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History Speaks
The 1920's Florida Real Estate Bubble
1925, The Miami Herald had more advertising pages than any other paper in the world, most of it real estate related.
The 2001-2006 housing boom in the U.S. lifted real estate values to levels we may not see again for some time, particularly in the "sand" states - Florida, Arizona, Nevada and California. But perhaps no cycle has been more dramatic than Florida's in the early 1920's. A strong national economy meant an excess of capital, and Florida - with its great winter climate and accessibility to the large East-coast cities - became the destination for much of that capital. The success of communities such as Coral Gables led to a buying frenzy with much buying done sight unseen and many buyers unwittingly purchasing swampland. By 1925, The Miami Herald had more advertising pages than any other paper in the world, most of it real estate related. Many of the sales involved binders whereby the purchaser put down 10% with the rest due at some later date. These binders- we would call them 'derivatives' today- were often traded multiple times before the full payment was due. The frenzy was already starting to slow in 1926, then two hurricanes hit the Miami region and the collapse was quick and brutal. Many Florida banks failed in the next few years despite broader nationwide prosperity. Like Florida in the 1920's, "sand" state property owners may have to wait a few decades before they see new price highs.
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Chart of the Month
A potential bright spot- from the real estate site Trulia whose 'Price Monitor' below has been positive for most of 2012. The chart is a measure of month over month changes in the asking price of home sellers. Since asking price changes precede actual sales this index is potentially a leading indicator of housing prices.
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Asset Class Returns
Through July 31st, 2012
Returns assume dividend reinvestment and do not include any types of management fees, transaction costs or expenses.
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Market Commentary
Perhaps even the markets understand that Europe doesn't work in August.
July was a strong month for markets as equities, bonds and commodities were broadly higher. This was driven by the hope that central banks will loosen monetary conditions. In particular, investors are expecting action from the European Central Bank (ECB) before the end of the year based on comments from the the bank's president, Mario Draghi, to do 'whatever it takes' to save the Euro. Mr. Draghi followed up those comments with a promise of open market action to ease the crisis in Euro sovereign debts. There has been a noticeable lack of detail on how he plans to accomplish all this although the ECB has promised more clarity in September. Perhaps even the markets understand that Europe doesn't work in August. Central to any intervention would be to lower the rates on Italian and Spanish government bonds:
 Neither Spain nor Italy can afford interest rates this high. If they cannot lower these rates substantially it would force their departure from the Euro currency. As these countries represent such a significant part of the Euro-currency zone, the loss of either would indicate the breakup, or fracturing, of the currency zone.
Back in the states there is significant speculation that Federal Reserve Bank President Ben Bernanke will flesh out details on a new round of quantitative easing at the bank's annual August confab in Jackson Hole, Wy. This would probably involve the central bank buying either longer term treasuries or mortgage backed securities. Unlike their more recent 'twist' operation, we doubt this would involve selling shorter term securities in conjunction with purchases. The larger danger for the Federal Reserve is that, in taking further actions now, they limit their options for later if the European crisis deepens. More broadly it makes the markets ever more reliant on the actions of the central banks instead of economic fundamentals. Previously we have highlighted the creation of an ETF that is designed to appreciate when the market is in a 'risk on' mode.
The movements in this ETF are highly correlated with the expectation of the Fed's policy actions. The Federal Reserve is always important to markets but they do not want to put themselves in the position where they are the only thing that matters to markets. Particularly at a time when they have already utilized many of the policy actions available to them.
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