Paradise for Sale

by Nick Wynne

  The race for space was on, and Florida was the immediate beneficiary.

  At Cape Canaveral, the National Aeronautics and Space Administration, which had been created in 1958, was the recipient of massive funding from Congress and immediately put out the call for engineers and workers of all kinds. Rural Brevard County, which had been in the backwater of previous developments, now found itself overwhelmed by the thousands who answered the call. Housing was in such small supply that engineers with doctorates were forced to sleep in culverts and concrete pipes alongside the roads that were being built to connect the space center with the mainland. Anyone with an extra room in their house was urged to rent it to a space worker. Garages, barns and unused outbuildings were quickly occupied. Contractors from all over the nation rushed to Brevard County to build houses for the families of the newcomers, and local governments rushed to build the infrastructure that was needed to service the Cape. The hullaballoo was even greater than Miami had experienced in 1925.

  Cocoa Beach, a 1920s development of Gus Edwards, had lain fallow for forty years. Few houses dotted the barrier island for several decades, but suddenly its proximity to the space center pushed sales toward the sky. Motels, restaurants, houses and apartment buildings rose from the marshes and barren sands overnight. Cocoa, Titusville and Cocoa Beach became gold-rush towns as eager thousands, pointed straight to the space center by the old Dixie Highway, came to find work. Bust? Maybe on the west coast of Florida, but not here. By 1965, the need for housing had been met and exceeded, and the Space Coast bubble burst. Not to worry, there was another bubble coming.

  In Florida, desirable beach properties were becoming scarce. Faced with this growing shortage, developers turned to finding new ways to maximize what was left. The answer was simple—condominiums. Instead of dedicating a half acre or acre to a single home, promoters discovered that they could take that same piece of property and build vertically to create residences for more people. Looking much like apartment buildings, condominiums offered much more to builders. Gone were the hassles of dealing with temporary renters and the need for constant maintenance. Under the generous laws passed by the Florida legislature, condominiums are made up of individually owned units that can be bought and sold as such. Governed by an association of owners, purchasers were assessed monthly fees for maintenance and larger assessments for repairs. The 1961 Housing Act allowed the Federal Housing Administration to insure mortgages on condominium units, and the availability of funding touched off another boom. Although condominiums made their first appearance on the crowded beaches of the Miami area, they soon spread throughout the Sunshine State. Soon, the other forty-nine states and much of the industrialized world boasted “condo canyons,” which were praised as answers to urban sprawl and the demand for more urban dwellings.

  In Florida, condominiums appealed to retirees who wanted to escape the maintenance problems that individual homes presented and who wanted to spend the last years of their lives free of such burdens. Even the emergence of “condo Nazis,” unit owners serving on condo association boards who enforced rigid rules governing what could and could not be done by individual owners, did not halt the condominium explosion. Americans from other states were particularly attracted to buying condominiums in the Sunshine State. An amendment to the state’s constitution, passed at the height of the boom of the 1920s, prohibited the imposition of a state income tax. The end result was the growth of buyers who, after six months and a day, declared their condominium their permanent residence, registered to vote and moved their assets to Florida. Many of these new residents retained their homes in other states and only visited Florida seasonally after they had established residency. Condominiums were the new Coral Gables or Boca Raton. Happy days were here again!

  Real Estate Investment Trusts (REITs), first created in 1960, added to the condominium boom. Established strictly to aid investors, the primary benefit is that REITs are subject to no or low corporate income taxes as long as 90 percent of their income is distributed to investors, private or public. REITs became the instrument of choice for new developments since individual investments in a single project could be minimized and additional funds invested in a number of projects. The risks were minimized as well since the failure of one project did not usually mean a loss of all investments.

  In 1958, rumors began circulating that something big was going to happen in the Orlando area. What it was exactly, few people knew, and they were not talking. Slowly, anonymous buyers started to purchase large and small plots of citrus land and pasture, accumulating some twenty-seven thousand acres. Eventually, the news leaked that Walt Disney was the money behind the purchases, and Florida would become the home of Disney World, a new and expanded version of Disney Land in California. The legislature of Florida was so impressed that in 1967 it voted to give the Walt Disney Company unprecedented governmental powers—not as an incorporated city that might be subject to the whims of future legislators but as an independent agency with powers that exceeded those of a normal corporation. It was exempt from state and local zoning laws, which meant that the company could build anything it wanted on its property (including a nuclear power plant) without fear of any regulation from county or state entities. In addition, it could offer tax-free municipal bonds to raise money for future development. Most importantly, the Disney Company gained the right to annex adjoining property through eminent domain, a power usually reserved for elected governments.

  Disney World opened on October 1, 1971, to instant success. More than eleven million visitors came the first year of operation, and the numbers continued to grow during the second and third years. Originally, the Disney Company projected four thousand employees, but that figure was doubled immediately and had doubled again by 1973. Surrounding the theme park, hundreds of lesser attractions and scores of new hotels opened to accommodate visitors. Orlando, which had never had a significant tourist industry before, suddenly became the destination of choice of many Americans, and the boom generated new businesses throughout central Florida. Yeah, Florida had sold its soul to the Mouse, but look at what it got in return!

  The first hint of trouble came not from Florida but from the small oil-producing countries of the Middle East. By the beginning of the 1970s, world gold prices had reached $800 an ounce, and in 1971, President Richard Nixon ended America’s policy of backing its currency with gold at a rate of $35 an ounce. Oil prices were pegged to the U.S. dollar and had not changed significantly since the end of World War II. The situation needed to be addressed, and quickly. For oil-producing countries, the opportunity to do so came quickly. The United States had resupplied the Israeli military at the end of the Yom Kippur War in 1973, much to the displeasure of Arab countries. In retaliation for the United States’ support of Israel, OPEC, the Organization of Arab Petroleum Exporting Countries, imposed an embargo on oil shipments to the United States until an acceptable peace deal had been worked out between Israel and its neighbors. When the embargo ended in 1974, higher prices for crude oil had been established. The problems created by the embargo were exacerbated by the tremendous expenditures of the U.S. government in fighting the Vietnam War. At the same time, federal spending on the War on Poverty poured more money into the economy. The overall economy faced additional problems as prices for manufactured goods rose and salaries remained the same—stagnation.

  The oil embargo produced repercussions in every level of American society and seriously affected the Sunshine State. At the gas pumps, prices rose to previously unseen prices but were brought down to an acceptable level when Nixon imposed wage and price controls. Tourism, which was based on automobile and airplane travel, slackened as Americans curtailed their driving and airlines raised prices to compensate for higher fuel prices. In Orlando, Disney announced the termination of two thousand workers. If the Mouse was cutting back, so should everyone else.

  The wage and price freezes of the Nixon administration proved to be disastrous, and Gerald Ford, the new interim president, seeme
d incapable of dealing with the situation. He left a muddled economy for his successor, Jimmy Carter, to deal with. Carter, too, was incapable of doing so. A second oil embargo, precipitated by the Iranian Revolution in 1979, added to the economic woes of the United States. Long lines at service stations were the order of the day as Americans sought to fill their tanks with this necessary commodity, which was now in short supply. Once again, prices rose on petroleum-based manufactured items.

  Fixed interest rates for new homes, which had hovered around 5.5 percent annually, suddenly rose to 7.5 percent and higher. Payments on adjustable rate mortgages (ARMs), which were pegged to the prime rate of interest and had been introduced as a way to allow marginally qualified buyers into the residential market, skyrocketed. Homeowners found themselves unable to meet the higher monthly payments as salaries remained the same and the cost of other consumer goods rose. Foreclosure signs appeared in virtually every neighborhood.

  REITs found the going tough, too. Huge condominium and apartment complexes found no buyers, and investors faced the possibility of losing everything. Some sought to convert their unfilled complexes with temporary residents by selling two-week residencies as “time shares.” If buyers couldn’t afford to own a condo outright, they could settle for two weeks each year in some exotic development. For a one-time purchase price and annual maintenance fees, the buyer could claim partial ownership in a condo. Not a perfect solution, but one that worked in the short term.

  Savings and loan associations, usually regarded as the most conservative financial institutions in the nation, invested heavily in the real estate market of the late 1960s and early 1970s. As the economic slump continued during the decade, the financial toll of these investments pushed these institutions to the wall. By the beginning of the 1980s, the nation faced its first potential bank failure crisis as more and more of the thrifts (and some banks as well) had to call on the federal government to bail them out. The Federal Savings and Loan Insurance Corporation was called on to replace depositor funds lost in real estate speculation. Major borrowers, unable to meet the payments on loans, simply walked away, leaving the institutions with empty finished buildings or buildings still under construction.

  John Ellis “Jeb” Bush, son of one U.S. president, brother to another and a two-term governor of the Sunshine State, was one such borrower. He defaulted on a $4.5 million loan in Miami, eventually settling his debt for $500,000 and leaving taxpayers to pay the remainder. Another brother, Neil, was director of the Silverado Savings and Loan in Denver, which failed, eventually costing taxpayers $1.3 billion. The U.S. Office of Thrift Supervision investigated Silverado’s failure and determined that Bush had engaged in numerous “breaches of his fiduciary duties involving multiple conflicts of interest” but failed to file criminal charges. He paid $50,000 to settle a civil suit brought against him. The entire crisis cost the American taxpayers $150 billion to resolve.

  Although costing them enormous amounts in tax dollars, Americans were blasé about the savings and loan’s failures, perhaps because the full extent of the crisis played out over the entire decade of the ’80s; perhaps because they were tired of bad economic news; perhaps because of the stature of the people involved; or perhaps because the conclusion of the crisis faded into obscurity when the United States got involved in a new war in the Middle East. Perhaps.

  During the decade of the ’90s, the American economy gradually recovered. The real estate market took a backseat to the “.com” boom that was centered in California. Enormous sums of venture capital, which might have normally gone into real estate, were poured instead into startup companies and exotic web-based operations that marketed everything from social contacts to banking, from the contents of entire specialty stores to airline tickets, from video games to…real estate? The expansion of the Internet changed American commerce forever, and no new company, nor one that had been in business for decades, could afford to compete without a website or shopping cart. The world joined in. The outsourcing of critical services to underdeveloped countries became the bane of the consumer’s existence as he tried to understand “Steve,” whose accent was neither American nor British but sounded suspiciously like Hindi or Pashtu. Even government agencies outsourced critical functions to nameless, faceless voices in foreign countries or to private industry in the United States. It was, pundits alleged, simply the realities of a global marketplace. The “.com” bubble, like most bubbles, soon burst. By 2000, most of the startup companies had either succeeded wildly or were gone from the scene.

  The new century started on a high note for the United States and for Florida. It combined two of the twentieth century’s biggest bubbles into one. Stocks climbed to record highs as the federal government, followed closely by state governments, adopted a pro-business stance and passed numerous pieces of legislation designed to aid investors. Estate taxes were reduced, and the amount of an estate exempted from “death taxes” was raised. Burdensome laws, many of them left over from the New Deal, were repealed or watered down. Banks were allowed to engage in speculative activities, and brokers were allowed to create new instruments for investment. Loan standards, which had once focused on annual income and debt levels, went out the window. Subprime mortgages, guaranteed by government agencies, were offered to virtually anyone. Indeed, lending institutions were required by law to allocate a percentage of the loans they made to individuals who could not qualify for a traditional loan. Government grants provided down payments in some cases, and mortgage assistance was available to lower monthly payments. Money was so plentiful that simply filling out a loan application was often enough to secure a loan of some kind. Step up and sign on the dotted line!

  Mailboxes were indiscriminately flooded with letters guaranteeing recipients “pre-approved” loans without cumbersome or restrictive credit checks. Online mortgage companies followed suit, clogging the Internet with unsolicited offers to lend money. Adjustable rate mortgages, the scourge of the 1970s, made a reappearance. Lenders who could not even come up with a small down payment on a new home were offered multiple loans to cover down payments, closing costs and other incidental expenses. Gone were the days when a borrower might deal face-to-face with his banker and find a sympathetic friend in tough times. Instead, borrowers saw a lender briefly at the start of the loan process, and that was the only time. Loans, once made, were “bundled” together and sold to investors who then traded the bundles on the stock market. Investors in newly emerging nations—China, Korea, Taiwan—and the oil-rich sheikdoms of the Middle East eagerly snapped these up. Even the federal government, engaged in two wars, got in the act, selling bonds and treasury bills by the billions to overseas investors at unprecedented levels.

  In Florida, condominium sales, which had faltered in the wake of the savings and loan crisis, were suddenly rejuvenated as Americans poured their profits from a constantly rising stock market into purchasing them. Sales were so strong that many investors sold their homes or mortgaged them to the hilt to put down payments on unfinished units at preconstruction prices and “flip” them for higher prices when the project was finished. It was not unusual for a single investor to purchase three or four units in the same building. With a mere $100,000, an investor could control property worth millions. For many, the profits to be made would be their retirement fund. What could go wrong?

  “Flipping” entered the American lexicon as a noun. In the residential home market, flipping became the new “ostrich farm” or “emu ranch.” It was a quick way to make a fortune. All you had to do was buy a run-down property, invest “sweat equity” or a little money to fix it up and put it back on the market at a higher price. Television shows chronicling the adventures of “flippers” received some of the highest ratings each season. Get-rich gurus, filmed surrounded by the toys of success, touted “systems” to wannabe millionaires guaranteeing them that they could buy properties with nothing down and sell them for enormous profits. It was foolproof.

  In Florida, the years from the 19
80s to the beginning of the first decade of the twenty-first century saw a return of the “planned” community concept. In 1979, in isolated Walton County in the Panhandle, which had no zoning or building codes, builder/developer Robert Davis introduced his “New Urbanist” Seaside development to the world. Sounding strangely like George Merrick’s City Beautiful in Coral Gables, it features a strict building code that governs the exteriors of all buildings and other architectural elements, as well as standards on the size of lots. In Brevard County, the Viera Company, an offshoot of the A. Duda and Sons agricultural empire, began construction on its Viera planned community in 1993. Located in former cow pastures, the development extends for several miles on both sides of I-95. In addition to schools, churches and homes, Viera also has several commercial centers, including the Avenue, an outdoor mall featuring high-end stores. The Duda Company offers one-stop shopping for homebuyers, and its subsidiaries include Viera Realty, which handles sales, and Viera Builders, which constructs the homes in the development. In the Kissimmee-Orlando area, the Disney Company developed its Celebration community in 1996 and announced plans for additional communities. Like Seaside and Viera, Celebration is governed by strictly enforced architectural and building codes.

  Something happened to the latest boom in 2007–08. The nation’s financial institutions suddenly discovered that they were over invested in mortgage bundles and that the market for them had maxed out. This discovery led to a major collapse of banks, now numbering in excess of two hundred and predicted to rise to as many as four hundred before the crisis is over. Another four hundred banks have been placed on the FDIC’s “problem list.” The cause? Too many “toxic” subprime real estate loans.

  Major brokerage houses and other large institutions are in trouble today (2009) because of investments in the same loans, which precipitated a severe decline in stock market values (approximately 40 percent of all stocks) and a corresponding decline in home values. Individuals who had purchased homes and condos to flip found their values to be significantly lower than what they had paid for them. One by one, they lost them or gave up their investments when no new buyers stepped forward to purchase them. The dreams of a comfortable retirement built on real estate profits vanished. Some of the investors, having placed their entire estate in such purchases, were forced back into the labor pool.