History has a mysterious way of creeping up on those that fail to study it.
Somehow, with all the talking heads going crazy, you would think this housing market has no parallel in history.
When you hear that the national median home price has never gone down there is always the caveat of “since the Great Depression.”
I’ve written 3 articles about the Great Depression (
letter from a lawyer, letter from a president of a bank, and
3 main reasons why this bubble is worse) highlighting eerie similarities of this credit bubble to the Roaring 20s.
Keep in mind during the 1920s the nation was engulfed with Coolidge prosperity and all things business were here to stay.
In fact, today we are going to examine a few paragraphs from an amazing book by Frederick Lewis Allen called
Only Yesterday written in 1931
which examines the decade of the 1920s in great detail.
A reader of this blog recommended this book sometime ago and I'm glad I had the chance to read this in depth analysis of the 1920s from an author with an uncanny ability to retell history. Dispute it all you want but there is a chapter in the book called
Home, Sweet Florida that if one didn’t see the date, could be published in the Miami Herald dated 2007.
Let us compare and contrast the past with our current housing debacle:
“There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925. The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage. The shirt-sleeved crowds hurrying to and fro under the widely advertised Florida sun talked of binders and options and water-frontages and hundred thousand-dollar profits; the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion. The warm air vibrated with the clatter of riveters, for the steel skeletons of skyscrapers were rising to give Miami a skyline appropriate to its metropolitan destiny. Motor-busses roared down Flagler Street, carrying "prospects" on free trips to watch dredges and steam-shovels converting the outlying mangrove swamps and the sandbars of the Bay of Biscayne into gorgeous Venetian cities for the American homemakers and pleasure-seekers of the future. The Dixie Highway was clogged with automobiles from every part of the country; a traveler caught in a traffic jam counted the license-plates of eighteen state among the sedans and flivvers waiting in line. Hotels were overcrowded. People were sleeping wherever they could lay their heads, in station waiting- rooms or in automobiles. The railroads had been forced to place an embargo on imperishable freight in order to avert the danger of famine; building materials were now being imported by water and the harbor bristled with shipping. Fresh vegetables were a rarity, the public utilities of the city were trying desperately to meet the suddenly multiplied demand for electricity and gas and telephone service, and there were recurrent shortages of ice.”
So first we must realize that real estate frenzies have occurred in the past. In addition, the idea of people waiting to bid on property not currently built occurred during the 1920s in Florida. And all those high-rise condos waiting to come online in 2008 or 2009? Florida again seems to be ground zero of the real estate frenzy. Even the out of town investors going zero down on a mortgage for a property that isn’t even built is something that happened long ago. Reminds many people of the multiple license plates in Arizona a few years ago of people extending their credit to buy a pre-fab construction only to flip it a few months down the road. Like any boom, this didn’t happen overnight back then either. What events led to Florida being the prime location? Let us take a look:
“For this amazing boom, which had gradually been gathering headway for several years but had not become sensational until 1924, there were a number of causes. Let us list them categorically.
1. First of all, of course, the climate-Florida's unanswerable argument.
2. The accessibility of the state to the populous cities of the Northeast-an advantage which Southern California could not well deny.
3. The automobile, which was rapidly making America into a nation of nomads; teaching all manner of men and women to explore their country, and enabling even the small farmer, the summer-boarding-house keeper, and the garage man to pack their families into flivvers and tour southward from auto-camp to auto-camp for a winter of sunny leisure.
4. The abounding confidence engendered by Coolidge Prosperity, which persuaded the four-thousand-dollar-a-year salesman that in some magical way he too might tomorrow be able to buy a fine house and all the good things of earth.
5. A paradoxical, widespread, but only half-acknowledged revolt against the very urbanization and industrialization of the country, the very concentration upon work, the very routine and smoke and congestion and twentieth- century standardization of living upon which Coolidge Prosperity was based. These things might bring the American businessman money, but to spend it he longed to escape from them-into the free sunshine of the remembered countryside, into the easy-going life and beauty of the European past, into some never-never land which combined American sport and comfort with Latin glamour-a Venice equipped with bathtubs and electric iceboxes, a Seville provided with three eighteen-hole golf courses.
6. The example of Southern California, which had advertised its climate at the top of its lungs and had prospered by so doing: why, argued the Floridians, couldn't Florida do likewise?
7. And finally, another result of Coolidge Prosperity: not only did John Jones expect that presently he might be able to afford a house at Boca Raton and a vacation-time of tarpon-fishing or polo, but he also was fed on stories of bold business enterprise and sudden wealth until he was ready to believe that the craziest real-estate development might be the gold-mine which would work this miracle for him.
Crazy real-estate developments? But were they crazy? By 1925 few of them looked so any longer. The men whose fantastic projects had seemed in 1923 to be evidences of megalomania were now coining millions: by the pragmatic test they were not madmen but-as the advertisements put it- inspired dreamers. Coral Gables, Hollywood-by-the-Sea, Miami Beach, Davis Islands-there they stood: mere patterns on a blue-print no longer, but actual cities of brick and concrete and stucco; unfinished, to be sure, but growing with amazing speed, while prospects stood in line to buy and every square foot within their limits leaped in price.”
Did someone write this yesterday? The book title is still accurate even though 1931 is a distant memory. The same arguments used in 1925 are being used in the current marketplace regarding housing. First, the main argument for Florida and Southern California is the weather. We’ve dubbed it the sunshine tax. So this argument for pumping ludicrous mortgages isn’t something new. Next, we have the argument of proximity to locations and centers of employment. Another argument used by many housing pundits pushing these overpriced units. None of these things changed (after all we still have the sun) and this is nearly 100 years ago. Subdivide and conquer seems to be the mantra in real estate booms. The author makes a unique point about the primal desire for families to reunite with a more tranquil life at the cost of working like a maniac to afford the mortgage on a home in an urban area. A Catch-22 that many families in 2007 are facing. And the marketing and advertising tactics haven’t changed. Have you seen the current ads for Florida housing? “Your home with the tranquility of Venice” or “Come escape to your own private Paris.” What they are implying is that your subdivided cookie cutter home is somehow similar to condensed apartment style living from Europe. Last time I checked not many Parisians or Italians had 2 car garages to support monster Hummers and Expeditions. So this yearning for European style tranquility is highly misplaced because even Europeans do not live this way. But the underlying implication is “you too can get away from the stressful congested freeways and 12 hour work days in the city” at least for a few hours in your private palace even though you have to work like a maniac to afford your exotic-high-flying-zero-down mortgage. But did people get caught up in the frenzy like this current boom?
“Yes, the public bought. By 1925 they were buying anything, anywhere, so long as it was in Florida. One had only to announce a new development, be it honest or fraudulent, be it on the Atlantic Ocean or deep in the wasteland of the interior, to set people scrambling for house lots. "Manhattan Estates" was advertised as being "not more than three fourths of a mile from the prosperous and fast-growing city of Nettie"; there was no such city as Nettie, the name being that of an abandoned turpentine camp, yet people bought. Investigators of the claims made for "Melbourne Gardens" tried to find the place, found themselves driving along a trail "through prairie muck land, with a few trees and small clumps of palmetto," and were hopelessly mired in the mud three miles short of their destination. But still the public bought, here and elsewhere, blindly, trustingly-natives of Florida, visitors to Florida, and good citizens of Ohio and Massachusetts and Wisconsin who had never been near Florida but made out their checks for lots in what they were told was to be "another Coral Gables" or was "next to the right of way of the new railroad" or was to be a "twenty-million-dollar city." The stories of prodigious profits made in Florida land were sufficient bait. A lot in the business center of Miami Beach had sold for $800 in the early days of the development and had resold for $150,000 in 1924. For a strip of land in Palm Beach a New York lawyer had been offered $240,000 some eight or ten years before the boom; in 1923 he finally accepted $800,000 for it; the next year the strip of land was broken up into building lots and disposed of at an aggregate price of $1,500,000; and in 1925 there were those who claimed that its value had risen to $4,000,000. A poor woman who had bought a piece of land near Miami in 1896 for $25 was able to sell it in 1925 for $150,000. Such tales were legion; every visitor to the Gold Coast could pick them up by the dozen; and many if not most of them were quite true-though the profits were largely on paper. No wonder the rush for Florida land justified the current anecdote of a native saying to a visitor, "Want to buy a lot?" and the visitor at once replying, "Sold."
Greed has an interesting way of coming back into the mainstream. As the author points out, even places that were 15, 20, or 30 miles away from the prime locations were selling like crazy simply because the real estate tornado frenzy brought these places into the fold. Think of the Real Homes of Genius, the Inland Empire, Arizona, Nevada, and Florida. One need only look at the current headlines of current Florida housing to find similar parallels from the above. Why are housing pundits so quick to dismiss history without taking a critical eye of what happened in the past? Do they somehow think they are above the narrative of history? Is this time really different? They want you to believe that they have found the new calculus of housing success. Well as you are seeing, this bust is playing out exactly like it did almost 100 years ago. To continue with the chapter, it appears that speculation was rampant just like it was during our boom:
“Speculation was easy-and quick. No long delays while titles were being investigated and deeds recorded; such tiresome formalities were postponed. The prevalent method of sale was thus described by Walter C. Hill of the Retail Credit Company of Atlanta in the Inspection Report issued by his concern: "Lots are bought from blueprints. They look better that way .... Around Miami, subdivisions, except the very large ones, are often sold out the first day of sale. Advertisements appear describing the location, extent, special features, and approximate price of the lots. Reservations are accepted. This requires a check for 10 per cent of the price of the lot the buyer expects to select. On the first day of sale, at the promoter's office in town, the reservations are called out in order, and the buyer steps up and, from a beautifully drawn blueprint, with lots and dimensions and prices clearly shown, selects a lot or lots, gets a receipt in the form of a `binder' describing it, and has the thrill of seeing `Sold' stamped in the blue-lined square which represents his lot, a space usually fifty by a hundred feet of Florida soil or swamp. There are instances where these first-day sales have gone into several millions of dollars. And the prices! ... Inside lots from $8,000 to $20,000. Water-front lots from $15,000 to $25,000. Seashore lots from $20,000 to $75,000. And these are not in Miami. They are miles out-ten miles out, fifteen miles out, and thirty miles out."
Wait. Did they say people needed 10 percent down? We out did the speculative bubble of the 1920s since we cut out that measly 10 percent down and went zero down and sometimes people got cash-back at closing! This reminds one of sales even in Orange County California where new subdivisions sold out the first day. People waited in line for days to get on a list for the chance to purchase a home at a hyper inflated price. Looking back people must feel that they were waiting in line to be punched in the face by Mike Tyson. And what about the metal cranes covering the Florida skyline? Many of these units won’t hit the market until 2008 and 2009 at the peak of the bubble decline. Fascinating how greed can overtake an entire population. And lets be honest, how many of these people actually had visions of buying a Miami condo to live and raise a family for an entire generation? I would venture that the percent can be counted on one hand. What kind of rhetoric was used to pump these new paradise resorts? Let us take a look:
“Steadily, during that feverish summer and autumn of 1925, the hatching of new plans for vast developments continued. A great many of them, apparently, were intended to be occupied by what the advertisers of Miami Beach called "America's wealthiest sportsmen, devotees of yachting and the other expensive sports," and the advertisers of Boca Raton called "the world of international wealth that dominates finance and industry . . . that sets fashions . . . the world of large affairs, smart society and leisured ease." Few of those in the land-rush seemed to question whether there would be enough devotees of yachting and men and women of leisured ease to go round.
Everywhere vast new hotels, apartment houses, casinos were being projected. At the height of the fury of building a visitor to West Palm Beach noticed a large vacant lot almost completely covered with bath- tubs. The tubs had apparently been there some time; the crates which surrounded them were well weathered. The lot, he was informed, was to be the site of "One of the most magnificent apartment buildings in the South"-but the freight embargo had held up the contractor's building material and only the bathtubs had arrived! Throughout Florida re- sounded the slogans and hyperboles of boundless confidence. The advertising columns shrieked with them, those swollen advertising columns which enabled the Miami Daily News, one day in the summer of 1925, to print an issue of 504 pages, the largest in newspaper history, and enabled the Miami Herald to carry a larger volume of advertising in 1925 than any paper anywhere had ever before carried in a year. Miami was not only "The Wonder City," it was also "The Fair White Goddess of Cities," "The World's Playground," and "The City Invincible." Fort Lauderdale became "The Tropical Wonderland," Orlando "The City Beautiful," and Sanford "The City Substantial."
Location, location, location. Speculation, speculation, speculation. I was going through this weekend’s LA Times and an inordinate amount of space is given to real estate advertisements. In fact, most of the ads are housing related. For example, you have your multiple electronic stores telling you how to fill up every nook in cranny of your place with 60 inch plasma TVs and state of the art refrigerators that make ice out of thin air. All for 0 percent financing over 24 months. And then we have all the ads about majestic beds and sofas that are fit for King Tut himself. Even the King didn’t have access to American Express! And then we have the housing ads. I was looking at some condo ads in Florida and you would think that you are buying the most fantastic, stupendous, amazing, fabulous, and gorgeous 1,200 square foot piece of land in the entire universe. You may want to buy stock in Thesaurus publishers with the amount of adjectives these advertising and marketing agency use for housing. With the benefit of foresight, we know how the bubble of the 1920s ended but we are still uncertain how this current market will unfold. As humans, we like hearing things in a narrative form. If A happens then B happens which obviously leads to C happening. We are terrible at constructing real-time narratives because we are living the moment and have a hard time stepping back and examining the landscape from a bird’s eye view. Call it existential living. For the sake of forecasting, how did the 1920s Florida housing market end and can we learn anything from it?
“Perhaps the boom was due for a "healthy breathing-time…
As a matter of fact, it was due for a good deal more than that. It began obviously to collapse in the spring and summer of 1926. People who held binders and had failed to get rid of them were defaulting right and left on their payments. One man who had sold acreage early in 1925 for twelve dollars an acre, and had cursed himself for his stupidity when it was resold later in the year for seventeen dollars, and then thirty dollars, and finally sixty dollars an acre, was surprised a year or two afterward to find that the entire series of subsequent purchases was in default, that he could not recover the money still due him, and that his only redress was to take his land back again. There were cases in which the land not only came back to the original owner, but came back burdened with taxes and assessments which amounted to more than the cash he had received for it; and furthermore he found his land blighted with a half-completed development.
Just as it began to be clear that a wholesale deflation was inevitable, two hurricanes showed what a Soothing Tropic Wind could do when it got a running start from the West Indies.
No malevolent Providence bent upon the teaching of humility could have struck with a more precise aim than the second and worst of these Florida hurricanes. It concentrated upon the exact region where the boom had been noisiest and most hysterical-the region about Miami. Hitting the Gold Coast early in the morning of September 18, 1926, it piled the waters of Biscayne Bay into the lovely Venetian developments, deposited a five-masted steel schooner high in the street at Coral Gables, tossed big steam yachts upon the avenues of Miami, picked up trees, lumber, pipes, tiles, debris, and even small automobiles and sent them crashing into the houses, ripped the roofs off thousands of jerry-built cottages and villas, almost wiped out the town of Moore Haven on Lake Okeechobee, and left behind it some four hundred dead, sixty-three hundred injured, and fifty thousand homeless. Valiantly the Floridians insisted that the damage was not irreparable; so valiantly, in fact, that the head of the American Red Cross, John Barton Payne, was quoted as charging that the officials of the state had "practically destroyed" the national Red Cross campaign for relief of the homeless. Mayor Romfh of Miami declared that he saw no reason "why this city should not entertain her winter visitors the coming season as comfortably as in past seasons." But the Soothing Tropic Wind had had its revenge; it had destroyed the remnants of the Florida boom.
By 1927, according to Homer B. Vanderblue, most of the elaborate real-estate offices on Flagler Street in Miami were either closed or practically empty; the Davis Islands project, "bankrupt and unfinished," had been taken over by a syndicate organized by Stone & Webster; and many Florida cities, including Miami, were having difficulty collecting their taxes. By 1928 Henry S. Villard, writing in The Nation, thus described the approach to Miami by road: "Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side- walks, where grass and palmetto take the place of homes that were to be .... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death." In 1928 there were thirty-one bank failures in Florida; in 1929 there were fifty-seven; in both of these years the liabilities of the failed banks reached greater totals than were recorded for any other state in the Union. The Mediterranean fruitfly added to the gravity of the local economic situation in 1929 by ravaging the citrus crop. Bank clearings for Miami, which had climbed sensationally to over a billion dollars in 1925, marched sadly downhill again:
1925.............................$1,066,528,000
1926................................632,867,000
1927................................260,039,000
1928................................143,364,000
1929................................142,316,000
And those were the very years when elsewhere in the country prosperity was triumphant! By the middle of 1930, after the general business depression had set in, no less than twenty-six Florida cities had gone into default of principal or interest on their bonds, the heaviest defaults being those of West Palm Beach, Miami, Sanford, and Lake Worth; and even Miami, which had a minor issue of bonds maturing in August, 1930, confessed its inability to redeem them and asked the bondholders for an extension.
The cheerful custom of incorporating real-estate developments as "cities" and financing the construction of all manner of improvements with "tax-free municipal bonds," as well as the custom on the part of development corporations of issuing real-estate bonds secured by new structures located in the boom territory, were showing weaknesses unimagined by the inspired dreamers of 1925. Most of the millions piled up in paper profits had melted away, many of the millions sunk in developments had been sunk for good and all, the vast inverted pyramid of credit had toppled to earth, and the lesson of the economic falsity of a scheme of land values based upon grandiose plans, preposterous expectations, and hot air had been taught in a long agony of deflation.
For comfort there were only a few saving facts to cling to. Florida still had her climate, her natural resources. The people of Florida still had energy and determination, and having recovered from their debauch of hope, were learning from the relentless discipline of events. Not all Northerners who had moved to Florida in the days of plenty had departed in the days of adversity. Far from it: the census of 1930, in fact, gave Florida an increase in population of over 50 per cent since 1920-a larger increase than that of any other state except California-and showed that in the same interval Miami had grown by nearly 400 per cent. Florida still had a future; there was no doubt of that, sharp as the pains of enforced postponement were. Nor, for that matter, were the people of Florida alone blameworthy for the insanity of 1925. They, perhaps, had done most of the shouting, but the hysteria which had centered in their state had been a national hysteria, enormously increased by the influx of outlanders intent upon making easy money”.
And so the boom ended in a spectacular fashion. The peak hit in 1925 and steadily declined through the Great Depression. And as the author points out, this was during a time when the country was supposedly prospering. Doesn’t this remind you of the current administration touting our record low unemployment rate and record high home ownership rate? You would think we are in the apex of financial success with a minor bump in housing. But markets in Florida and California are hitting massive defaults. Keep in mind we are only in stage one of this housing bear market. Looking at the past as a reference, we know that there will be pain in the next few years. Even if Bush and others are pushing for income relief on debt forgiveness, this means society will carry the burden. After all, if someone bought a $500,000 home and it was foreclosed and sold for $450,000 – shouldn’t the lender and buyer shoulder some responsibility? We will be heading down this moral hazard road for months.
Even looking at current default rates in Southern California, many people in default have loans that are 2 years or younger. Now either the lender did a horrible job looking at the buyer's financial situation in which they should be liable, or a buyer speculated either knowingly or unknowingly. I have empathy for a family that was conned from an FHA fixed mortgage into a $200,000 subprime mortgage at 10 percent with prepayment penalties. No reason for this except higher commissions. But a person buying a $500,000 home trying to flip it for $600,000? See why I have an issue raising the caps? Most people think the money will evaporate like some sort of Vegas magic act. Yet the public as a whole, even those who didn’t participate in this speculating frenzy, will be on the hook if no one directly involved is willing to shoulder the responsibility of gambling [speculating] in a housing bubble. How about the lender, home owner, and the Wall Street players shoulder some of the debt forgiveness instead of asking for a government handout? Why isn't anyone going after the MBS market or the hedge funds? After all, some one did buy these exotic mortgages. So what are some other viable solutions? Lenders can modify terms on 30 year mortgages and extend the duration or drop rates; yet this would suppose that buyers actually bought homes to live in for the longterm. Speculate together, pay together. If you can cut through the green tangled vines of bail out rhetoric, the bottom line is someone isn't happy because the music stopped and they are left standing with no chair.
Back to the Florida boom and bust, it would be wrong to think that the real estate fever in the 1920s was only specific to Florida. Other cities had similar booms as well:
“The final phase of the real-estate boom of the nineteen-twenties centered in the cities themselves. To picture what happened to the American skyline during those years, compare a 1920 airplane view of almost any large city with one taken in 1930. There is scarcely a city which does not show a bright new cluster of skyscrapers at its center. The tower building mania reached its climax in New York-since towers in the metropolis are a potent advertisement-and particularly in the Grand Central district of New York. Here the building boom attained immense proportions, coming to its peak of intensity in 1928. New pinnacles shot into the air forty stories, fifty stories, and more; between 1918 and 1930 the amount of space available for office use in large modern buildings in that district was multiplied approximately by ten. In a photograph of uptown New York taken from the neighborhood of the East River early in 1931, the twenty most conspicuous structures were all products of the Post-war Decade. The tallest two of all, to be sure, were not completed until after the panic of 1929; by the time the splendid shining tower of the Empire State Building stood clear of scaffolding there were apple salesmen shivering on the curbstone below. Yet it was none the less a monument to the abounding confidence of the days in which it was conceived.
The confidence had been excessive. Skyscrapers had been overproduced. In the spring of 1931 it was reliably stated that some 17 per cent of the space in the big office buildings of the Grand Central district, and some 40 per cent of that in the big office buildings of the Plaza district farther uptown, were not bringing in a return; owners of new skyscrapers were inveigling business concerns into occupying vacant floors by offering them space rent-free for a period or by assuming their leases in other buildings; and financiers were shaking their heads over the precarious condition of many realty investments in New York. The metropolis, too, had a future, but speculative enthusiasm had carried it upward a little too fast.”
Compare this to the current metal cranes that stand up like a Brontosaur head in the middle of many metro cities. You see them in San Diego, Miami, and Orange County. Take a plane over Arizona and Nevada and you’ll see a jigsaw of subdivided land and spectacular urban sprawl. Are we growing this fast? Looking at population statistics it doesn’t seem that the building is in proportion to our growing demand for housing; we may have overbuilt a tad bit. Considering that many baby-boomers are looking to downsize, many homes should be coming online in the next 5 to 10 years simply because of the natural occurrence in the shift of demographics. Many will downsize and retire to less urban areas, thus creating more inventory.
A question many are wondering is "will there be another bubble after this one?" Considering we went from a technology bubble to a housing bubble, I think we’ve had enough for two decades. The cost of owning a home in certain areas, as many families are realizing, comes at too high of a cost. A society can only prosper so long via debt spending. So what happened after the boom in Florida?
“After the Florida hurricane, real-estate speculation lost most of its interest for the ordinary man and woman. Few of them were much concerned, except as householders or as spectators, with the building of suburban developments or of forty-story experiments in modernist architecture. Yet the national speculative fever which had turned their eyes and their cash to the Florida Gold Coast in 1925 was not chilled; it was merely checked. Florida house-lots were a bad bet? Very well, then, said a public still enthralled by the radiant possibilities of Coolidge Prosperity: what else was there to bet on? Before long a new wave of popular speculation was accumulating momentum. Not in real-estate this time; in something quite different. The focus of speculative infection shifted from Flagler Street, Miami, to Broad and Wall Streets, New York. The Big Bull Market was getting under way.”
Maybe we will finally see the decade long obsession with real estate go away. However after the boom in the 1920s, people decided to go back and gamble on US Steel, General Electric, General Motors, Woolworth, and Radio. Keep in mind that the economy didn’t shift gears over night. From the peak in September of 1929 it took approximately 3 years to hit bottom in 1932. Will we have another Great Depression? Probably not since there are many other factors in our current economy that are vastly different. However, a recession and a deep one at that, is almost a foregone conclusion.
I highly recommend that you read Only Yesterday by Frederick Lewis Allen because it’ll give you a fascinating and enlightening view of the 1920s and how an important defining time for America still impacts us today. We will always have booms and busts, otherwise known by a nicer name, the business cycle.
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