The memory of the great recession of 2008 looms in the memory of all who experienced it. The mortgage crisis. The rise and fall of the housing bubble. People thought the prices of real estate would never stop going up.
Here at SVN | Saunders Ralston Dantzler before the crash, properties went under contract in the morning and were sold by noon for a hefty premium. But swindlers took advantage of those crazy times, taking escrow money and investing it in contracts to flip. And when the bubble finally burst, the investors, swindlers and average Joes were all struck with a big dose of reality.
The old adage that “those who fail to learn from history are condemned to repeat it” is perhaps the most applicable statement to define the crash of 2008. In the 1920s, Florida had a major land boom followed by a devastating crash. If only we had heeded these events from our past, perhaps we could have avoided their replication.
By 1920, Florida had a population of just under a million people. Merely five years later, the population had swelled to over 1.2 million. But what was the cause for such a rise in the population at a time where travel was still somewhat limited?
Following World War I, many Americans finally had the time and money to travel to Florida and to invest in real estate. Educated and skilled workers were receiving paid vacations, pensions, and fringe benefits, which made it easier for them to travel and to purchase real estate. The automobile was also becoming an indispensable way for families to travel, and Florida was the perfect destination. Many of the people who migrated into Florida were middle-class Americans with families looking to build a house and plant their roots. The train line running directly to Miami also played a major role in the mobility of middle-class families.
Much like today, the "Roaring Twenties" was a time when a person's wealth and success was measured by their possessions. Since the economy was booming, banks made it easy to acquire a loan for land or a house if you had a decent job. People began to recognize this economic change and used it to make money buying and selling land. These people, known as land speculators, bought land at cheap prices and sold it at a large profit, oftentimes not even seeing the property they were purchasing.
During this boom, however, most people who bought and sold land in Florida had never even set foot in the state. Instead, prospective buyers and sellers would accept a "binder" on the sale. Which today would be considered a signed contract or a letter of intent with a non-refundable deposit. A binder was a non-refundable down payment that required the rest of the money to be paid in 30 days.
Many people got rich quick from the commission they made from these sales. With land prices rising rapidly, many of the buyers planned to sell the land at a profit before the real land payments were due. Sometimes land buyers didn't even have enough money to pay for the land; instead, they had just enough money for the binder. They were depending on the prices to continually rise. These financial techniques were the same that would be used to cause a boom and bust nearly a century later, in 2008.
Laws were also written to help support the land boom by cutting taxes and offering significant tax shelters for the rich. In order to get people to come to Florida and invest in real estate, the Florida Legislature passed laws that prohibited state income and inheritance taxes. During this time, horse and dog racing also grew in Florida as a way to attract rich gamblers. The railroads continued to grow throughout the 1920s, and Henry Flagler's railroad connecting Southeast Florida with New York caused other rail routes to be built.
Unfortunately, at the center of this land boom lay the rotten core that would eventually cause it’s collapse. While the wealthy used Florida as a playground, the demand for housing for the lower classes became so high that the cost of rent soared. Because the speculators had inflated the economy, many Americans who had migrated to Florida could no longer afford to live here. So what did these pissed-off Americans do? They turned to the media to expose the chicanery and false advertising that had defined the boom.
The Internal Revenue Service began to truly scrutinize the Florida investment bubble, and potential investors started hearing rumors of the great Florida sham.
The railroad companies then began an embargo in Florida due to a gridlock in their building materials, and when the Miami harbor was left inaccessible by the sinking of a sailing vessel, the facade of Miami as an idyllic paradise was cracked forever.
These strains proved to much for Florida’s real estate market. The bottom fell out, and real estate investors were left holding the bag. People from out of state, financially accountable for the developments and properties, simply ran away from the responsibility. This left thousands of acres and homes unfinished and unclaimed.
It seemed even Providence was forsaking Florida, as a series of natural disasters unfolded following the crash. An extremely hot summer and unseasonably cold winter, combined with two major hurricanes, all lead into the 1929 stock market crash and the Great Depression that followed..
In the midst of our current pandemic, many people speculate about whether the economy will crash and whether the real estate market will follow suit. But from what we have witnessed and analyzed here at SVN | Saunders Ralston Dantzler, real estate prices have slowly been back on the rise and we believe they are beginning to stabilize. The prices aren’t suspiciously soaring through the roof as they were a century ago, and the warning signs we’ve headed in the past don’t appear to be present. So while it is always wise to remain vigilant, we believe and hope that our current health crisis will pass and that the housing market will carry on.
Gary M. Ralston, CCIM, SIOR, SRS, CPM, CRE, CLS, CDP, CRX, CRRP, FRICS is Managing Director of SVN Saunders Ralston Dantzler Realty, LLC – the premier commercial services provider in Central Florida. Gary is a recognized subject matter expert on retail and commercial properties, a successful real estate developer, investor and group investment sponsor.
From the early 1990s through 2004 Gary was the president and a member of the board of directors of Commercial Net Lease Realty, Inc. (NYSE:NNN) the industry leader in single-tenant corporate net-leased real estate. During that time he guided the company's growth from less than $15 million in real estate assets to over $1.5 billion.