Lessons from the Pros

Real Estate: Its History and Cycles

I attended a charity event a couple of weeks ago at a place called Rancho Los Alamitos. This Rancho was a land grant of over 300,000 acres in 1790 and is now the city of Long Beach and most of Northern Orange County, California. Learning how this Rancho was developed into some of the most valuable real estate in the country made me think of the deep history that our country has in real estate investing, speculating and development.

In any investment or business it’s paramount that you understand the cycles, and to understand the cycles you must know the history.

So sit back, relax and enjoy a short history lesson on real estate investing in the United States.

Real estate has always been big business in the United States. After the Revolutionary War, the federal government began a process where it transferred one billion acres of land to private owners through land sales and land grants. In the 1830s, the government sold 20 million acres for roughly $1.25 per acre. Although this sounds like a bargain to us today, at the time the vast majority of citizens couldn’t afford the price. Consequently, a grassroots group called the Free Soil Movement formed and lobbied the government for an alternate method of distributing land.

The Homestead Act of 1862 was Congress’ answer. 160 acres per each adult in the family was given to settlers who didn’t already own land. There was no cash exchange. Instead, the understanding was that the settlers would live on and improve the land for a period of at least five years. This program was very successful. In total, the government distributed over 300 million acres of public property to private landowners and created the basis for the real estate market.

At the end of the 19th century, America was in transition from an agricultural society to a manufacturing economy. Citizens flocked to urban areas to work at the factories. Midwestern industrial center Chicago, for example, reached a population of one million people quicker than any other city in history.

The values of urban properties skyrocketed. By 1920, 50 percent of the American population lived in cities. This density in urban America created opportunities for real estate development in housing, office buildings, industrial facilities, hotels and retail centers.

The skyrocketing property values and associated costs began pushing the people and businesses that could not afford them outside the city. Developers made these planned communities attractive by building along the transportation routes so people could easily commute to work in cities.

Then along came the Great Depression crippling most industries, including real estate. Values dipped below debt levels, which caused a collapse. The federal government put the domestic financial markets through a major overhaul and was shrewd enough to include the real estate financing market as part of the New Deal programs.

Sound familiar?

America and the real estate industry slowly climbed out of the Depression, but just when things were turning the corner we entered World War II. Development was put on hold during the war, but this quickly changed once the GIs returned from overseas and another era of prosperity began. Virtually overnight there was a tremendous demand for housing. By 1946, new housing construction quadrupled to over 500,000 homes.

The decade was also a period of expansion for the highways, which provided access to more areas by car and truck. Consequently, this enabled all types of real estate (hotels, industrial and retail centers) to be located further outside the city. The suburb was born.

As the suburbs grew, the cities slumped. By 1960, there were many urban centers that hadn’t seen new office building development in 30 years.

In the last five decades real estate, spurred on by the growth of the service industry, the availability of financing and municipal incentives, is now considered one of the most dynamic sectors in the American economy. After all, people may divest from their stocks, but they always need a place to live, work and shop.

I’m sure, by reading this short history you can identify some of the cycles. Can you identify the cycle we’re currently in? Could you identify the next part of the cycle and how to profit? We can all probably name at least half a dozen real estate investors that have made extraordinary fortunes in this country. Will your name be added to the list?

- Diana Hill dhill@tradingacademy.com