Do You Still Think Real Estate is a Sure Thing?

The real estate “bubble” and resulting sub-prime mortgage crisis continues to unfold and take a heavy toll on credit dynamics in the global economy. But this isn’t the first time in history that investors were convinced real estate was a “sure thing.” And a look back can provide anyone with valuable insight and perspective.

In a 1926 Harpers magazine column, journalist Gertrude Shelby took a jab at those who were being swept up in a Florida Frenzy land rush. Long since out of print, her comments are still frequently quoted: “Did you ever keep chickens? Put down a pan full of big scraps and the hens come running. The first ones grab big pieces and depart rapidly. The others see the pieces in the beaks, and instead of realizing there’s plenty more in the pan, they chase the hens that got the first pieces. That’s resale psychology.”

The 1920s were a time of prosperity in America. Credit was readily available then, too, and even the working class had discretionary income, paid vacations, and autos ready to hit an expanding network of highways. For those who lived in the North or Midwest, that meant an opportunity to escape to sunny, balmy weather. If you mix these ingredients together, you get the perfect recipe for the Florida real estate bubble. While not the country’s first land rush, it went on record as one of the more colorful.

Upper-class planned communities

When pinpointing the beginnings of the bubble, many ignore the “herd mentality” phenomenon and point the finger at George Merrick, a wealthy owner of 3,000 acres of citrus groves and pine trees situated southwest of Miami. In 1922, Merrick set out to develop his land into the “City Beautiful,” one of the country’s first planned communities where upper-class citizens could hobnob on urban golf courses and stroll wide, tree-lined boulevards. It was a vision that would become Coral Gables.

All that was needed to complete the picture were home buyers – lots of home buyers. Just a decade earlier, fewer than 5,500 people were living in Miami. By 1925, Merrick had recruited 3,000 real estate salesmen and bought a fleet of 76 buses to bring in a steady stream of prospective buyers to Miami. They’d all bought into the same dream: Get rich on Florida real estate. Of course, it didn’t hurt that Merrick had previously spent over a year on the Dade County Commission, championing the construction of the very roads and major arteries that would facilitate the mass influx of people.

Word quickly spread beyond Merrick’s circle, and before long there were 25,000 real estate agents working in 2,000 offices in Miami. As the population grew to 75,000, some estimates said one in three Miami residents were selling real estate. The Miami Herald became the heaviest newspaper in the world as a result of its real estate classified advertising section.

Why was everybody hustling to buy in Florida? John Kenneth Galbraith explained it well in his 1954 classic, The Great Crash 1929. He wrote: “This is a world inhabited not by people who have to be persuaded to believe, but by common scrubland people who want an excuse to believe. In the case of Florida, they wanted to believe that the whole peninsula would be populated by the holiday-makers and the sun-worshippers of a new and remarkably indolent era. So great would be the crush that beaches, bogs, swamps and common scrubland would all have value.”

Florida was transformed from an overgrown bog – a swampy snake and wild pig-infested bottom land with vast stretches of slash pine – into the epicenter of get-rich-quick schemes.

Abundant stories illustrate just how crazed people had become over the lure of quick riches.
D. P. Davis, a real estate developer/huckster, had two islands near Tampa under development with the property ready for market. In October 1924, people lined up for 40 hours before the land sale began. One man chained himself to the door so he wouldn’t lose his place. Not only did the entire 875 acres – much of it still underwater – sell out for $18 million, but an additional $8.2 million was returned to eager buyers whose money had arrived too late.

State government fed the frenzy

Even Florida’s government did its part to feed the frenzy. In 1924, lawmakers amended the state constitution to abolish income and inheritance taxes. Florida didn’t even require motorists to have drivers’ licenses, and its 45-mile-per-hour speed limit was already the highest in the nation. As the frenzy accelerated, people were buying lots sight unseen, many from ads tucked into the back pages of popular magazines. Some property was little more than mosquito-infested inland swamps only recently drained, and yet real estate prices continued to escalate, sometimes quadrupling in less than a single year.

Before long, Florida couldn’t absorb the growth. In 1925, more than 2,000 freight cars were lined up waiting to be unloaded in Miami. In August, the single railroad serving Florida would accept no freight other than fuel, livestock and perishables. Stocks of building materials were already depleted. Real estate prices had become so exorbitant that land was no longer affordable. New buyers stayed away, and owners tried to sell. As might have been predicted, panic set in and the real estate market crashed. Prices kept falling as heavily indebted property owners tried to sell to avoid bankruptcy. In most cases, no buyers surfaced, and the property owners went bankrupt from the enormous mortgages.

Insult added to injury

Just then, to add insult to injury, two hurricanes hit south Florida, destroying 13,000 homes and taking hundreds of lives. This was followed by the citrus industry getting virtually wiped out by the Mediterranean fruit fly. Troops set up roadblocks and checkpoints to search vehicles for any contraband citrus fruit, but the damage to the economy had already been done. Gone were the fortunes of so many who had bought into the get-rich dream.

This bubble had burst like so many before it, but if there was any good news in the Florida land bust, it was the state’s reaction to the 1929 stock market crash and the Great Depression. In fact, it was more of a non-reaction. The residents of Florida were already beaten down into such dire financial straits that they barely noticed Wall Street’s meltdown.

When you read your history books and find the word “investor” linked to those who purchased property during the Florida land rush, chances are that you’d think “speculator” would be more appropriate. However, savvy speculators take calculated risks, and those caught up in the Florida Frenzy are more accurately described as “gamblers.”