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Lessons from the past: The Florida real estate bubble - Views on News from Equitymaster
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  • Mar 2, 2009

    Lessons from the past: The Florida real estate bubble

    At the heart of the subprime crisis was the belief that house prices would continue to rise without any risk. This is not the first case of real estate bubble in the US. In fact, a huge real estate bubble developed in the US during the early twentieth century. That infamous bubble is known as "The Florida Real Estate bubble of 1920."

    The Florida real estate bubble
    In the early 1920s, Florida entered a period of frenzied real estate speculation. At that time, the US was bustling with economic activity and it created a sense of delusion among people that such prosperity was infinite.

    The real estate market of Florida became the centre of the real estate story in the US. It became a popular destination for people who preferred its tropical climate. Population started growing steadily in Florida and housing couldn't match the demand. This in turn resulted in price escalation in the real estate market. Land prices quadrupled in less than a year.This swift movement of prices in the region attracted a lot of speculators. These speculators began to buy and sell land for small profits within a short span of few months. The story of Florida started spreading across the country and people poured into the state eager for quick profits. It is said that during this time everyone was either a real estate investor or a real estate agent in Florida.

    Very soon windfall profits began to escalate to unsustainable levels. At these levels it became difficult to find new buyers to flip properties at huge profits by speculators. By the beginning of 1925, investors started reading negative articles about Florida investments. Forbes Magazine warned that the prices of lands in Florida land were based only upon the expectation and not upon any reality. At the same time bankers from New York and other regulatory agencies started investigating and scrutinizing the Florida real estate boom. Eeverybody started seeing the writing on the wall, and panic started creeping into investors and then selling ensued.

    The inevitable bursting of the real estate bubble had begun. With sellers outnumbering buyers, prices fell like a stone. The Florida land boom was officially over as the Great Depression began.

    Benjamin Graham once quipped "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

    Asset price bubbles are part of every market. They do not happen overnight. These sharp upward moves are generated by a major shift in market psychology. This can come about by any kind of stimulus in the market. Investors begin to see the growth potential in a sector and invest large amount in a particular asset class. Subsequently, the media starts covering the action. This generally triggers massive interest from the public and retail investors begin to trip over themselves to get a piece of the action. This ultimately catapults prices in the market to unsustainable levels.



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