Miami Remembers 9/11

The 9/11 housing legacy: a boom, then bust

Miami Herald

Home prices in South Florida before and after the attacks
Case-Shiller Miami IndexYearly changeChange since 2001
Source: Standard & Poor’s/Case-Shiller

What would your house be worth if not for the 9/11 attacks?

The question may seem crass, but it sits at the center of exploring the financial consequences of the worst act of terrorism in American history. Hijackers struck in the midst of an already weak economy, and the assault was so shocking that financial regulators moved aggressively to contain the fallout.

Their main weapon: a drastic rollback in bank lending rates to lows not seen since the 1960s. The lower rates pumped cash into the lending system and within a few years, cheap mortgages helped send real estate values to unsustainable levels. When those prices collapsed, they sparked a financial crisis and pushed the country to the brink of a depression.

If Sept. 11 hadn’t happened, perhaps they wouldn’t have been as aggressive” in lowering rates, said Adam Carlin, a financial advisor in Coral Gables. “Perhaps the real estate market wouldn’t have turned around as quickly. Perhaps leverage wouldn’t have ramped up as quickly.”

Craig Studnicky, a partner in the International Sales Group condominium brokerage, saw a faltering market get a boost as the Fed helped spur lending after the attacks.

I absolutely believe 9/11 contributed to the housing burst,” he said. With the banking system flush with easy credit in the months after the attacks, mortgages eventually became much easier to obtain. He recalled a condo tower in Sunny Isles beach struggling for sales in the spring of 2002 but finding a flood of buyers by that summer.

You didn’t need to put 20 percent down,” Studnicky said of the post-9/11 housing market. “Zero percent would do.”

For sure, the seeds of a monumental housing boom and crash were planted before the 9/11 attacks, with Federal Reserve Chairman Alan Greenspan and the new Bush administration battling a recession caused in part by the bursting of the bubble in technology stocks.

The Fed dropped its short-term rate seven times between January and August in 2001, and real estate was already gaining steam before the attacks. The big question: would the Fed have kept cutting so drastically through 2003 if not for the shock to the system caused by 9/11 and the two wars that followed.

I attribute the housing bubble to the Fed and Greenspan’s management of the Fed,” said Tony Villamil, an economist and dean of the St. Thomas University business school. “Initially, it was 9/11. But they kept going and didn’t stop.”

When 2001 began, the Fed’s target rate — essentially what the Fed charges banks for short-term loans — stood at 6.5 percent. The economy was stalling, and analysts later determined a brief recession began in March 2001 and ended in November. Trying to forestall a decline, the Fed began a burst of easing, with its target rate down to 3.5 percent at the start of September.

By December, the rate was down to 1.75 percent, the lowest level in 40 years. While it took the Fed nine months to cut the rate in half, it took just 90 days for another 50 percent drop. With the war in Afghanistan underway and an invasion of Iraq eventually putting the economic rebound in doubt, the Fed kept cutting: down to 1 percent by the summer of 2003.

They got more aggressive after 9/11, no doubt about it,” said Robert Cruz, chief economist for Miami-Dade County. But he thinks the Fed probably would have kept cutting rates even without the attacks, and that the housing bubble was largely unavoidable.

Jack Winston, a real estate analyst and partner at Goodkin Consulting in Miami, agreed with Cruz, saying the Fed’s rate-cutting course was clear before the attacks. “Interest rates were coming down anyway,” he said.

Even the sharp drop in lending costs in the years after 9/11 wouldn’t have caused a housing crash if banks didn’t make so many bad loans as the real estate market gained steam in 2003 and 2004.

Many blame the 1999 repeal of portions of the 1933 Glass-Steagall Act that limited commercial banks with deposits from also owning investment banks that issued securities.

The change helped set the stage for the wildfire spread of “sub-prime” mortgages, since banks could pool home loans into investment packages and sell them on Wall Street. Mortgages only had to stay on the lender’s books for a limited time, the reselling of the loans lowered the stakes for the original bank to make sure the money would get paid back.

Villamil sees an indirect link between 9/11 and the housing bubble. He blamed the two wars that followed the attacks on the Fed sustaining its rate-cutting strategy.

Along with invading Al Qaeda’s stronghold in Afghanistan, the United States invaded Iraq after the Bush administration warned that country was stockpiling dangerous chemical and biological weapons that could be used to attack Americans.

You had a build-up of [federal] debt because of the war on terrorism. The Fed didn’t want the private sector crowded out by the government borrowing so much money,” Villamil said. “It’s a good way to fund the war: Lower interest rates.”


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