The last cycle was exacerbated by the confluence of two largely political factors, wildly speculative underwriting and the removal of income tax preferences for real estate. The speculative real estate underwriting of the savings and loans was political in the sense that they were trying to earn themselves out of a hole created by Paul Volcker's interest rate attack on inflation. The industry went to Congress when short term rates were double their portfolio yield and said, in effect, either pay off our depositors now, or give us new lines of business with which we can tap big profits. Some of us questioned whether there were enough profits out there to fill a fifty billion dollar hole in their collective balance sheets. Some of us also questioned whether if the opportunity was there, whether they had the expertise to tap it. Nonetheless, Congress courageously put off the day of reckoning by betting on the business acumen of the thrift industry, thereby introducing "build for fee" among the lesser excesses. As we know, the final reckoning was at least double the original amount, but it happened a couple of Congresses later.
At the same time an unusual alliance of interests passed the first simplification of the income tax code in memory. Coincidentally that simplification removed many income tax motivations for building and owning real estate. An article in Real Estate Review in 1987 estimated the value impact of the Tax Reform Act of 1986 to be on the order of 20%. Income either had to go up, or value down.
Well, we know what happened. Income could not go up in the glut that the Savings and Loans created for most properties in most markets. So markets tanked under the combined effect, tanked for the better part of a decade. It created a once in a lifetime buying opportunity for some.
Now, what is left when the political factors are abstracted? An inventory cycle. In general inventory cycles are a function of ignorance by participants in any given market. To the extent that the information revolution ameliorates that ignorance, future cycles should be less vicious. Industrial inventory cycles used to be disastrous, but rarely are today in this country.