Real Estate and the Credit Crunch: An Overview

Declining real estate values have shaken financial markets, undermined consumer confidence, and slowed economic growth around the world. From homeowners in California to billionaire real estate developers operating in New York, London, and Tokyo, all have seen their net worth dwindle as real estate prices have fallen. Sizable holdings of nonperforming real estate imperil the financial health of stodgy New England banks, aggressively managed Southwestern thrifts, and even the financial giants of Japan. Direct investors in real estate are not the only ones adversely affected by declining real estate values. Capital-impaired banks and insurance companies may be less willing to make loans. U.S. taxpayers may be required to ante up for real estate bets lost by federally insured institutions, while in other countries governments work behind the scenes to shore up their financial institutions. And everyone suffers from the drag on the economy that these real estate losses have exerted. In the fall of 1992 the Federal Reserve Bank of Boston convened a conference on "Real Estate and the Credit Crunch" to explore the causes of these real estate problems and their implications for financial institutions and public policy. The focus was real estate developments in the United States, but the discussion extended the topic to the world economy. The conference consisted of six sessions. The first two examined the causes of the fluctuations in real estate markets in the 1980s, focusing on housing prices and on commercial construction and real estate values.