This is a great Sunday read by Robert Schiller in The New York Times. History may not repeat but it certainly rhymes. And human nature and the cycle of emotions never change!
Some excerpts, below.
Before Housing Bubbles, There Was Land Fever
Fundamental factors like inflation and construction costs affect home prices, of course. But the radical shifts in housing prices in recent years were caused mainly by investor-induced speculation.
Anyone contemplating the purchase of a home wants an idea of where prices will be when it is eventually time to sell, perhaps many years later. For that kind of long-term forecasting, we need to understand the reasons for the recent, violent price cycle, and whether it is likely to repeat itself.
History has much to teach us about real estate bubbles, and some of it is reassuring. The land booms of New York State in the 1790s, Kansas in the 1850s, California in the 1880s and Florida in the 1920s all appear to have been relatively isolated events. And the cycle was not repeated in short order.
But those events were fundamentally different from the recent housing bubble. As relatively local phenomena, involving a fairly small number of adventurers, they did not consume most people’s attention. And a major cause can be easily identified: they developed from the promotion of supposedly valuable lots of land.
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In fact, outside of New York City and a few urban centers, most speculators in past decades didn’t focus much on home prices. The term “housing bubble” was not even in their vocabulary. Land, not houses, was the object of their desires. They had “land mania” or “land fever.”
In a 1932 book, “The Great American Land Bubble,” Aaron M. Sakolski offers a vivid history of these manias, going back hundreds of years. There were repeated examples of promoters creating land subdivisions with vaunted plans for development, and advertising campaigns to sell them to investors.
As president in the 1790s, George Washington helped promote the sale of lots in his namesake capital city, and even bought some himself. Earlier in his life, he was a surveyor, and in 1763, he was a founder of the Mississippi Land Company, which was to acquire land, survey and subdivide it, and sell off individual farm and town plots to settlers. While his involvement in the development of Washington, D.C., was ultimately successful, his earlier company failed.
Land fevers tend to have a definite starting point and vector of contagion: they begin when a promoter subdivides land into lots small enough for many investors, and are usually accompanied by an advertising blitz with glowing descriptions of the future town and country, setting off a buzz and speculative excitement.
READ THE FULL ARTICLE HERE
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