The Fruits of Civilization (26-11) American Property Bubbles

American Property Bubbles

Crises and contagion often start in a small way and then move in unpredictable ways. ~ American financial analyst Chris Zaccarelli

The US has a long history of property manias, including western New York in the 1790s, Alabama 1815–1819, Chicago in the 1930s to 1841, Los Angeles in the 1880s, New York City 1920–1933, and California in the 1970s & 1980s. This fits with the American spirit of speculation.

Though “animal spirits” may animate investors during bubbles, booms are often consistent with reasonable beliefs about the future.

Alabama farmland was a steal until the end of the 1810s. Growing cotton was highly productive there, and cotton prices were surging on demand from British textile manufacturers. In 1817, Alabama acreage sold for ~$35 per acre (2012 dollars): twice the national average for unimproved land. In the next year, prices nearly quadrupled to $134 per acre. Even at that price, land looked like a good buy given going cotton prices.

Recession struck in 1819. Farm prices fell, and leveraged buyers went bust. A prolonged slump followed; by 1850, an acre of Alabama could be bought for $5. However optimism may have been warranted in the mid-1810s, financial carnage resulted in the wake of the Panic of 1819.

A sudden recovery in European agriculture in 1817 led to many bankruptcies and mass unemployment. This sparked the Second Bank of the United States to sharply curtail loans in 1818, leading to the 1819 Panic. The American economy was moribund until 1921: the first major peacetime financial crisis in the country.

The Chicago boom in the 1830s reached greater extremes than Alabama. At the time, access to water was critical to trade. In 1816, it cost as much to porter cargo 30 miles over land as it did to ship it across the Atlantic Ocean. Hence, land near key ports and shipping routes was at a premium.

The Erie Canal led to economic booms around the Great Lakes. Chicago’s proximity to the Mississippi River made it an attractive bet.

In 1830, Chicago land could be had for $800 per acre (2012 dollars). In 6 years, Chicago soil soared to $327,000 per acre, with some plots fetching a cool $1 million.

Tightening international credit conditions led to the Panic of 1837. By 1841, Chicago land prices had retrenched to $38,000 per acre. But that was mostly a product of unpredictability.

Chicago was poised to become an illustrious metropolis: its prospects in the 1830s looked uniquely bright. Chicago prices in 1836 made sense given the defensible view that Chicago land values might rise to be 1/4th of those in New York City. Those who bought Chicago land and held it through the crash prospered over the next 2 decades: average annual returns through to 1856 were ~9%.

Unexpected good news, or a general mood of optimism, often births a bubble. The momentum that blows the bubble typically involves short-sightedness which only becomes clear as such in hindsight.

Alabama’s land rush rested on pricey cotton; but dear cotton led to an explosion in world production. Cotton prices plummeted 50% between 1818 and 1820. American agricultural land experienced an akin boom/bust again in the early 20th century as wheat prices made a similar swing.

Urban real estate is just as vulnerable as farmland. New York City and Chicago boomed in the early 20th century. Real land values leapt by over 50% in NYC during the 1920s, buoyed by high rents and novel high-rise building technology which boosted the earning potential of a single property. Investors were slower to suss skyscrapers’ effect on the supply of real estate. Erecting 50-storey buildings on just half of Chicago’s business district would have generated a 10-fold increase in the city’s 1933 square footage. In practice, it took much less skyscraper construction to send prices tumbling.

The housing bubble in the 1st decade of the 21st century followed the same arc: suburban home prices soared despite America’s almost unlimited capacity to build. Provoked by price, new supply checked the housing spike.