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US Housing Crash - History Repeating in Florida and Lessons from the Roaring 20's - Part 2

Housing-Market / US Housing Nov 12, 2007 - 01:58 AM GMT

By: Dr_Housing_Bubble

Housing-Market

Part 1 - Perhaps the boom was due for a "healthy breathing-time…

Best Financial Markets Analysis ArticleAs 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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By Dr. Housing Bubble

Author of Real Homes of Genius and How I Learned to Love Southern California and Forget the Housing Bubble
www.doctorhousingbubble.com

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