How one of the first big property bubbles led to the Great Depression

John Stepek looks back at Florida’s property boom of the 1920s – and the inevitable crash that followed.

This week it was the 30th anniversary of the 1987 stock market crash.

But I've already covered that, and I don't have much more to say about it. And you're probably sick of reading about it elsewhere too.

So instead, I thought we'd start by looking at a big crash that happened just before the Great Depression.

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No, it's not the crash of 1929, but it is tangentially related.

Today we're looking at a property crash the Florida land boom and bust of the 1920s...

How Florida became hotter than bitcoin

These days, Florida seems to be the butt of a lot of jokes. Lots of sunshine, lots of retired people, lots of tourists, lots of theme parks the American equivalent of one giant, slightly tacky British seaside resort.

It's not the worst analogy. Back in the early 1900s, Florida was also analogous to a British seaside resort as was the case in the UK back then, it was mainly the well-heeled who could afford to go there and kick back in the sunshine. (Of course, you couldn't catch malaria or get eaten by an alligator in Bognor Regis. But it was sunnier.)

In 1900, the population of Florida was around half a million people. The economy was mainly reliant on agriculture. The tourists were mainly people with a fair bit of money. In 1910, the population of Miami was a mere 5,000.

But by 1920, Florida was opening up. The population had grown to nearly a million people. America's middle class was expanding fast. They had good jobs, decent pay, disposable income to buy consumer goods and time to go on holidays. More importantly, they also had access to a fast-growing new technology the car and highways to drive them on.

As Florida became more accessible, more and more people moved south looking for opportunity and a better quality of life. And gradually, land that had been practically worthless suddenly held all manner of possibility.

A developer called Carl Fisher had already dredged out enough land and filled enough swamps to create the resort of Miami Beach. Then in 1921, a developer called George Merrick began selling lots in the west of Miami. They were a huge hit, and Merrick expanded fast.

According to Rainbow's End: The Crash of 1929 by Maury Klein (an excellent book on the colour of the period, even if it doesn't discuss the actual causes of the crash in any great detail), Merrick spent $3m in one year on advertising, and hired a gang of 3,000 salesmen and a fleet of buses to take potential buyers down to Florida from New York, Chicago and as far away as San Francisco.

Florida wasn't booming in isolation loose credit conditions and a generally healthy economy meant that land prices across the US were going up. But Florida was special. It had a great story to go with the boom a freshly-accessible paradise by the sea, that everyone wanted a piece of and we all know what great stories do to human beings. They drive them into a frenzy.

According to some reports, about two-thirds of real estate in Florida was sold by mail to gamblers who had never been to the state. Meanwhile, in the state itself, "binder boys" would show land to prospective buyers, who could effectively buy options on the land by paying a binder'. This was a non-refundable deposit, with the balance due in 30 days. But rather than pay the balance, the land buyer would often flip' the option for a profit to someone else.

Florida real estate regardless of the quality was worth a fortune. It was practically the bitcoin of its day. According to some sources, some lots in Miami could be bought and sold as many as ten times a day.

A truly biblical bursting of a bubble

As with all of these things, the Florida bubble ended badly. By 1925, Miami had 25,000 estate agents working out of 2,000 offices (I realise that merely describes the typical Home Counties high street these days, but that was a lot in 1920s America). Tales of fast fortunes and land that had gone for $22 an acre selling for $200 an acre had lured in punters from all over America.

But the supply of willing and solvent buyers was drying up, and newspaper reports in other states were warning of Florida land scams. Ohio even banned some companies from selling property in Florida. People who had bought "binders" found they were the ones left stuck with them when they couldn't find a greater fool to flip them to. As a result, they began defaulting in their droves.

Then in late summer, early autumn that year, the main railroad companies running into Florida stopped shipping anything but essential supplies to the state, because the railway lines needed repairs, and also they needed to recover stacks of freight cars that were being used to store supplies.

That left the housebuilders stranded without supplies. That situation was only made worse when in January 1926, a schooner which had been due to be turned into a floating hotel sank in the mouth of Miami harbour, blocking all access. Meanwhile, the winter was unusually cold apparently central Florida saw frost which took the sheen off the "sunshine state" schtick.

By then, boom had well and truly turned to bust. In July that year, notes Klein, a writer for The Nation wrote that "The world's greatest poker game, played with building lots instead of chips, is over. And the players are now cashing in or paying up." To add insult to injury, in September, a hurricane swept through Miami and killed more than 400 people (Florida then suffered a smallpox epidemic too it really was a rather biblical end to the bubble).

For Florida, the Great Depression began early the state's economy wouldn't recover again until World War II. Of course, the rest of the country would catch up a few years later. Florida's only mild consolation was that it was little affected by the crash of 1929 but only because it was already on its knees.

However, what's interesting is that latterly, economic historians have started to dig out research that suggests that while Florida was one of the hottest markets, the housing boom in the US was a nationwide phenomenon.

It wasn't just Florida that saw its bubble burst in 1925/26. Foreclosures (repossessions) started to mount across the country from 1926 and construction started to turn down. So by the time 1929 arrived, household balance sheets were fragile. The first American property boom and bust may not have caused the Great Depression but it certainly didn't help.

John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.