Warnings Never Heeded During Manias

You can warn all you want during a mania. Remember Alan Greenspan’s “irrational exuberance” comment about the stock market in his testimony in 1996? The exuberance continued on for four more years before busting.

Other stock market analyts were also warning about the stock markets, in 1998 and 1999. But they were shrugged off.

Several years ago, Robert Shiller, a Yale Professor, who also wrote a book about the stock market crash, warned about the American housing market, that it too was in a mania and headed for troubles.

Did anyone listen? Some. But most shrugged and went about profiting from the real estate madness.

That’s the thing about manias, no one ever listens to the warnings. Recently, some commentators have been saying that this real estate crisis is the worst “since the Great Depression.” So, in our continuing walk down Memory Lane, we will look at what was going on back in the 1920s and 1930s in the real estate market. You will find it sounds very familiar.

From the Chicago Daily Tribune on January 20, 1927:

Warning of the danger of overbuilding unless a breathing spell is taken in the construction of office buildings, hotels, apartment houses and apartment hotels, Simon Straus, head of S.W. Straus & Co, yesterday declared that no more structures of these four types should be started in New York, Chicago and other big cities for a period of six months to a year. Mr. Straus declared that studies just completed by him showed that after five years of heavy building in Gotham and elsewhere, the saturation point had been reached in the four types referred to.

Mr. Straus had this to say about speculative building: “In the building operations of the last five years the speculative factor has played an important part. The average amount of building in the country during that time has been more than $6 billion a year. A considerable portion of this has been speculative in character.”

“I’m not saying this in condemnation of this kind of building, for it has played an important part in the building up of our cities and in relieving the housing shortage following the war. From now on, however, I feel that there should be no further projects contemplated except in response to a definite ascertained demand.”

Imagine that? Building something on “definite ascertained demand.” S.W. Straus was one of the big mortgage and financing companies of its day. Straus was likely involved in nearly all of the large apartment and commercial skyscrapers being built in the 1920s in Chicago and New York.

Not surprisingly, his warning and call for a freeze on construction weren’t heeded. In Chicago, new construction continued to pick up with 1927 seeing the highest number of permits and construction spending in five years.

Construction continued in Chicago even after Black Monday, two years later, in 1929. Just days after the big stock collapse the Chicago Daily Tribune ran an article titled: “Stock Skid Scatters Funds Into Chicago Real Estate: Brokers Smile as Public Again Turns to Land.” Thousands of average people had been “investing” in the stock market up until October 1929. Real estate brokers saw the crash as their big opportunity to sway those investors.

“I believe that the turning point in renewed public interest in real estate as an investment has arrived,” said Percy Williams, head of Percy Williams & Co. “The increased sales through our office within the last ten days have been so great as to leave no doubt in my mind that the public is now beginning to realize that we’re now entering a real estate era and that those who give the subject much thought at all are beginning to buy before prices get any higher.”

But it was not to be. Any gains in the days after the big stock market crash were fleeting as the stock market rebounded through April of 1930. By the end of 1930, it was clear that real estate was going nowhere. Also from the Chicago Daily Tribune, January 1, 1931, “1930 One Big Headache for Real Estate”:

In addition to realty’s own woes, it suffered throughout the year from the illness of its near realtives, the building construction industry, the mortgage bond market and the tax situation. Chicago had the lowest record of building construction during the last decade.

No new commercial buildings were built in 1930, though several that were started in 1929, before the stock crash, including the Chicago Board of Trade, were completed in that year. Also no new apartment high rises of significance were built in 1930, despite dozens being built in the years leading up to 1930.

1930 was the beginning of the big real estate slowdown in Chicago, and nationally. Foreclosures and an almost the complete withdrawal of credit in the form of mortgages would dominate the real estate landscape until 1936-1937.

Simon Straus didn’t live to see much of his prediction about overbuilding become a reality. He died in September, 1930, at age 63. His obituary read: “Mr. Straus was generally recognized as the originator of the modern first mortgage real estate bond, and through that medium of financing he was one of the pioneers in the development of America’s greatest skyscrapers.”

During the Great Depression, the New York wing of S.W. Straus & Co. would face allegations of fraud, mismanagement of its bonds and eventually, bankruptcy. The Chicago branch, which included a financing bank, survived the Great Depression intact.

A monument to the S.W. Straus company still exists in Chicago. The “Straus building” on North Michigan Avenue used to the be the site of the old S.W. Straus building which was torn down in 1941. A plaque on the building simply says “S.W. Straus & Co” in honor of the man who started the “modern” American mortgage financing.

Fittingly, the building is now called “Metropolitan Tower” and is being converted into luxury condominiums.