Sunday, December 24, 2006

"...San Diego, Del Mar, Azusa, Redlands, Riverside, Pasadena, anywhere brought fabulous prices...and the boom utter collapse..."

This December 6, 2006 article by Fred Sheehan called "A Brief, Superficial, and Arbitrary History of Property-Price Collapses" uses Los Angeles and Southern California as illustrations. The title of this post was quoted from David Starr Jordan, writing about a severe So Cal real estate bust in 1887 and 1888, despite a decade in which the population was doubling. Sheehan also looks at data from other historians and argues how the argument that demographics supports real estate prices is flawed. I admit it's difficult to verify the author's statement that nominal residential property prices in some part of the country have never recovered after the 1920's-1930's collapse. But do take note of what Sir John Templeton says at the end of the article.

The Anderson Forecast team at UCLA might restore one’s hope that academic economists 
fulfill a productive function. Having disparaged the California housing boom through 
its ascent, a springtime presentation by one of its economists predicted the swoon 
that has come to pass. Alas, he stumbled. Asked if a real estate crash was in store, 
he reverted to form: Southern California is in no way comparable to such one-industry 
towns as Houston, and besides, California had never suffered a real estate meltdown. 
On the first point, with 2% of adults in California now proudly waving real estate 
licenses to sell, houses to California today may be as dominant a force as oil to 
Houston in the 1980s. On the second point, one of the worst real estate debacles in 
the history of the United States occurred on the ground where he stood.

More important than the misleading history lesson is the foregone opportunity to 
profit. The banking system today is a far more reckless operation than during earlier 
periods. This offers investment options.   

Maybe the professor’s own education is lacking. For all the data spilling forth that 
quantify current property trends (e.g., house sales, inventory, borrowing rates), 
reference to past price changes is lacking. Unlike historical data on stock and bond 
market peaks and valleys, the history of housing swoons lies entombed in the dark. 
The information is difficult to collect, if it was ever collected at all. Therefore, 
such formulations as “the stock market fell an average of x% during past market 
breaks” do not exist. Yet, to ignore what we do know leaves us without any reference 
when economists make off-the-cuff predictions with no fear of contradiction.

A recent example by America’s most successful mortgage broker was par for the guild 
and for the man. On October 26, former Federal Reserve Chairman Alan Greenspan 
mumbled that the housing slump is “likely past.” Exactly one week later, this 
unsubstantiated opinion was expertly choreographed into a National Association of 
Realtors $40-million-advertising campaign with full-page newspaper ads: “It’s a Great 
Time to Buy or Sell a House.” According to the upper-right-hand quadrant of the 
newsprint layout, the man who told the nation “a traditional fixed-rate mortgage 
might be an expensive method of financing a loan” in February 2004, only to raise 
rates two months later, assures us now that the fourth quarter (of 2006) will 
“certainly be better than the third quarter.”

Alan Greenspan has always been wrong when it mattered. But that’s enough of him. What 
follows is a brief, superficial, and arbitrary history of property-price collapses in 
the United States. It is true any tenured economist would toss this summary into the 
dustbin – only data worthy of correlation and regression analyses are worth knowing. 
(Charles Kindleberger’s Manias, Panics and Crashes is chock full of property-crash 
prices, but the late and great economist was his own man.) The intention of this 
exposition is to annotate the broad generality that real estate prices never fall. 
When Houston in the 1980s and Southern California in the 1990s are mentioned, these 
tempests are qualified as local market quandaries. This is both selective (only 
post-World-War II need apply) and faulty (the national price level dropped in 1964). 
And besides, since most local markets across the country are falling now, parochial 
dips in the past are worth visiting. Alas, the broad generality is what most everyone 
knows and the National Association of Realtors should be congratulated for succeeding 
so thoroughly in its marketing campaign.

In one sense, the post-War fixation is proper: the Federal Reserve’s money printing 
press is greased and oiled to ward off a collapse in prices today. Yet, to save the 
housing market by inflating credit is a remedy for a specific problem that would 
cause a general epidemic. The Fed has no control over the direction of credit flows. 
Should the current rate of credit growth spill into consumer prices, $50 hamburgers 
will create a bull market in Ramen Pride. It is doubtful the unnerving private equity 
flows today would exist if not for current Fed efforts to resurrect the moribund 
housing market. If the authorities accelerate this vain effort, the credit inflation 
will chase things and Spam will be served for Thanksgiving dinner.

Should the Fed either resist the temptation to hyperinflate, or find itself incapable 
of doing so, the current housing market will fall into a much longer history of 
bubbles. Here, the most important recurring characteristic is the propellant for all 
such bubbles: credit. The recent mania was no different: it was not a housing feast 
but an indulgence of mortgages.

A protracted exposition on California is explored for the benefit of haphazardly 
tutored students at UCLA. Florida is next in line followed by some quick flybys of 
other mortgage manias.

The population of Los Angeles rose from 10,000 in 1880 to 50,000 in 1890 and 100,000 
in 1900. Yet, a severe real estate bust wiped out most of the wealth in 1887 and 
1888.  David Starr Jordan described the boom and bust in California and the 
Californians: “[A]lmost every bluff along the coast, from Los Angeles to San Diego 
and beyond was staked out in town lots.” He continued: “Every resident bought lots, 
all the lots he could hold. The tourist took his hand in speculation. Corner lots in 
San Diego, Del Mar, Azusa, Redlands, Riverside, Pasadena, anywhere brought fabulous 
prices. A village was laid out in the uninhabited bed of a mountain torrent, and men 
stood in the streets in Los Angeles… all night long, to wait their turn in buying 
lots. Land, worthless and inaccessible, barren cliffs' river-wash, sand hills, cactus 
deserts' sinks of alkali, everything met with ready sale. The belief that Southern 
California would be one great city was universal. The desire to buy became a mania. 
‘Millionaires of a day,’ even the shrewdest lost their heads, and the boom ended, as 
such booms always end in utter collapse.”

Of course, those “Visionaries” who believed Southern California would be “one great 
city” were correct. This was an impressive long-sighted prediction (and, we can be 
sure, also promoters’ attempts to entice more fish to the lure), yet, “even the 
shrewdest” lost their shirts. Those today who harp on “housing shortages” and the 
demographic needs of a growing population should consider a city that went broke 
during a decade of 500% incremental growth.

In 2006, “utter collapse” looks remote. It is difficult to imagine. It is drummed in 
to us that the Fed would never permit another mass default such as occurred in the 
1930s. So we turn to the 1890 account of T. S. Van Dyke, author of Millionaires for a 
Day, who writes in terms a Californian might find enriching today, given the loan 
markdowns – and tight credit – sure to beset the more aggressive local lenders: "The 
money market tightened almost on the instant. From every quarter of the land the 
drain of money outward had been enormous, and had been balanced only by the immense 
amount constantly coming in. Almost from the day this inflow ceased money seemed 
scarce everywhere, for the outgo still continued. Not only were vast sums going out 
every day for water-pipe, railroad iron, cement, lumber, and other material for the 
great improvements going on in every direction, most of which material had already 
been ordered, but thousands more were still going out for diamonds and a host of 
other things already bought – things that only increase the general indebtedness of 
community by making those who cannot afford them imitate those who can. And tens of 
thousands more were going out for butter, eggs, pork, and even potatoes and other 
vegetables, which the luxurious boomers thought it beneath the dignity of 
millionaires to raise."

Van Dyke’s paragraph addresses a handful of parallel booms and busts that accompany 
any and all property credit booms and busts. These might be considered by the reader. 
Of a more specific nature, we do know the population in Los Angeles proper was 
supplemented by at least 200,000 transients in 1887. (Living in tents, they used the 
post office for mail delivery.) We know that over 40% of houses bought nationwide in 
2005 were for speculation or second (or third, or fourth) homes. (The Internet 
rendered the pup tent unnecessary, making it possible to buy blocks of houses without 
missing one’s favorite sitcom.) Price levels are hard to come by; the momentum of 
day-traders is easier to track. We also know that the value of real estate 
transactions in Los Angeles County exceeded $2 million for the first time in May 
1886, passed $5 million in January 1887, $10 million in June 1887, $12 million in 
July 1887, fell below $5 million in December 1887 and slid under $3 million in 
November 1888. (The figures look small but it is the change in proportions that 
matter. There was no Federal Reserve in those days to print and inflate the money 
supply as it wished – the reader might feel more at home by replacing “million” with 

Of greater immediate importance for those considering a short or put position against 
California lenders, is the comparative recklessness of banks today. In The Boom of 
the Eighties, Glenn S. Dumke found that banks became more conservative as the boom 
reached its peak. “In 1885 loans amounted to 80% of deposits; in January 1887, to 62 
½ per cent…. By July of 1887, less than half of the banks’ funds were on loan, and 
six months thereafter only one quarter.” There were a couple of minor bank runs; the 
banking system stood rock solid after the crash. All this, and without the 500 Ph.D. 
economists on the Federal Reserve staff whose models have proved housing bubbles are 
either inconsequential or cannot exist.

The Florida land mania of the 1920s offers another potentially fruitful comparison 
for the contemporary investor – then, too, banks were tightwads compared to the 
profit-mad lenders of today. Promoters descended on the state. Restaurants and delis 
served lines of speculators coffee for 75 cents (with no cream) when the going price 
for a cup in New York City was a nickel. In the summer of 1925, residents of Miami 
placed “Not for Sale” signs to ward off the pests. Leases to realtors reached $700 a 
square foot in Miami, when similar space at Broadway and 42nd Street in New York – a 
very desirable location – rented for $13 a square foot. Even today, the top 
commercial property rents in the world, in Hong Kong and London, top out at around 
$250 and $220 a square foot, respectively.  

The momentum traders in Miami, tracked by real estate transfers, increased volume 
from 4,126 in January 1924 to 9,744 in January 1925 to 16,960 in October 1925 to 
4,491 a year later. By March 10, 1926, it was reported that scores of small real 
estate offices had been closed “overnight.” Miami real estate bond houses took 
advantage of a stock market break in that same month. They waged a full-page ad 
campaign: “How Wall Street Lost $4 Billion: and how you can forever escape such 
losses.” It seems safe to say the credulous readers of National Association of 
Realtors propaganda today will be just as dissatisfied as the followers of Miami bond 
touts 80 years ago.

Price depreciations are anecdotal, though a good part of the property went to zero. 
D.P. Davis sold 875 acres near Tampa in 1924 for $18 million. People waited in line 
40 hours before the sale began. Most of the property was underwater. In 2005, San 
Diego-based Zarzar Land sold 10- and 20-acre lots of West Texas desert to eager 
buyers on eBay. The land was worthless. The local school district included 53 
students. It took 100 acres to support each cow. The Texas Attorney General’s office 
was asked to interfere but decided not to. “The only thing we could take action on is 
something like the Deceptive Practices Act, but if you look at their websites, they 
tell people there is no survey, no water, no utilities,” reckoned the Assistant 
Attorney General.

A skeptical view of the media would go a long way to restoring common sense. The 
parade of economists who echo Greenspan are daily features in the newspapers and 
television. In mid-summer 1925, the Miami Daily News set a New World Record with a 
506-page edition – almost all of it real estate advertising. On October 25, 1925, the 
Miami Herald published a story planted by a movie and real estate promoter who 
cautioned, “a treacherous Arctic current had been discovered off the coast of 
California and in a few years would freeze the California climate so severely that 
filmmakers would have to quit Hollywood and ship their studios to Florida.”

Homer B. Vanderblue wrote in 1927 the money spent on skyscrapers in Miami “has 
probably been lost exactly as though it had been sunk in drilling dry holes in an oil 
field.” In May 2005, Miami boasted 60,000 condominiums that had been sold but not yet 
built. Prices of houses and condos rose 28% in 2005. In South Beach, Miami, a new, 
20-story condominium sold beach cabanas for $850,000 apiece. 

That was last year. In 2006, the city’s condo supply is leapfrogging demand. 
According to Multiple Listing Service of Miami, 34% of the houses and condominiums on 
the market have dropped their price. Many listings, of course, have de-listed. But 
building continues at a ferocious rate: Empire World Towers, two, 106-story hotel and 
apartment buildings, are awaiting approval by the Federal Aviation Authority. Cranes 
over Miami are giving Shanghai and Dubai a run for the most blighted skyline.

Money poured in from points north and west. After the break, it fled. Deposits of 
clearing house banks in Miami rose from $56 million on December 31, 1924, to $191 
million in August 1925, and then fell to $98 million in June 1926. There were 
failures, but, as in California, the banking system acquitted itself. Vanderblue 
reported: “[T]he condition faced by the Florida bankers in 1924 and 1925 was quite 
unprecedented, and it is more remarkable, and greatly to their credit, that most of 
them were prepared for the shrinkage in deposits when it came. The plethora of funds 
had not been allowed to flow into land speculation but was invested mainly in 
corporate and government bonds…. The bank failures were relatively few in numbers….” 
Vanderblue goes on to commend the governor of the Federal Reserve Bank of Atlanta who 
visited every Fed member bank and made sure they were prepared for a collapse. Only 
one Fed member bank in the district failed. By comparison, Greenspan’s bizarre, 
February 2004, adjustable-rate “exotic loan” speech was pitched to the Credit Union 
National Association in Washington. The Fed chairman’s Open Wallet Policy was a clear 
signature of approval for the most irresponsible Florida banks and developers – some 
of whom must now wish the Atlanta Fed governor of 1925 was their regulator in 2005.

It is difficult to offer a comparison to the fate of Florida bank shares today. For 
what it’s worth, the common stock of the Land Company of Florida rose from $50 on 
September 11, 1925, to $89-3/4 at the end of the same month. A year later the 
theoretical price was $20 but was rarely traded.

Florida is merely the most benighted of the 1920s property speculation – the building 
spree crossed the nation. Losses were much greater than from the stock market crash. 
Prices in many cities have never recovered. Nominal prices of Baltimore residential 
property prices are still lower than in the 1920s. Prime commercial property prices 
in Omaha still trade at a discount to Jazz Age highs. In Boston, a lot on Boylston 
Street near Copley Square sold for $2.12 a square foot in 1873, $35.30 in 1912 and 
$3.00 in 1939. A building on Boston’s Arch Street sold for $33 a square foot in 1881 
and traded for $5.13 sq. ft. in 1940. A lot between Summer and Essex Streets sold for 
$2.50 in 1831, for $32.16 in 1916 and $1.80 sq. ft. in 1940.

The dollar has lost approximately 90% of its value since the 1920s. Besides being 
wrong on even a nominal basis, the claim that real estate prices always go up does 
not address what those dollars –going up, down, or sideways – would buy. Homer Hoyt’s 
One Hundred Years of Land Values in Chicago shows that some of the most fashionable 
addresses between the 1860s and 1880s – Michigan Avenue, Dearborn Street, Prairie 
Avenue – sold at prices as much as 50% lower at the height of the 1920s boom, and 
were often 90% lower than their peaks by the 1930s. Economists, especially from real 
estate trade organizations, love to drag out the argument that demographics support 
real estate prices. Yet the population of Chicago rose from 109,000 in 1860 to 
3,376,000 in 1930. (A great visionary who correctly forecast Chicago’s future from 
his Prairie Avenue mansion in the 1870s may still have gone broke if he was dealing 
in real estate.)

John Templeton, who has absorbed price changes in many markets across several 
decades, told Equities magazine in 2003 (well before the peak): “Almost everyone has 
a home mortgage and some are 89% of the value of the home (and yes, some are even 
more.) If home prices start down, there will be bankruptcies, and in bankruptcy, 
houses are sold at lower prices, pushing down home prices further. After home prices 
go down to one-tenth of the higher price homeowners paid, buy them.”


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