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Lenders’ Strategies and the 2026 Real Estate Peak: Echoes of the Past

Updated: Dec 1, 2023

If you look at the run-up to the peak in the last few cycles — 1973, 1989, 2008 — rates always rose alongside prices (much like they’re doing now, as we approach the expected 2026 peak).

It required lending institutions to find innovative ways to attract borrowers into the winner’s curse phase of the cycle (the final two years), regardless of cost-of-living pressures.

Homer Hoyt noted this reoccurring pattern in the run-up to the peak in his book One Hundred Years of Land Values in Chicago (published in 1933).

Commenting on the excesses of the Roaring Twenties, he said:

…the point was reached in 1928 where 100 per cent loans were made on first mortgages in many cases, and where an additional 20 per cent was obtained on a second mortgage. These junior issues had hitherto enabled an owner to raise 80 per cent of the conservative value of his property on the basis of mortgages. A first mortgage of from 50 to 60 per cent of the value of improved holdings could be secured at normal interest rates, and an additional 20-30 per cent on a second mortgage at a premium of from 3 to 6 per cent additional per year. In the inflated market of 1927 and 1928, however, the two mortgages frequently exceeded 100 percent of the cost value of the property even at boom levels.

You’ll recall that the extension of 100%-plus loans was rife, leading to the subprime crash of 2008.

Prior to 2000, subprime lending had been virtually non-existent. In the second half of the cycle, however — post-2001 — it took off exponentially.

Looking back at the 1970s to early 1990s cycle, inflation rates and interest rates rose dramatically, laying the foundation for the ‘savings and loans crises’.

Savings and loan institutions grew a whopping four times the size of the banking industry in the run-up.

They used short-term deposits to fund long-term fixed-rate home mortgages (borrowing short to lend long), allowing thousands to enter the market.

But rapid inflation and rising short-term rates left many paying more to their depositors than they were making on their mortgages.

At the time, US President Ronald Reagan attempted to remedy the situation (kick the can down the road) in the second half of that cycle with deregulation (the Garn-St Germain Depository Institutions Act).

The new laws allowed savings and loan institutions to invest in risky real estate projects, regardless of location.

Loan-to-value ratios, previously limited to 75%, rose to 100% in the years leading to the peak.

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