This is the second post in a series of three posts from Rick Tobin, where he discusses the evolution of the suburbs in America and how they were shaped and continuously molded by the economic, political, cultural and technological changes in the world. In his previous post, Rick discussed the real estate situation 100 years ago to the 1950s. In this post, Rick covers the 1960s to the 1980s. In the next post he will cover the 1990s up to the present time.
Suburbia’s Evolution: The 1960s
American suburbia continued to grow and evolve in the 1960s. While Americans in the 1950s decade saw significant prosperity after World War II, the 1960s had both positive growth as well as major heartaches.
The Baby Boom generation (born between 1946 and 1964) increased in size through the early parts of this decade. The increase in the size of American families helped fuel the continued demand for the larger homes that suburbia offered them.
As more Americans moved away from urban population centers, many inner city areas began to decay. The decline of urban cities brought an increase in crime, poverty levels, and a decrease in inner city property values. The urban decline also motivated more people to move to the “safer” and more “family friendly” suburban areas.
Americans in the 1960s experienced many conflicts or wars during that time. The threat of World War III reached the pinnacle of potential near actual conflict with the Bay of Pigs conflict in October 1962. An American U-2 spy plane photographed Soviet missile bases installed on the neighboring island country of Cuba. President John Kennedy announced the discovery to America via a televised speech. President Kennedy imposed a naval blockade around Cuba to prevent further missile shipments from the Soviet Union. The world community was stunned and fearful of the first nuclear conflict between the two Superpowers.
The Soviet Premier, Nikita Khrushchev, agreed to remove his troops from Cuba on October 28, 1962 if the U.S. agreed to withdraw their missiles from Turkey. In addition, the Soviets wanted an assurance that America would not later invade Cuba.
The potential of the world’s first nuclear war had a profound effect on the mindset of the average American citizen. For example, a high percentage of school children began practicing air raid drills or “duck and cover” drills to prepare for any missile attacks on America. As a result, many more Americans sought the safety that suburbia offered them away from the crowded cities.
The assassination of President John Kennedy in Dallas shocked our nation the following year. His successor, President Lyndon B. Johnson, helped pass through Congress the Civil Rights Act of 1964 to lessen discrimination in the sale or financing of housing (later expanded on by the Fair Housing Amendment). The bill also provided equal benefits for all, and partly helped rebuild inner city areas affected by the mass exodus to the new suburban communities. In 1965, the Housing and Development Act created HUD to assist in low income housing and equal lending for all.
President Johnson worked to enact social and welfare programs to promote equality throughout the land with his Great Society concept. In addition to the Civil Rights Act and equal lending programs, Medicare was established in 1965 in order to help those over the age of 65 with their medical treatments.
At about the same time that the Civil Rights Act, HUD, and Medicare were established in the mid-1960s, the conflict in Vietnam caused the U.S. to become involved with the dispute between the communist-backed North Vietnamese and their South Vietnamese counterparts. This conflict was not formally resolved until 1976.
Mortgage rates in the early 1960s were almost equivalent to today’s low rates. Interest rates in the 1960s sometimes varied wildly from city to city across the nation. Mortgage loans were sometimes difficult to obtain as the qualifying guidelines varied from one lending institution to another. There was not nearly as much uniformity in mortgage loan qualifying as there is today partly due to the lack of a major secondary market for mortgage loans such as Freddie Mac (established in 1970).
Fertility rates began their long gradual decline from the peak of 3.77 children per married household (1957) to an average of closer to 2 children per household at the end of the 1960s. The post Baby Boom era also had a large increase in the number of married women entering the work force. Approximately 30 percent of married women worked at the beginning of the 1960s, and close to 40 percent worked near the end of the 1960s. The suburban population varied from close to 50 million (1960) to over 80 million (1969) as more Americans favored the suburban lifestyle.
America saw a great deal of turmoil in the 1960s. The U.S. also saw the Baby Boom wave grow through 1964 (1946 to 1964 was the “Baby Boom Wave”), the increase in our Gross National Product (GNP), and the expansion of American businesses both nationally and internationally. America experienced potentially the peak of our pride in the 1960s by beating the Soviets to the Moon on July 20, 1969. America’s dominance as a world economic power helped our financial markets, housing markets, and overall economic strength continue through the end of the turbulent 1960s decade.
Suburbia’s Evolution: The 1970s
There are many Americans who are not as nostalgic about the 1970s as they were about previous decades in the 20th Century. When many Americans think of the 1970s, we may think about the Vietnam War, Watergate, the movies: Rocky, Saturday Night Fever, Star Wars, and Jaws, gasoline lines due to the OPEC energy crisis, high inflation levels, rampant real estate appreciation, stagflation, and the hostage crisis in Iran. Real estate investors, on the other hand, may look at the 1970s favorably in that many homes could be purchased near coastal regions for $20,000 to $30,000 at the beginning of that decade.
The Vietnam War continued on until 1976. During the Vietnam War, our country experienced the Watergate scandal. Prior to Watergate, President Nixon helped expand America’s foreign policy with other nations. Nixon thought it was important for our country to have more open policies with countries like China and the Soviet Union. These relationships later laid the groundwork for more business and investment opportunities for our nation.
Unfortunately, President Nixon’s foreign policy accomplishments were later overshadowed by Watergate. America experienced its first major energy crisis in 1973 and 1974. OPEC (the Organization of Petroleum Exporting Countries) began to limit the production of oil for both political and economic reasons.
Their self-imposed oil embargo caused gasoline prices to jump from almost 38 cents per gallon in 1973 to well over 55 cents (a 150% increase in prices in 1974). While these prices may seem cheap to us today, they were very similar to today’s gasoline prices (in most parts of the U.S.) when adjusted for inflation. It was almost equivalent to almost $3.80 per gallon in recent years’ adjusted Dollars.
As many economists believe that energy prices are the main cause for inflation to increase worldwide, the actions of OPEC and the subsequent gasoline lines helped push the costs of consumer goods and housing costs much higher. The actions of OPEC set in motion the significant appreciation of real estate throughout our nation as inflation took off. Inflation in the 1970s was a “doubled edged sword” for the U.S. economy.
Real estate values increased tremendously in the early to mid-1970s as inflation levels began to soar. The U.S. stock market, on the other hand, was adversely affected by higher energy costs and high inflation in the 1970s. For example, the Dow Jones index hit a low of 577 during the 1973-1974 bear market. Inflation in the mid-1970s later evolved into something known as “stagflation.” Stagflation is a period of time where the economy is in a recession with high unemployment, low demand for goods and services, and high prices (i.e. home prices and consumer goods).
Gerald Ford later succeeded Richard Nixon. Ford later lost his re-election bid to Jimmy Carter. President Carter had the primary economic problem of how to contain the escalating rates of inflation that America experienced in the 1970s. Inflation rates hit a high of 13.3% on an annualized basis in 1979. Carter appointed Paul Volker as the new Federal Reserve Chairman in 1979.
Chairman Volker determined that inflation was “public enemy number #1” so he went on a crusade to increase short-term interest rates to “quash” the high inflation numbers. The Federal Funds Rate had averaged slightly over 11% in 1979 (as compared with 1% – 5% the past several years).
The Federal Funds Rate peaked near 20% in 1981 after the series of rate increases encouraged by Chairman Volker. The Prime Rate reached 21.5% in early 1981, and the long-term Treasury Bond hit above 15%. Chairman Volker’s rate increase actions, though controversial at the time, later did help control the annual rate of inflation as the Consumer Price Index (CPI) levels later averaged less than 4% for all of 1982.
The late ‘70s and early ‘80s were challenging times to work in the mortgage industry partly since mortgage rates hit such insanely high double digit levels. Seller financing options such as “Contracts for Deed” or “AITDs” (All Inclusive Deeds of Trust) became options for motivated sellers who could not find any buyers who could qualify at the time for double digit mortgage rates.
The computer evolution experienced an exponential growth phase in this decade with the introduction of the first UNIX operating system. Intel’s RAM chip, the computer scanner, micro-processors, email programs, the first home video game: Atari’s “Pong” game, the first home computer: The Altair 8800 (powered by Microsoft’s BASIC computer language), the Apple computer, and the expansion of IBM’s operating system, software, and hardware.
Computer technology helped more Americans to move out to suburban areas more than ever before. More people could work from home with the new computer and communications technology at their disposal. The U.S. suburban population exceeded 100 million people by the end of this decade, average U.S. fertility rates per household hovered below two children throughout much of the 1970s, and the percentage of married women in the workforce exceeded 50% by the end of this decade. Americans in the 1970s experienced some pains, but increased prosperity was just around the corner.
Suburbia’s Evolution: The 1980s
The decade of the 1980s began during the middle of a major economic recession. The first quarter of 1980 had 30-year Treasury Bonds yielding over 12%, U.S. Treasury Bills were near 15.6%, and inflation was hovering near 14.6% on an annualized basis. The Federal Reserve eventually quashed inflation with the massive increase in short term interest rates, and the inflation and economic numbers later improved dramatically in 1982.
When President Ronald Reagan took office in January 1981, the Dow Jones index was 970, and real estate was sluggish due to the high rates. One of Reagan’s first actions was to enact a series of tax cuts to try to improve the U.S. economy. Reagan helped reduce the top marginal tax rate from a high of 70 percent down to 28 percent in 1981.
In addition, the new Tax Act of 1981 encouraged the creation of new tax shelters (i.e. real estate and equities investments). This later fueled a new investment boom. The flip side of the tax cuts is that the federal budget deficit grew to record levels as the reduced tax revenues did not fully cover the government’s expenses at the time.
The 1981 tax cuts were later followed by The Tax Reform Act of 1986. The 1986 Tax Act was pushed by President Reagan, passed by a Democratic controlled Congress, and a Republican controlled Senate. The new Tax Act reduced tax levels even more, the tax base was expanded so more individuals and businesses were taxed, tax laws were simplified, and the investment tax credit was repealed.
Both short term depreciation schedules and the use of accelerated depreciation were eliminated. The government established new cost recovery periods of 27.5 years for residential real estate, and 31.5 years for non-residential properties.
The 1981 Tax Act encouraged the over building of highly leveraged real estate in the early 1980s. The building boom was later followed by a building bust when both the depreciation and the “passive loss” rules were tightened as a result of the 1986 Tax Act. The value of much of what had been built in the early 1980s was adversely impacted by the 1986 Tax Act.
One of the major fallouts of the economic recession of the late 1970s and the early 1980s was the eventual collapse of over 1,000 Savings and Loans (or Thrifts). The Federal Savings and Loan Insurance Corporation (FSLIC) was effectively bankrupted by the collapse of so many major lending institutions in such a short period of time. As a result of the FSLIC collapse, the U.S. government with the help of U.S. taxpayers, stepped in and covered losses of between $175 and $190 billion dollars (see the Savings and Loan vs. Credit Crisis section)
Congress later turned over the management of all of the assets and liabilities to the Resolution Trust Corporation (RTC) in 1989. The RTC’s focus was to liquidate the assets of the failed savings and loans. It was during this time that interest in real estate foreclosures began to increase exponentially.
Savvy real estate investors purchased homes, condominiums, apartment buildings, and commercial properties for a fraction of their recent market value. The American taxpayer helped cover any losses incurred for the heavily discounted property sales. Mortgage professionals, however, lost many of their key funding sources for their clients due to the loss of so many flexible S & L lending options.
The expansion of American suburbia was tremendous in the 1980s as the 1981 Tax Act encouraged builders to build small and large commercial property centers. In addition, residential housing tracts were built right alongside the new commercial property developments in places like Dallas, Houston, and Phoenix.
The computer and high tech revolution continued in the 1980s with the introduction of the floppy computer disc by Sony in 1980, the improvement in portable computers, the introduction of DOS by Microsoft and their affiliates, Apple’s Macintosh Computer (1984), Microsoft’s Windows software program, the CD-ROM, and the creation of the world wide web (www) in 1989. As with previous decades, the technological advances allowed more Americans to live farther away from major urban areas as they had the technological and communications systems at their disposal either at their home or their suburban offices (or both).
Fertility rates for American families remained close to two children per household throughout this decade. Approximately 60% of married women were working full time by the end of the 1980s, and the size of American suburbia reached close to 120 million people by 1989.
The economy started the decade in the midst of a recession, but the economy closed out the decade much stronger as interest rates and inflation dropped, technological advances continued, America won the “Cold War” with the Soviets, tax rates dropped (although the federal deficit increased), the Savings and Loan Crisis situation worsened, and both the stock and real estate markets improved. The economic boom of the 1980s later continued well into the next decade.
Stay tuned for part 3 (Suburbia’s Evolution: The 1990s up to the present) in the issue after next.
Author: Rick Tobin
Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.
Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.
You can visit Rick Tobin at RealLoans.com.