Bill Bonner for Money Morning

Dear MoneyWeek Online reader,

“You can get wood. You can get brick. You can get stucco. Boy, can you get
stucco.” Groucho Marx

In the Florida land boom of the 1920s, promoter Carl G Fisher hired a huge, lighted billboard in Times Square in New York. It advertised that “It’s June in Miami”, a claim that was fraudulent 11/12ths of the year. In June, it was just too bad. 

South Florida is entering its fourth year of a property slump. Places sell for about half of what they brought three years ago. The retail building across the street is half empty. Signs are everywhere: “Office for rent”, “Ocean front lot for sale”, “Commercial space available”. Here in Delray Beach, the sun is shining. The grass is growing. Waves caress the shore. But our hotel is nearly empty. Many restaurants on Atlantic Avenue are closed. The streets are so quiet the city seems like a ghost town. Then again, it’s so hot and sweaty, even the ghosts wilt. 

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But the ghosts talk: “There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925,” wrote Frederick Lewis Allen in 1931. “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 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 boom of the 1920s came to an end in 1926. Henry S Villard reported what he saw two years later: “Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement sidewalks, where grass and palmetto take the place of homes that were to be... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death.” For three years, Florida’s property market died, even as the rest of the nation danced the Charleston. It did not recover until after World War II – 20 years later. Now, it’s out of season once again. The subject of today’s note is why it may never be high season again. 

There are no houses for sale here. A house is a tangible thing. Its paint peels. Its roof leaks. But a home is an agreeable abstraction. So great is the local realtor’s distaste for tangibility, that houses have all been replaced by mansions, estates, compounds, retreats and, most importantly, by ‘homes’. We find, for example, a “spectacular Palm Beach Estate Home”, with a separate two-bedroom oxymoron – a “guest home”. It must be a house for guests who refuse to go home. Or perhaps a home for people who refuse to be guests. And if we looked for a home in the country, we’d probably find one with a dog home in the back yard. 

“This palatial home features over 20,000 square feet of living area,” says a current listing. “Built with entertaining in mind, this home features 9 bars, 2 walk-in wine coolers, 3 outside grilling areas, a 75’ pool surrounded by a 400’ marble dock and patio... summer kitchen complete with outdoor fireplace... no detail has been overlooked.” Well, maybe one detail. Who would want to pay $11.5m for a jumpedup mock-Tuscan relic from the bubble era? Even in the best of circumstances, a major property bust can take decades to fix. In Japan, property collapsed after the stockmarket bubble popped in 1989. All around it, the world economy kept bubbling away. But Japanese property sank to the bottom anyway. Twenty years later, prices are still down as much as 80%. 

The Hoover administration helpfully turned its back, neither causing the bubble of the 1920s nor trying to repair it. This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the Feds now are more involved. Too bad, again. Like Florida in June, government support isn’t what it pretends to be. The New York Times: “For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” said Ms Blair. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes. 

She mentioned Fannie Mae and Freddie Mac too. Along with the other federal subsidies, the two agencies largely financed America’s real-estate bubble. Now, with their help it could be a long time before the market recovers. Maybe forever. Fannie and Freddie stand behind $5.5trn worth of mortgages. More than $1trn of them were written during the height of the bubble. Those houses, many of them in Florida, are probably underwater now – worth less than the value of their mortgages. Most will go into default leaving Fannie and Freddie, and indirectly the taxpayers, on the hook. The foreclosed properties will cause properties to sink deeper. And by the time the inventory is finally worked off, circumstances may have changed. Buyers may look to Cuba, Nicaragua or the moon for their retirement havens... leaving Florida to the ghosts forever.  

To read Bill’s thoughts, sign up to Money Morning’s free email at www. moneymorning.co.za.

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