Good Real Estate Times Come to an End
The Savings and Loan Crisis of the early ’90’s
From January 1, 1986, through year-end 1995, the number of federally insuredthrift institutions in the United States declined from 3,234 to 1,645, or byapproximately 50 percent, according to an article written by Timothy Curry andLynn Shibut entitled “The Cost of the Savings and Loan Crisis: Truth and Consequences”
The Implications of Mello-Roos
Just When You Thought Things Couldn’t Get Worse: The Orange County Bankruptcy of 1994
Bob Citron , was the longtime Treasurer-Tax Collector of Orange County, when it declared Chapter 9 bankruptcy on December 6, 1994. Citron was the only Democrat to hold office in heavily Republican Orange County at the time. This was brought on by Citron’s investment strategies, which seemed to be an effort to earn high incomes for the county without raising taxes. As controller of the various Orange County funds, Citron had taken a highly leveraged position using repurchase agreements (repos) and floating note rates (FRNs). The loss incurred by the usage of these financial instruments reached the amount of $2 billion and was caused by being too highly leveraged for rising interest rates. In other words, if federal interest rates had not risen, the massive trading position would have been a substantially profitable position; if interest rates did rise, the trading position would result in substantial losses. In fact, rates rose
The Implications of the Fall of the Berlin Wall and the Outsourcing of Manufacturing
The fall of the Berlin Wall and the break-up of the Soviet Union, saw the decline of our aerospace industry, as well as the outsourcing of much of our manufacturing industry to the Asian markets where goods and services could be purchased at a fraction of the price it cost to make in the United States. This added to the economic recession during this period of time.
The Housing Market Bottomed Out in 1996
We saw the fallout of the real estate market reach its nadir around the last quarter of 1996. We had had the S & L Crisis, the Orange County bankruptcy, the outsourcing of manufacturing, the decline of the aerospace industry, the fires that swept through Laguna Beach and Irvine, and finally the incessant rains caused by El Nino. The only thing Irvine lacked was the locust plague!
The Turn Around and Upward Bound
Ultimately, the housing market rebounded. This was first reflected at the beginning of 1997 as some investors quietly returned to the depressed housing market and continued through the end of the decade. The impetus for the refueling of the housing market was the ensuing internet craze. The late 1990’s saw the exponential growth of the Internet and with it on-line games. Also there was the rise of dot com companies that were snatched up by Wall Street investors as fast as they could be developed. Price/earnings ratios went out the door, and, in turn, every twenty-something could put together a dot.com and become an overnight success and with it go public and cash in becoming overnight billionaires. I personally saw this irrationality consume a great many of my clients, who quit their jobs and became day traders. There was even a day trading company that opened up in the University Center during these heady days.
The Dot Com Bubble and the Inevitable Dot Com Bust
From 1996 to 2000, the NASDAQ stock index exploded from 600 to 5,000 points. “Dot-com” companies run by people who were barely out of college were going public and raising hundreds of millions of dollars of capital. Many of these companies lacked clear business plans and even more had no earnings whatsoever to speak of. For example, Pets.com, which had intended to become an online pet products retailer, was losing money before it went public and raised billions of dollars. Numerous dot-com companies wasted millions of dollars on frivolous parties to celebrate their IPOs. There are even stories of dot-com employees who walked around their offices barefoot and played foosball and video games during the work day. At the peak of the dot-com bubble in 1999, it was said that a new millionaire was created every 60 seconds in Silicon Valley.
How the Dot Com Bubble Popped
By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble. Within months, the NASDAQ stock index crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which once had multibillion dollar market capitalizations, were off the map as quickly as they appeared. Panic selling ensued as the stock market’s value plunged by trillions of dollars.
Thus ended the roaring ’90’s, as we dug ourselves out of the housing recession, we wound up plunging into a dot com debacle.
Stay tuned….The City of Irvine, California ~ Our Personal Perspective – Part Three — the Turn of the Next Century…coming soon…
In cased you missed Part One, here it is: The City of Irvine, California ~ Our Personal Perspective – Part One – the ’80’s