Florida Housing Bubble

Florida Housing Bubble: Comparing A Bubble From the Past To What’s Happening Today

By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Monday, November 18, 2002: Issue #190

“The Florida boom was the first indication of the mood of the Twenties that God intended the American middle class to be rich.” - John Kenneth Galbraith

What is the best advice for real estate investors today? Is it possible that real estate could fall in value by 10% 20% even 50%? The short answer is that anything is possible. So in this Investment U e-Letter, we’ll first take a look at the Florida housing bubble then determine whether or not we’re in a nationwide “real estate bubble.”

The Great Florida Housing Bubble

George Merrick switched from selling fruit to selling Miami land in 1914, and Florida would never be the same again.

In 1910, only 5,471 people lived in Miami. But that was before Merrick. By 1925, he had 3,000 real estate salesmen in Miami. Merrick’s fleet of 76 busses was constantly bringing down prospective buyers who all had the same mission: to get rich on Florida real estate.

George Merrick is only a small part of the story. In all, by 1925, there were 25,000 real estate agents working in 2,000 offices in Miami. As the population grew to 75,000 - remember, it was 5,000 just 15 years earlier - an astonishing one in three Miami residents sold real estate there.

Why was everybody hustling to buy in Florida? Author John Kenneth Galbraith explained it well in his 1954 classic The Great Crash:

“This is a world inhabited not by people who have to be persuaded to believe but by people who want an excuse to believe. In the case of Florida, they wanted to believe that the whole peninsula would be populated by the holiday-makers and the sun-worshippers of a new and remarkably indolent era. So great would be the crush that beaches, bogs, swamps and common scrubland would all have value.”

Getting Rich Was Easy

Stories of overnight fortunes were headlines across the country

“One man picked up ocean frontage for a quarter ($0.25) an acre and sold it for a million;
Another reluctantly took 1,200 worthless acres on a debt and couldn’t sell it at $10 an acre until the boom delivered him a whopping $1.2 million.
A returning soldier traded his overcoat for 10 worthless acres near the beach and soon found it worth more than $25,000.
A poor woman who had bought a Miami lot back in 1896 for $25 sold it during the boom for $150,000.” (From the book Rainbow’s End by Maury Klein.)

Getting rich was easy - buy Florida real estate and you’ll be rich in a few weeks. It seemed true The assessed value of property in Miami went from $63.8 million to $421 million in just four years (1922-1926). Money was growing on trees (palm trees, right?). If there was any value to the underlying asset, nobody cared anymore. And as the real estate housing boom was reaching its peak, nobody even bothered to do any research anymore (just like people buying the dot-coms in the year 2000).

“An enterprising Bostonian, Mr. Charles Ponzi, developed a subdivision “near Jacksonville.” It was approximately 65 MILES west of the city. (In other respects, Ponzi believed in good, compact neighborhoods; he sold 23 lots to the acre.) In instances where the subdivision was close to town, as in the case of Manhattan Estates, which were “not more than three fourths of a mile from the prosperous and fast-growing city of Nettie,” the city, as was so of Nettie, did not exist.” -John Kenneth Galbraith

The Florida Housing Bubble Bursts And Hopes Of Easy Riches Are Crushed

Then - just like the Nasdaq - the bubble burst. And it was painful. In 1925, bank clearings in Miami were in excess of a billion dollars. In 1928, they were $100 million - one-tenth of what they were just three years before. The boom was over. And like the Nasdaq, speculators with hopes of easy riches were crushed.

My friends, this was a real estate bubble. I can see many similarities between Florida real estate in the 1920s and the Nasdaq bubble of 1998-2000. But I really don’t see much similarity in real estate today.

First of all we don’t have any “cities of Nettie,” though we do have people speculating on pre-construction developments. We don’t have people buying sight-unseen like back then. And most importantly, we don’t have the “euphoria” that we had then that is a defining characteristic of speculative bubbles.

While some people think that real estate “always goes up,” some are still very afraid that “it’s too expensive and is about to fall.” I don’t know how many people fall into each camp. But for a speculative bubble to develop, everyone has to believe that this is the sure path to riches - just like people believed about stocks in 1998-2000. We’re not there yet.

Lastly, I define a bubble as “when prices become un-tethered from fundamentals.” Right now, real estate fundamentals, as measured by the amount of rent you can collect on a property versus its value, are fine. You can earn 6%+ in net rent on a rental property. Maybe more (even much more) if you’re lucky or good. Where else can you get paid that kind of income? Nowhere

We’re Still A Long Way From A Real Estate Housing Bubble

No, I don’t think we’re in a housing bubble. If prices double from here, and the word on the street is that “the easy way to get rich is to buy real estate” then we’ll be in a bubble. That will be the time to get worried.

We’re not there yet.

So for most investors, the best advice is to simply don’t worry about your real estate, in particular your rental properties. We are still a long way from the bubble stage.

Prices may slow their rise, or even contract some. Then again, they may continue to rise. (How’s that for an accurate forecast? Remember, I don’t trust forecasts.) Nobody can know what will happen.

But since there is underlying fundamental value it seems smartest to ride it out - particularly if you don’t have too much debt.

Could real estate fall 10% in value? 20%? Even 50%? Sure it’s possible. Anything is possible. But my opinion is that we’re not in a real estate housing bubble. People don’t expect to get rich next month in real estate by buying this month.

Good investing,

Steve

Today’s Investment U Crib Sheet

Rainbow’s End by Maury Klein and The Great Crash by John Kenneth Galbraith - both quoted above - are fine books on the 1929 stock market crash. But a better choice for your education in investment bubbles would be Edward Chancellor’s Devil Take the Hindmost. It’s about as good a financial history book as there is - a lively read that entertains and searches for answers. That’s the way I like ‘em.