Exactly 30 years later, Black Monday still holds the record for the stock market’s greatest single-day decline of 22.61%—what would amount to a more than 5,000 point drop in the Dow today.
In the midst of a brash housing boom in the 1980s, real estate agent Donna Olshan started her eponymous Manhattan brokerage. But the stock market crash on Oct. 19, 1987, turned her office overnight into a "halfway house for people who wanted to talk," she recalled.
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"I remember getting calls from clients freaking out...who really lost a lot," Ms. Olshan said. "It changed how and if they were going to buy."
The crash, caused by the growing complexity of the market and the crude beginnings of computerized trading, was relatively short-lived and was not inextricably tied to a real estate bubble in the fashion of the 2008 financial meltdown. The market took only three months to recover, but the event shook confidence across assets, including real estate, and set the groundwork for the recession that hit in the early 1990s.
In New York, Black Monday underscored just how vulnerable the city’s real estate was to the whims of the New York Stock Exchange.
A composite of housing prices for 10 U.S. cities shows that prices continued to appreciate at a clip uninterrupted by October 1987, while price growth puttered to a halt in New York City in the wake of the crash, according to S&P/Case Shiller indices. The city’s housing prices went from flat to falling by the summer of 1988 and kept sliding all the way through 1991.
"They were four bad years," Ms. Olshan said.
Ms. Olshan had recently closed on a co-op when the crash hit. She recalled the worry of pouring money into renovations on an apartment that was no longer worth what she’d paid, she said. To make matters worse, the city was in a state of decay with crime rates soaring and major corporations, including Exxon and JCPenney, fleeing their Manhattan headquarters.
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"The crash was converging with a city that was falling apart," she said.
Hugh Kelly, chief economist at Hugh Kelly Real Estate Economics in Brooklyn, was in the midst of a series of speeches on financial shifts when the market went into freefall on Black Monday. Without the benefit of cell phones and instant news alerts, Mr. Kelly delivered his speech and left the audience with a remarkably auspicious thought: "We don’t know when it will happen, but there’s going to be a big shake."
A waning real estate boom was the cause of Mr. Kelly’s concern. Overdevelopment and rapid price appreciation had taken hold across the country in the 1980s, fueled by small investors taking advantage of new tax benefits. But an act of Congress in 1986 removed many of those benefits and resulted in a cascade of defaults.
"It didn’t happen overnight, but the real estate market was weakening," he said. "You were building an investment climate that was speculative and that was true across all the asset classes."
"The 1987 crash said that forces other than extrapolation of trends were at work in the market," he said. In other words, the crash pulled the rug out from underneath the nation’s confidence. Trust in basic economic principles and the euphoric notion that real estate values would continue to rise into infinity evaporated.
"It was the realization that suddenly things can get very bad," said Michael Slattery, senior vice president of research at the Real Estate Board of New York.
But the financial shudders beginning with the crash of 1987 and the housing bust eventually led to urban renewal in 1990s in New York City.
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Overdevelopment had left office buildings with record high vacancy rates, and the city began a campaign to turn them into condos and create mixed-use neighborhoods, including Manhattan’s Financial District, the home of Wall Street, Mr. Slattery recalled.
That particular neighborhood has now gone from a nine-to-five financial center in the days of the crash to one of the hottest residential areas populated by a growing number of luxury towers that include the Robert A.M Stern-designed 30 Park Place and the so-called "Jenga Tower" at 56 Leonard St.
The ultimate lessons of the crash of ‘87 and subsequent recession, as with every downturn, Ms. Olshan said, is to wait.
"If you go and sell equities or real estate you’re just going to walk into losses," Ms. Olshan said. "When you have a crisis like this, you just have to take a deep breath and sit through it."