Mr. Ponzi and His Other Scheme
In 1926, Charles Ponzi, who is said to have invented the Ponzi scheme in 1920,
was released from jail. (Also called a circulation scheme, a Ponzi scheme is a
fraudulent investment fund that pays off early investors with money raised from
later investors, creating a false impression of profits to lure yet more victims.)
Soon thereafter, Ponzi went back to jail for violating Florida’s blue-sky law.
During the Florida land boom, he began selling small parcels of Florida land to
investors without disclosing that the land was under water, in a swamp.14 Ponzi’s
name, and the story of unwitting investors buying land in a swamp, went viral
with his circulation scheme, and it remains famous even today, but his name is
not so attached to the swamp narrative.
In reaction to such abuses, the United States imposed stronger laws on the
subdivision of land for sale to small investors. State laws defined land sales as
securities sales, even if the sale was a simple transfer of property, thus making
the sales subject to securities regulation. In addition, regulation of the sale of
land was reinforced to prevent such abuses.15 As a result of the scandals and the
ensuing legislation, people began to think that investing in undeveloped land
based on prospective future use was irresponsible and disreputable, that land
needed to generate real income before reputable brokers could sell it. Thus
advertising turned to offering investments in going businesses and owner-
occupied homes, which continued to feed the real estate narrative.
As people continued to think of home purchases as investments in land rather
than reproducible and depreciating structures, the potential for home price
bubbles persisted. At the same time, real estate investment remained the simplest
of speculative investments. Most people never find the time to get involved in a
risky specialized investment, but many people own a home at some point in their
lives, and so they typically do not have to work hard to learn about real estate as
a speculative investment.

City Land and Stories
Changing narratives do not explain some major swings in home prices afflicting
certain cities and sparing others. There is evidence that booms in some cities but
not others can be explained merely in terms of supply constraints. For example,
undeveloped land available for building is more available in some cities than in
others, and there could be a time when a city that once had plenty of land for
building finds that its land has been exhausted.
When a city’s population is expanding, even if the city is not particularly
attractive and has no particularly favorable narratives, there will be some people
who want to move there. For example, there are always potential immigrants,
often from poor or unstable countries, seeking a foothold in advanced countries,
and they may choose cities based on arbitrary factors such as proximity to their
home country or the existence of a subpopulation speaking their language in the
destination city. If land is readily available for purchase there, new houses will
be built, and the immigrants’ demand for housing may have minimal impact on
prices. But if such land has run out, these immigrants will have to outbid others
for existing houses, and home prices will rise. In that case, only the wealthier
buyers will be able to live in that city. People who are already living in the city
but have no special interest in it have an incentive to sell their houses and take
the proceeds to another more affordable house in another city. The supply
constraint thus results in higher prices and a wealthier population in that city.16
Supply constraints also help to explain the differences in home prices across
cities and through time. Economist Albert Saiz used satellite data to construct
estimates of the amount of available land around major US cities. He found that
cities that are boxed in by bodies of water or steep-sloped terrain (which is less
suitable for building) tend to have higher home prices.17 There is also a tendency
for people who already own homes in a city to try to block further construction
of homes, particularly of affordable housing. They have an economic incentive
to do so, for limiting housing supply boosts home prices. The effects of such an
incentive may differ across cities. But beyond such conventional economic
explanations, there is also evidence that changing narratives play a role in
housing booms.
The years leading up to the 2007–9 world financial crisis saw record-breaking
increases in home prices in some countries, notably the United States. According

to the S&P/CoreLogic/Case-Shiller home price index, home prices in the United
States nationwide rose 75% in real (Consumer-Price-Index inflation-corrected)
terms between 1997 and 2005, while the Consumer Price Index for Rent of
Primary Residence, corrected for Consumer-Price-Index inflation, rose only 8%.
This boom in home prices far exceeded anything that could be attributed to
increased unmet demand for housing services. This housing boom in the United
States and other countries was a major factor in the world financial crisis of
2007–9. Home prices fell dramatically and defaults on mortgage payments
surged, plunging mortgage lenders into serious financial difficulty, a crisis that
then spread to the rest of the financial sector and the world. By 2012, in the
aftermath of the crisis, real US home prices fell to a level that was only 12%
above that of 1997, before taking off again in a new boom that continues as of
2019, though the boom shows some signs of weakening and actual price declines
in some US cities. US real home prices were up again 35% from 2012 to 2018,
while real rents were up only 13%.