake Winnipesaukee. In my 45-year real estate career, I have never seen so many new developments and condominium projects start up throughout the Lakes Region. I counted 45 new condominium developments started in the 1980s. There were contractors on every corner. They patronized the local delis and grocery stores during their lunch breaks.
Because of the huge demand for workers, contractors were coming from Texas, Florida, and Mexico. The unparalleled housing boom was sufficient to coin the phrase "the go-go '80s." During this period, there were new communities developed surrounding Lake Winnipesaukee including Broadview, Samoset, Windward Harbor, Jonathan's Landing, Lands End, Stonecrest, Gilford Meadows, Sundown, Mallard Cove, Christmas Island, and South Down Shores. These developments included 30 to 100 units. Between South Down Shores and Long Bay alone, over 600 housing units were eventually developed.
New Hampshire's success seemed invincible. In 1986 NH housing increased to a high of 22,000 units. In the Lakes Region, we were selling condos to clients benefiting from the Reagan administration's defense buildup and the Boston-based computer industry's remarkable rise.
These employees were snapping up luxury lakefront condos and purchasing boats in a frenzy. This influx kept the bulldozers and construction workers stretched throughout the decade. I remember an article in the Boston Globe titled "Cash Registers Ringing in New Hampshire's Lakes Region." Billions of dollars were invested in speculative residential and commercial real estate projects. The rampant speculation also contributed to the future savings and loan debacle.
The real estate miracle was built on frail earth. The pipeline of high-tech jobs slowed, and two national events caused the real estate boom to nosedive. First was the Tax Reform Act of 1986, eliminating tax shelter advantages with a major impact on rental income; then "Black Monday," the stock market crash of Oct. 19, 1987. That day, the market declined by 22.6 percent. These events shifted confidence in the markets and set the groundwork for the recession that hit in the 1990s. During this time, many people who took equity loans backed by the new value of their homes were cut off at the knees. Leverage developments through New Hampshire and Massachusetts were painful to watch. What happened next was a real estate bust as epic as the boom that proceeded it. Jobs vanished. Banks failed. Unsold condos littered the market.
With the increased real estate loan defaults, a large number of Northeastern banks failed: 16 in 1990, 52 in 1991, and 43 in 1992. In 1991 the assets of failed banks represented 25.4 percent of prior year-end banking assets in New Hampshire. Approximately five of New Hampshire's largest banks closed during this time. Growing up in Manchester, I always remembered the huge neon Amoskeag Bank sign at the corner of Elm and Hannover streets, across the street from my father's law office. To see that sign go down was a shock to everyone.
The foreclosure process that followed was not fun. Instead of real estate ads, papers were filled with foreclosure notices and real estate auction ads. The numbers were tragic, everyone was dazed, and it happened so fast. The speed and tenacity of the auction process ultimately led to a quick deceleration of values, which took a decade to rebalance.
Fast forward to 2008 and compare what happened during that period versus the 1980s. The housing and stock market crash in 2008 originated because of an unrelenting surge in the subprime mortgage market, which began around 2000. During this period, Fannie Mae and Freddie Mac made home loans to clients with low credit scores with a higher risk of defaulting. These subprime borrowers took out adjustable-rate mortgages that started with low monthly payments and grew larger after a few years. To keep up with the accelerated growth of these mortgages, financial companies sold pools of packaged subprime loans to commercial investors. By 2008, borrowers were defaulting in huge numbers, which led to the fallout in the financial markets and ultimately the collapse of the stock market, followed by the Great Recession.
The mortgage market was out of control, and we saw it here in the Lakes Region. It seemed as though if a buyer had a pulse, they could get a mortgage from 2000 to 2005. These creative adjustable-rate mortgages were a disaster waiting to happen. During this time, mortgage-backed securities and credit default swaps were utilized with little oversight. This led to AIG's huge losses in its portfolio, resulting in $150 billion in bailout money from the government. The failure of Bear Stearns was another catalyst to rock markets due to losses in the subprime market, which ended up with many homeowners upside down, leading to foreclosure and bankruptcies.
In 2008 Lehman Brothers collapsed, panic occurred, and Bank of America announced it was buying Merrill Lynch. Government bailouts began to prevent a financial meltdown. The Dow dropped 3600 points from September to October, and Washington Mutual was taken over by the FDIC and later transferred to JP Morgan Chase.
The housing bubble that formed in 2006 and 2007 did precipitate the Great Recession that followed. According to Benjamin Keys, "An important lesson from the 2008 crisis is that just because someone is willing to make you a loan, it doesn't mean that you should accept it."
So where are we today with our frenzied market with epic real estate prices fueled by huge demand, limited inventory, and record low interest rates? And where are home prices going next?
Stay tuned; it should get interesting!
This article was written by Frank Roche. Frank is president of Roche Realty Group with offices in Meredith and Laconia, and can be reached at 603-279-7046. Visit rocherealty.com to learn more about the Lakes Region and its real estate market.