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The US Real Estate Bubble: Was This Time Different?

by Elaine Schwartz    •    Apr 21, 2013

Our recent housing bubble has been called a unique phenomenon by economist Robert Shiller. With its national impact, a connection to houses rather than land, and a demand side surge fueled by “investor-induced speculation,” the rise and subsequent fall in housing prices (see graphs below) has been different from other real estate bubbles.

Here, though, is my description of the 1920s Florida boom and bust in an excerpt from Econ 101 1/2. Doesn’t it sound rather familiar?

“Before 1920, Miami Beach, Coral Gables and Tampa–indeed most of the Florida we know today–did not even exist. Widespread news of the glorious climate, the newfound mobility created by the auto, optimism because of Coolidge prosperity, and a swarm of developers transformed one huge expanse of swampland into a vacation wonderland…or what was supposed to become one.

In 1925 two thousand Miami real estate agents were reported to be selling acreage. Blueprints abounded. Entire communities were planned and sold long before the first bulldozers appeared. Across the state people were cutting down trees, moving tons of sand, fashioning lagoons, paving streets, and building houses and hotels. Without even counting vacationers, Miami’s population jumped from 30,000 in 1920 to 75,000 five years later.

{But then…}

The Florida boom collapsed in 1926. At first people began to default on payments for land on which they had left a binder. It was said that one gentleman who had sold some property for $12 an acre experienced regret because the land was resold repeatedly, at first for $17, then $30, and finally $60 an acre. The gentleman had cause for further regret. Because no one in the sequence of transactions had paid what was due, once Florid’s economic decline began, the property moved backward from hand to hand. The story ends with him repossessing his land.

Compounding the economic contraction in Florida were the other calamities that followed. Two hurricanes struck. A September 18, 1926 storm targeted Miami. It left hundreds dead and roofs, autos, yachts, and other assorted debris strewn haphazardly in its wake. The next step was for the banks to fail. With everyone needing more money and few having it, the number of Florida’s bank collapses steadily climbed. From thirty-one in 1928 to fifty-seven in 1929, the number was destined to rise even further. The final blow was struck when the Mediterranean fruit fly destroyed the 1929 citrus crop. And by then, because the entire nation was starting to experience an economic decline, there was no one to pick up the pieces in Florida.”

Unrealistic optimism, demand driven price increases, speculative purchases, a cascade of sales, catastrophic banking problems. For a real estate bubble, can we ever say, “This time it’s different?”

Sources and Resources: My thoughts about whether our recent housing bubble has been so unique started with economist Robert Shiller’s column in today’s Sunday Business section of the NY Times. It returned me to Econ 101 1/2, my book from what is now HarperCollins. (Out of print, Econ 101 1/2 will be published in a Kindle version during September, 2013.) The wonderful housing price maps that follow were from the NY Fed. Here, you can see a US map for each year since 2005.

Described by the NY Fed, these maps show “changes in home prices each month compared with prices one year earlier…”

Change in US Housing Prices 2008

Change in Housing Prices 2013

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