Investing Sometimes Brings up the Vision of Tulipmania
January 3, 2023
John Mijac, Managing Broker
Long Realty Foothills Office
Investing sometimes brings up the vision of Tulipmania, that extraordinary investing bubble which happened in Holland back in the mid-1600s. If you are not aware of that amazing blip in investing history, look it up. In short, Tulips were introduced to Holland as an exotic flower in 1593…by a couple of years later, anyone who had any money at all needed to own tulips to demonstrate their wealth. Interestingly, a mosaic virus caused some tulips to sport unusual colors and stripes. Naturally, the wealthier you were the more unusual the Tulip you needed, and so a climate of desire emerged for bizarre and unique flowers. Soon, whole markets were dedicated to selling the most unusual sports.
At the height of the frenzy, an exotic tulip could go for 4 to 5,500 Florins a bulb…so, in today’s money, that’s around million dollars. Many bulbs traded for between $50,000-$150,000! You see where this is going, or rather where this went. Virtually overnight people realized there really was no inherent value in tulips, after all, plant the bulb or the seeds and shortly you will have many more with little investment. Secondly, lots of tulip investors had leveraged themselves on the plan that the love of tulips would last, but it didn’t, and they had to sell short or not at all.
What does this have to do with real estate? I draw a couple of conclusions. First, the price of something is not inherent. An exact price is fleeting and only occurs the moment a buyer and seller agree on it. Yes, they (the buyers and sellers) may use comparable sales, but each one of those were also determined by an ineffable mystery…the meeting of the minds created opportunity, need, and desire. If we look back to the last real estate bubble in 2008, it does bear some similarity to Tulipmania…compare the idea that home prices will always go up and that leveraging your buying power to buy a home you could not afford might create wealth. That anyone could get in on the frenzy. Isn’t that really what those easy loans were all about? Creating some quick and easy wealth out of something as ephemeral as a tulip? Greed won the day for many.
However, the similarity falls short for our times, even though many people might draw a comparison. Why? People who bought in this last two-year buying binge bought largely to own and live in the home, they bought with equity or cash, not leveraged assets. Also, as there is a limit to available land and since the population keeps growing, the demand for housing continues to grow at a direct ratio. The years after 2008 depressed that normal growth…you remember, all those millennials and others sharing households. As a result, part of these last two years of astonishing sales were baked-in and only some of the madness was actual insanity. Greed was not the driving force this time.
For us? We are in the middle of a cooling off period and the price adjustments we are seeing now will most likely adjust back in due course. It is not the doom some are predicting. The best word for investors still comes from Warren Buffet: “Do not take yearly results too seriously. Instead, focus on four or five-year averages.” Take a breath.
John Mijac, Managing Broker, Long Realty