The Florida Housing Market: Shades of 1926?

Few are alive today to remember it, but 80 years ago, a great Florida real estate bubble burst. This long-forgotten event foreshadowed the 1929 stock market collapse, which preceded the Great Depression.

There are notable differences and similarities between 1926 and 2006. Now we have condo “flipping,” and the 1920s real estate boom had its “binder boys” who speculated in and greatly influenced the Florida housing market.

In those days, binder boys typically marketed 5 percent down payments to hold properties for 30 days. During those 30 days, the binder might be resold dozens of times while the property price zoomed.

Swarms of people coming to Florida dealt in real estate and made money… at least for a while. Draining the Everglades had been partly successful, and an Army Corps of Engineers earthen dike held back the waters of Lake Okeechobee.

The population of Florida soon climbed to more than a million with 100,000 in Miami alone and no end to the boom in sight.

In those crazy days, pessimists pegged Florida’s future population at 5-10 million. Optimists predicted 80-90 million. A baseball statistician, after much number-crunching, even came up with 300 million as Florida’s ultimate population.

But vastly inflated prices and easy credit made the market ripe for collapse. Like today, many Floridians denied that there was a bubble. A trend of price appreciation mirroring 2001-2005 merely reflected that true values had been kept too low, people said.

A breakdown of transportation systems soon led to critical shortages of building materials, however, and without them, construction was delayed and Florida mortgage loans became overdue. By 1926 the boom was weakening. Individuals, businesses and the economy as a whole teetered on the brink of collapse.

A powerful Category 4 hurricane struck the Miami area, causing widespread destruction and death in September 1926. The 138 mph winds smashed flimsy structures and a storm surge of over 13 feet washed away buildings, swept boats inland and deposited 2-3 feet of sand on Miami Beach streets (see picture above). Floodwaters flooded cropland and drowned many people.

That final blow burst the housing bubble.

Banks went belly-up and the great boom was over. Looking back on Florida in 1926, are there any parallels today? Many homeowners today have maintained extravagant lifestyles by extracting equity from their homes with second Florida mortgages. If consumer credit is not as shaky as in 1926, the difference is made up by an enormous, still-growing federal deficit.

• In the first six months of 2006, Volusia County granted 1,900 new permits for construction.
• That was down from 3,401 permits the first six months of 2006, a 44 percent drop.
• Meanwhile, the average value of a single-family home in Volusia County rose 27 percent to $248,000.
• Many middle-class working families can no longer afford homes here as affordable housing is at levels lower than any point in history.
• Buying and selling condos has resulted in too much housing inventory with many more properties being financed.

Transportation problems now differ from those of 1926. Despite this late summer dip, gas prices have been on the rise as the demand for petroleum overtakes supply and threatens to halt popular urban sprawl. Mass transit in Florida is rudimentary… on its very best day. Society remains dependent on the automobile.

Buildings are generally better-built today, but we are entering a period of more frequent hurricanes, more frequent floods and droughts and a rising sea level forced by human actions. Roaring ’20s schemes to sell submerged or flood-prone property have persisted. Florida insurance costs have become staggering, amounting to a bona fide crisis.

Federal Executive Order 11988 was enacted in order to bar development in risky floodplains, but is often not enforced. The 6,281-acre Hammock Creek project west of I-95 in Volusia County is planned for more than 20,000 new residents in a flood-prone area. There is no official floodplain map of the area, making enforcement of EO 11988 questionable.

Some observers of the Florida scene say not to worry about the real estate bubble might burst. They maintain that Florida home loan rates are still low, and that population growth will take care of any real estate market slowdown. Maybe so, but it’s worth keeping an eye on.