Crash Leaves Few Real Estate Scars : Interest Rate Cut After Stock Market Plunge Seen Bolstering Home Buying

Times Staff Writer

After the stock market plummeted 508 points in a single day a little more than a year ago, experts predicted that the crash would have profound effects on the nation’s real estate markets.

Pessimists said first-time home buyers would shelve their plans for fear that they’d lose their jobs and have no way to pay their mortgage. “Move-up” buyers who wanted a nicer house would decide to stay put, because much of their savings had been wiped out by the crash.

Optimists said small investors would put more cash into rental properties whose values weren’t as volatile as stock prices. Meantime, big pension funds would snap up office complexes and the like to make their battered portfolios less susceptible to the twists and turns of the stock market.

‘A Little Embarrassed’


Now, one year after Black Monday, neither the doom sayers nor the optimists appear to have guessed correctly. In fact, many now say that the stock market crash of Oct. 19, 1987, has had little effect on the nation’s economy and even less on the real estate market.

“The net effect that the crash has had on real estate is minimal, if there has been any effect at all,” said John Tuccillo, chief economist of the National Assn. of Realtors. Many of his fellow forecasters, he adds, “are probably a little embarrassed right about now.”

Perhaps the most beneficial byproduct of the crash was a sharp drop in interest rates, which occurred after the Federal Reserve Board pumped billions of dollars into the banking system to prevent financial paralysis. The lower rates have helped extend a buying binge in most of the nation’s housing markets.

But at the same time, the post-crash belt tightening by many Wall Street firms has hurt the market for commercial properties from New York to Los Angeles.


Here’s how experts say different segments of the real estate market were changed by Black Monday:

Single-family homes: Home sales faltered at the end of last year as buyers and sellers waited a few months after the crash to see if the nation would fall into a recession.

“But then the air-raid siren turned off, people came out of their bomb shelters and saw that everything was all right,” Tuccillo said.

“Very few people canceled their home buying plans because of the crash; they just postponed them until 1988. So this year’s resale market has been a lot stronger than most of us anticipated.”

“Move-up” buyers have defied the forecasters and continue to drive the market, even though many of them saw much of their wealth wiped out on Black Monday.

“The move-up buyers weren’t depending on their stock market profits to buy a bigger home,” said Frederick Cannon, senior economist for Bank of America. “They were depending on the equity they had built up over the years in their current home.

“Since the crash didn’t lower property values, the move-up market has just kept humming along.”

Still, the thousands of financial-services jobs lost because of the crash have dampened sales and price hikes in the New York area and other parts of the Northeast. “Any time an area loses 15,000 or 20,000 jobs, the local housing market is going to feel it,” Tuccillo said.


Apartments: Even if real estate has taken on new luster in the wake of the crash, its shine hasn’t been bright enough to attract hordes of investors to apartment buildings.

Apartment investments have been out of vogue for a couple of years, thanks to overbuilding and tax reform’s scaling back of deductions for rental property.

“The multifamily market was in retreat well before the stock market crashed, and lower rates really haven’t helped much,” said Sanford Goodkin, executive director of Peat Marwick/Goodkin Real Estate Consulting Group.

Commercial: The crash prompted many firms involved in the financial-services business to put their expansion plans on hold, which has put upward pressure on vacancy rates in New York office buildings and kept leasing rates in check.

Corporate belt tightening on Wall Street has had a ripple effect in Los Angeles, San Francisco and many other cities west of the Mississippi, said Paul J. Garity, a real estate principal with accountants and consultants Peat Marwick Main & Co.

“There’s real evidence in the downtown L.A. market that we’re feeling the effects of the crash,” said Garity. “When the big brokerage houses and investment bankers scaled back their expansion plans, it caused all these other firms--like law firms, accountants and consultants--to slow down, too.”

Wall Street firms are among the biggest users of office space, and their aggressive expansion into the West Coast market helped fuel downtown’s building boom for much of this decade. The slowdown since Black Monday has made local office space harder to fill, Garity said, and has left some developers whose projects aren’t yet complete “a little bit worried.”

However, he said, the slowdown is probably only temporary. “The financial-services firms will start expanding again,” he said. “It’ll take a little longer for all of them to get to Los Angeles, but they’ll get here.”


Pension funds: The widely expected move by big pension funds out of the stock market and into real estate so far hasn’t materialized. In the weeks after the crash, many experts said these multibillion-dollar funds--some of which sustained huge losses on Black Monday--would start pouring cash into office towers, industrial buildings and the like because real estate values are far more stable than stock prices.

“The pension funds are slowly shifting into real estate, but it takes time,” said Jack Bartell, a partner with the real estate consulting and accounting firm Kenneth Leventhal & Co. “They don’t just run out and buy the first office tower they see.”

According to Bartell, pension funds now have about $95 billion of their estimated $2 trillion in assets in real estate, up from about $85 billion a year ago.

But that $10 billion in new real estate investments may be just the tip of the iceberg, Bartell said.

“Pension funds like to have about 15% of their assets in real estate, but right now they only have about 5%,” he said. If pensions funds get back to the 15% level, they’ll be investing another $200 billion in real estate.

Syndications: Sponsors of limited partnerships were already having a tough time selling their deals to the public even before the market crashed. Although a few syndicators say sales of their partnerships have since picked up because some investors are wary of stocks, others say the crash has hurt more than it has helped.

Part of the lackluster sales may be attributable to the skepticism with which some investors now view the advice of their stock brokers. Many brokers sell shares in partnerships as well as stock.

Said Garity: “I think a lot of stock brokers are afraid to call up their customers and say, ‘Hi, remember me? I’m the guy who sold you that stock that has dropped 50%. Do you want to buy some shares in a limited partnership?’ ”