Real Estate and the Credit Crunch: An Overview Real Estate and the Credit Crunch: An Overview

November 30, 1992

In the late 1980s, declining real estate values led to an increase in nonperforming loans, which forced the shrinkage or failure of many banks. Has a "credit crunch" resulted, as many small business representatives insist? This article offers an overview of the Federal Reserve Bank of Boston's 1992 economic conference, which examined the crisis. The first sessions explored the causes of the sharp fluctuations in real estate values and construction activity, and the significance of economic fundamentals, tax and regulatory policy, and speculation. The next two sessions dealt with the effects of the real estate cycle on financial institutions and credit availability. The final sessions considered the implications of these problems for public policy.

The research presented at the conference and the discussions that followed suggest that real estate markets are prone to speculative bubbles and overshooting, because of construction lags and expectations created by past price appreciation. But procyclical regulatory policy and tax code changes exacerbated both the boom and the succeeding bust in real estate activity. This experience suggests that greater attention be paid to the short-term transition effects of policy changes, and to excessive risk concentrations in lending institutions.

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