Doing some research the other day, I came across a 1926 article from Harper’s Monthly on the Florida real estate boom and how the journalist covering the story eventually succumbed to the boom mentality. (Sorry, there’s no link.) Here’s a short excerpt (from Gertrude Mathews Shelby, “Florida Frenzy,” Harper’s Monthly, January 1926, p. 177):
…I then was offered by a reputable firm a great bargain in a [Fort Lauderdale] city lot for $1000, an unusually low price. Well-located $3000 fifty-foot lots are rather scarce. This bonanza turned out to be hole, a rockpit–and I reflected on the credulous millions who buy lots from plats without ever visiting the land!
But to set against this experience I had one of exactly the opposite sort which left me with a sharp sense of personal loss. An unimportant-looking lot several blocks from the center of Fort Lauderdale (whose population is fifteen thousand) on Las Olas Boulevard had been offered me about a week before at $60,000. I didn’t consider it. It now resold for $75,000.
“It doesn’t matter what the price is, if your location is where the buying is lively,” I was told. “You get in and get out on the binder, or earnest money. If you had paid down $2500 you would have had thirty days after the abstract was satisfactorily completed and the title was approved before the first payment was due. You turn around quickly and sell your purchase-contract for a lump sum, or advance the price per acre as much as the market dictates. Arrange terms so that your resale will bring in sufficient cash to meet the first payment, to pay the usual commission, and if possible to double your outlay, or better. In addition you will have paper profits which figure perhaps several hundred per cent–even a thousand–on the amount you put into the pot. The next man assumes your obligation. You ride on his money. He passes the buck to somebody else if he can.”
“But what happens if I can’t resell?”
“”You’re out of luck unless you are prepared to dig up the required amount for your first payment. You don’t get your binder back. But it’s not so hazardous as it sounds, with the market in this condition.”
Imagine how I felt two weeks later when the same lot resold for $95,000. By risking $2500 with faith that I could have made $35,000 clear, enough to live on for some years. Terror of an insecure old age suddenly assumed exaggerated proportions. Right then and there I surrendered to the boom bacillus. I would gamble outright. The illusion of investment vanished….
Only two years later and a year before Black Tuesday, Joseph Kennedy would liquidate much of his investment portfolio and warn that “only a fool holds out for the top dollar.” He later invested in Florida real estate at depressed, post-boom prices.
Shelby’s story reminded me of the boom mentality that pervaded the country in the 2000s, especially Florida and especially again in my hometown of Naples, where so-called investors driven by the “greater fool theory” were day-trading houses at one point. Lost in most of the popular writings from the 1920s is any understanding of the role played by an activist Fed in expanding credit, lowering interest rates below market rates by its control of the discount rate, inflating the dollar in an explicit strategy to allow the British pound to find its pre-war exchange rate, and the general reinterpretation of the Fed’s implied mandate in the Federal Reserve Act to increase the money supply to ensure funds flowed to “legitimate business,” whether or not the economic was experiencing a panic, and even if this resulted in the bubbling land boom in Florida.
As people tended not to make those connections in the past, so they don’t today, following several years of massive and unprecedented increases in bank reserves engineered by the Bernanke Fed and optimistic news reports that the housing market is recovering. Are happy times and land booms are here again? As Clarence Darrow once said: “History repeats itself, and that’s one of the things that’s wrong with history.”