Salient to Investors:

Edward Glaeser at Harvard says:

  • Exuberant buyers may be more rational than many assume and booms are often consistent with reasonable beliefs about the future — the recent housing boom fits comfortably within America’s speculative past.
  • In 1817, Alabama farmland was $35 per acre (in 2012 dollars) and rose to $134 per acre in 1818, before falling to $5 per acre by 1850. The land rush rested on expensive cotton, but dear cotton led to an explosion in world production – cotton prices dropped by 50% between 1818 and 1820, reducing expected profits on typical Alabama land by roughly 90%.
  • In 1816 it cost as much to move goods 30 miles over land as to ship them across the Atlantic Ocean. In 1830, Chicago land sold for $800 per acre (in 2012 dollars) before rising to $327,000 per acre in 1836, before falling to $38,000 per acre in 1841. Those who bought and held land through the crash prospered over the next two decades, with average annual returns of 9% through to 1856.
  • Over the long run high prices lead to more supply, a dynamic often forgotten in the heat of a boom.
  • The recent suburban housing boom was checked partly by America’s almost unlimited capacity to build – the entire population could fit in Texas with more than one acre per household.
  • Ditto the American agricultural land boom and bust in the early 20th century in response to similar movements in wheat prices, before rising crop yields popped the bubble.
  • Ditto New York City in the 1920s when adjusted for inflation, land values rose by more than 50% as high rents and new high-rise technology stimulated new supply.
  • While easy credit is a common thread in America’s property history, low interest rates are unfairly blamed as booms have occurred amid rising, falling and flat rates. The under-priced option to default is more dangerous, and history suggests it is best not to subsidize property speculators.

Robert Shiller at Yale says animal spirits animate investors during bubbles and America’s recent housing boom was an especially bad case of irrationality.

Charles Kindleberger said unexpected good news or optimism often provides the beginnings of a bubble.

Robert Morris in the 1790s became the richest man in America by acquiring millions of acres from Native Americans and friends of the crown and then selling them on to speculators, before more expensive credit left him bankrupt.

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