Frenzied Finance

January 15, 2014, 4:43 pm

Real estate bubbles did not pop into existence in the 21st century. There’s a long tradition of land speculation in American history, something of which I was reminded of during my research today. I was reading the 1943 memoirs of Colonel Edwin Bowden, a career Army officer, and he was discussing his involvement in the Florida land boom of the 1920s. As one historian described the boom:

There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925. The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage. The shirt-sleeved crowds hurrying to and fro under the widely advertised Florida sun talked of binders and options and water-frontages and hundred thousand-dollar profits; the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion. The warm air vibrated with the clatter of riveters, for the steel skeletons of skyscrapers were rising to give Miami a skyline appropriate to its metropolitan destiny. Motor-busses roared down Flagler Street, carrying “prospects” on free trips to watch dredges and steam-shovels converting the outlying mangrove swamps and the sandbars of the Bay of Biscayne into gorgeous Venetian cities for the American homemakers and pleasure-seekers of the future.

Bowden was newly married with a baby son in 1925, living in Georgia, but that did stop him dabbling in real estate: “The year 1925 saw my first, and it is hoped, last adventure in frenzied finance. The Florida land boom was at its dizziest peak and many tales of riches backwashed through the local channels.” Bowden connected with a friend in Florida and “placed five hundred dollars in the whirling maelstrom.” Success! They “emerged with fifteen hundred cash in forty-five days.” But, of course, that was not enough. Once in, why stop? “Re-invested, this amount pyramided to six thousand cash in sixty days.” At this point, the land boom was at its frothiest, just on the edge of utter collapse. Bowden began to think carefully, but not carefully enough. “Six thousand dollars in four months, on an original investment was a pretty fair return; wisdom told me to stop but the lure of real riches was too great so back it went, accompanied by an additional thousand.” Even that worked: “one month later I could have have sold for ten thousand but held out for twelve.” But then the crash came, and the prices plummeted, leaving him with nothing but essentially valueless land that he could not get rid of, and on which he owed taxes. “Six months later it was necessary to employ the services of a lawyer to persuade the sheriff to take it for taxes. The experience gained was cheap at the price for the return is usually commensurate with the investment.”

The land boom, though particularly frenzied in Florida, was nationwide, as this chart shows:

Table from Leo Grebler, David M. Blank and Louis Winnick, “The Course of Residential Construction, 1889-1953″ in Capital Formation in Residential Real Estate: Trends and Prospects

Note the massive surge in housing starts in the middle of the 1920s, with the peak right around 1925. Lots of people lost their shirts in 1926-27. The Bowdens were fine. He had his army salary and his wife’s family was comfortably middle-class. The $1500 they lost (not counting the valuations) works out to about $20,000 in 2013 dollars. A substantial loss but not a devastating one. The US economy was not so lucky as the land crash was one of the precursors of the depression which started only a few years later.

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