As Old as the Hills

“I just got wonderful news from my real estate agent in Florida. They found land on my property.” – Milton Berle

An army of new day traders using government stimulus money that was sent out because the country went into a self-imposed depression caused by a worldwide pandemic is not something I was expecting heading into 2020 but here we are.

In some ways, it seems crazy that we would see such speculation during the most severe economic crash of our lifetimes.

In other ways, this actually makes sense.

As Edwin Lefevre once observed, “Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Things are constantly changing in the world but human nature remains the constant.

There were plenty of comparisons being made in March between this crisis and the Great Depression but the current speculative environment feels more like another boom-bust period that began in the 1920s — the Florida land boom.

The real estate bubble of the mid-1920s was overshadowed by the Great Depression but the mania that originated in the Sunshine State may have been a precursor to the blow-off top that ended in 1929.

As of the late-1800s Florida was still mostly an undeveloped swamp with beautiful beaches. This changed once some enterprising wealthy individuals saw the potential to create the necessary infrastructure, homes, hotels and shopping that would be required to bring in more residents and tourists.

The combination of World War I and the 1918 flu pandemic created a situation in which international travel wasn’t an option for the wealthy elite so Florida became a dream destination for those looking to travel or settle down in a warmer climate.

Once that dream became a reality it didn’t take long for people to lose their minds about the potential riches that could come from buying and selling real estate. The data and anecdotes from the 1920s land boom in Florida show all the hallmarks of a classic mania:

  • 6 million people poured into the state in just 3 years.
  • In 1925, two and a half million people moved to Florida looking for jobs (and most of them found one in construction).
  • Bank deposits in Florida jumped from $180 million in 1922 to $875 million in 1925 (the 1924 bill that abolished state income taxes and the inheritance tax helped).
  • Builders could spend $7,000 making a bungalow in a new neighborhood and immediately sell it for $20,000 the day it was completed.
  • One piece of beach property was purchased for $775,000. A month later it sold for $1.5 million. Another huge beach project was purchased for $3 million, then sold just 3 days later for $7.6 million.
  • Coral Gables was described as “the only city in the world where you can tell a lie at breakfast [about real estate price appreciation] that will come true by evening.”
  • By the fall of 1925 the Miami Police Department was short-staffed because so many of their officers quit the job to become real estate brokers.
  • More than $1 million a day was being spent on real estate in 1925 at the height of the bubble.
  • The Miami Herald set a record for the amount of paid advertising they sold for real estate. The paper sold nearly 675,000 classified ads in 1924 alone.
  • There were so many lots for sale in Florida by the late-1920s, half the population in the entire country would need to buy a place to occupy them all.
  • The crowds were so enamored with buying property, it created small riots. People began throwing checks at developers, which numbered so high they had to be collected in barrels.
  • One person who witnessed the madness observed, “all Florida was like a mighty vacuum sucking in all the loose money in the world.”

Christopher Knowlton details this and more in his book, Bubble in the Sun. One of the stories he shares evokes the speculative actions we’re seeing today in the shares and options of bankrupt companies.

The Robinhood traders of the 1920s Florida land boom were called Binder Boys.

They made money taking advantage of the fact that courthouses were swamped from all of the real estate transactions. This led to long delays in getting the deeds and titles transferred to the rightful owners.

This group of speculators got their name because they drew up contracts, or binders, that included properties and tracts of land which could be purchased for as little as 10% down. Since it could take anywhere from 30-90 days for the settlement to occur on the deeds, these binders were traded back and forth before an additional 25% down payment was required.

So in the weeks between the initial contract and the actual closing, the binders were being traded back and forth like call options. These transactions took place on the streets, in train stations or in backroom deals. Contracts could trade hands as much as eight times in a single day. They effectively created an options market for Florida real estate which required a tiny upfront investment with the opportunity to earn massive returns which simply added lighter fluid to an already out of control fire.

Those massive returns required prices to continue rising which could only occur for so long once the speculative orgy got out of hand.

As is the case with most bubbles, hubris played a role in the downfall of those who became wealthy from the initial price appreciation. Knowlton explains that even as prices began to roll over, the developers who all became fabulously rich (on paper) couldn’t bring themselves to take some money off the table:

As Florida’s real estate kings’ businesses stalled—temporarily, they believed—it provided the perfect opportunity to take stock and take some of the risk off the table. And yet, not one of the big developers chose to do so. Instead, they succumbed to the temptation to celebrate their spectacular success by buying new cars and building new homes. As the New Republic aptly reported in late January, “We are all practitioners in greater or lesser degree of the new hedonism. We insist on living, if not for pleasure alone, at least a life in which comfort and ease are predominant aspects.… The Florida madness is itself sufficient proof that this civilization is still far from having found its equilibrium.”

Florida’s real estate kings were by now enormously successful. And yet the greater their success, the harder it was for them to see their success as something separate and distinct from their own labors; to believe that circumstances, even luck, might have played a part in what they had accomplished.

Their paper wealth didn’t last once people finally came to their senses and the buyers dried up.

One of the biggest developers defaulted on all of the various loans he took out. Nearly 200 creditors were left scrambling to get their millions back. Once the claims were settled in the court system, those creditors would receive just one-tenth of a penny for every dollar they were owed.

Another saw a $60 million development that once sold $16 million of lots in a single day sell for just $10,000 following the Great Depression.

Properties that sold for tens of thousands of dollars would end up changing hands for a few hundred bucks.

Seven out of every 8 cities or towns in Florida ended up defaulting on their municipal bonds.

Forty to 50 banks would go under per year over the next 4 years.

Many of the Binder Boys lost their entire investments when they couldn’t come up with additional funds when down payments that came due.

The names change. The assets are different. The economic environments are never the same. The stories are always new and exciting.

Yet speculation is as old as the hills and it will never go away.

Bubble in the Sun: The Florida Boom of the 1920s and How it Brought on the Great Depression

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