A Cautionary Housing Tale from Japan

Bull! Not bull ^ | September 8, 2006 | Michael Nystrom

[dirkdavies68]

A Cautionary Housing Tale from Japan

by Michael Nystrom
September 8, 2006
Cambridge, MA

In the summer of 1990, with my freshly minted Bachelor's degree from the University of Washington, I went off to Japan to make my fortune. In the late 1980's if you recall, Japan was the place to be - Japanese management was all the rage, the Nikkei was soaring, and Japanese businessmen were buying up impressionist paintings and prime properties around the world at record prices. Americans were fretting and wringing their hands at the prospect of being displaced as the world's supreme economic power.

In spite of all these good economic reasons to stake a claim in Japan, the reason I was there had little to do with all of that. While I had heard of the "bubble economy" in college, I frankly had no idea what it meant. (Having just graduated from college, I barely knew my ass from a hole in the ground, and it was only after leaving school that my true education began.)

[dirkdavies68]

The real reason I was in Japan was because I'm half Japanese and I'd just graduated from college without a clue of what to do with my life. So I set off to meet my relatives and discover my roots in the land of the Rising Sun. While I had a job and a place of my own in Tokyo, I spent a good deal of time at my uncle's house in Yokohama. My uncle is a salary man (sarariman), on the young side of middle age at the time, married and with two kids. In many ways he was an average Japanese enjoying the fruits of a booming economy. Japan was on the rise. Between 1955 and 1990, land prices in Japan appreciated by 70 times while stocks increased 100 fold! You might remember when it was claimed that the land under the Imperial Palace in Tokyo was worth all of Manhattan, and that the land in Tokyo alone was worth more than all the US.

Oh, so that's what they meant by a bubble!

In spite of the booming economy, my uncle, like many Americans today, was shut out of the housing market. Prices always seemed too high, but a pullback never materialized, so he waited until the right time to buy. While he waited, prices spiraled up and away until at last they were hopelessly out of reach. By the time I arrived in 1990, his family was living in a government-owned, rent controlled flat that was, by any standards, small: Two rooms that were each about 12 square feet, a small kitchen and a tiny bath to serve three adults (including his mother) and his two kids. (Japanese rooms are multi-use rooms, so at night when you're done eating and watching TV, the furniture is put away and the futons come out and everyone sleeps together on the floor). His was a unit on the first floor of a huge concrete building that sat in the middle of a sea of identical buildings. The picture below is not his actual building, but you get the idea.



And now to the meat of the story that I've found myself telling with increasing frequency of late: My uncle thought that he would never ever be able to afford a house in Japan, and that he would live out his dying days in that little rented flat. In his experience, housing prices went only in one direction: up. But by 1992, two years after the Nikkei peaked, something strange began to happen - housing prices started drifting down. Of course my uncle didn't know that the Nikkei had just put in its all time high, and would ultimately fall by 80% over the next 13 years. Anyone paying attention to the stock market most certainly thought that it was just taking a necessary and well-deserved breather, and that new highs were just around the corner.

By 1994, housing prices continued to drift lower until some units started to become, with considerable stretching and creative financing, affordable. So that year, by taking out a two generation, 60-year mortgage -- with his 16-year old son on the hook for the remaining years that he might not be able to pay -- my uncle bought his first home. The family had to scrimp, and both he and my aunt had to work more hours, but they were finally, proud homeowners. And it was a nice house - larger than their old house (but not much), in a nicer neighborhood, and on a higher floor with a view of the treetops. I even helped them move in. It was a happy day. I don't recall the exact price he paid, but I remember thinking that it sure was a lot! Somewhere north of half a million dollars. Those were the kinds of details were lost on me at that age.

I left Japan in 1994, and didn't return again for a visit until late 1998. In the intervening 4 years, housing prices had continued to fall, and fall, and fall to the point where my uncle's house was worth only half of what he had paid for it four years earlier: A couple hundred thousand, up in smoke, just as Japan's economy was mired in a 13-year slump. But he stuck with his loan, hoping the value will come back. And one day, it just might. So he makes his payments each month faithfully, and when he can no longer make them, his son will take over and pay off the remaining balance. And sometime, in the remaining 48 years on the mortgage, the house may once again be worth more than what is owed on it.

The reason I've been telling this story so frequently is that, as housing prices in Boston start to come down , my home-less friends and acquaintances are perking up, excited that they may actually be able to own a home of their own - something previously thought to be an impossibility. But when I go out to the Sunday open houses with them, what I see is still, in my opinion, overpriced. I certainly wouldn't mortgage my life for 30 years for any of it. And so I tell the story of my uncle, but for the most part it falls on deaf ears. I have no problem in believing that housing prices actually can come down, because I've seen it with my own eyes. Since I learned that lesson from the Original Bubble Economy, I've since seen many bubbles. This chart, from the recent EWI Special Report on real estate (free with sign in) clearly depicts a bubble:



Since its peak in January of this year, the homebuilders index has fallen by almost 50%, is hovering near its low and threatening to break down further : See Bloomberg Chart Here. Stocks always move before the news. As late as this June, Time was still way behind the curve, featuring its "Home $weet Home" cover:

But now the tidal wave of bad news is hitting the media. The Dallas Morning News reports:

Never in the history of the United States have so many home owners hocked so much of their biggest asset, hoping that rising prices would let them outrun their debt forever. The resulting picture isn't pretty. Last week, Moody's Investors Service reported that the delinquency rate in the home equity loan market rose 11 percent for the quarter ended in April from the same period a year earlier.

According to Moody's, delinquent loans now represent nearly 7 percent of the total existing pool of home equity loans. "This is the 11th consecutive month that the home equity delinquency growth rate has risen," Moody's Ben Garber said.

The Moral of the Story

Most of the people I know today either glibly, or grimly, believe that housing prices in the US will never come down - or if they do, it won't be that much - just like my Japanese uncle once did. The glib ones are those who already own a home and are just waiting for the higher prices that they know are coming. The grim ones have been shut out and believe that they'll never own a home, and so are ready to pounce on the first opportunity they can afford to buy, even if the house is not suitable either physically or financially. But I know that just as prices spiraled up for years, they can also spiral down for years.

The advantage my uncle had of renting a government-subsidized unit was that he was able to save a lot of money for his house. But had he waited only a few more years, instead of jumping on the first thing he could afford, he could have bought twice as big a house, or had half as large a mortgage. And his life would have been quite different. My Uncle already learned this lesson once, and I pass this story along so that you also might benefit from his experience.

When I finish this article and post it, I'm going to get on the horn to my friend T, who is a real estate agent in Seattle. The last time I spoke with him, he told me that things were holding up well in Seattle - business was brisk, and prices were still rising - a big contrast to Boston. I'm going to get his perspective, and see what kind of advice he's giving current buyers and sellers. And tomorrow I'm going to call the agent for the house next door to mine, which has been for sale now for about 3 months. I've never seen anyone visit it, and I've never seen an open house, so I think I'll call the agent and see what I can find out.

That's for next week's report. If you'd like to be notified, please sign up to my low-volume email announcement list.

[sushiman]

" And sometime, in the remaining 48 years on the mortgage, the house may once again be worth more than what is owed on it. "

The LAND will certainly be worth something , but the actual structure won't be worth much even if well maintained .

[Blue_Ridge_Mtn_Geek]

I was cured of the delusion that house prices never go down back in 1964 when I was a teenager. My father made a job related move from one metro area to another, and had to sell the house for a loss of several thousand dollars, due to a slump in the housing market of our former residence at the time he put it on the market.

I strongly doubt if the current slump will mirror Japan's, but given the prevalence of "crazy" mortgage products, the stagnation of household income, and the large number of marginal to very weak borrowers who have been shoe-horned (very temporarily) into 'home-ownership' with subprime mortgages, many of those who are forced by circumstances to sell in the next couple or three years are likely to have our family's unpleasant experience.

[proxy_user]

Well, you have to know how to value an asset.

Could a reasonable person have told that the Japanese real estate market was overpriced in 1990? I would say yes.

Now look at the US. How do housing prices compare to rental values? How do housing prices compare to the cost of materials and labor need to build them? In many parts of the country, they are reasonable by these measures.

Now in Boston, or New York, or California, they may be a bit high. But even in these places, I wouldn't wait around for a 50% drop. Our economy is too strong, and the earning power of potential buyers too high, for this to happen.

Of course, I could be wrong, or things could change.

[gaijin]

His life moves parallel my own so neatly, it's EERY..!

[gaijin]

ping

[Moonman62]

Japan has gone through banking gridlock since their 1990 stock market crash. (Banks didn't write off their bad loans, and therefore couldn't make new loans.) That hasn't happened here and is unlikely to.

[Moonman62]

Now in Boston, or New York, or California, they may be a bit high. But even in these places, I wouldn't wait around for a 50% drop. Our economy is too strong, and the earning power of potential buyers too high, for this to happen.

And the next direction for interest rates is down.

Of course, I could be wrong, or things could change.

And that's the difference between us and the doom and gloomers who have been predicting a real estate bloodbath six or seven times a day, every day for the past few years.

[mozarky2]

I got a joke e-mail several years ago about the Japanese banking crisis...you've probably seen it..."the Origami Bank has folded..something is fishy at the Sushi Bank..." Laughed my a** off!

[RegulatorCountry]

"Two rooms that were each about 12 square feet"

Big difference between 12 square feet (a 3' x 4' closet is 12 square feet) and 12 feet square, which would be 12' x 12' (144 square feet). I suspect the author meant 12' x 12'.

[VanShuyten]

Another thing to keep in mind is that, although it's a crowded country with limited space suitable for building, Japanese population is stable or even declining. We've added the equivalent of THE ENTIRE POPULATION OF JAPAN since I started high school.

[Redbob]

JApan's slump, if you recall, or realize, had little to do with real estate, or the world economy, but had much more to do with the Japanese government's unsustainable manipulation of the economy, especially interest rates which were on the order of 1 per cent, or even negative if adjusted for inflation.

Nothing remotely like that exists in this country at this time, and making a comparison between our economy and that of Japan in the late '80s/early '90s borders on the silly.

[dirkdavies68]

Redbob - You're a real funny one. That is the most hilarious thing I have ever heard! What has the Fed been doing for the past five years, if not manipulating interest rates?

[Moonman62]

What has the Fed been doing for the past five years, if not manipulating interest rates?

And after years of raising rates, the yield curve is flat. What do you think that means?

[indthkr]

bump for later entertainment......

[marktwain]

"Redbob - You're a real funny one. That is the most hilarious thing I have ever heard! What has the Fed been doing for the past five years, if not manipulating interest rates?"

"Japanese government's unsustainable manipulation of the economy, especially interest rates which were on the order of 1 per cent, or even negative if adjusted for inflation."

There is a very large difference between what the Fed has been doing and what the Japanese government did. I think the operable term is "unsustainable".

[elmer fudd]

Could a reasonable person have told that the Japanese real estate market was overpriced in 1990? I would say yes.

Back in 1990 I was seriously infatuated with Japan and all things Japanese. I was studying Japanese at school, living with a Japanese girlfriend and spent my summers working in Japan, but I remember having serious doubts about the Japanese economy even then. The value of the Nikkei was at the time more than the combined value of all the other stock markets in the world and regardless of how well run and efficient Japanese companies were, they simply weren't worth more than all the rest of the worlds companies combined, in fact they weren't even close. That was just obvious on the face of it, even to someone like me.

[nmh]

Bump!

[Oshkalaboomboom]

You must not pay too much attention to the housing market, there was a housing crash in the Boston area market about 15 years ago. I bought my hous in southern New Hampshire in December of 1984, by the time we closed in February of 1985 the house had appreciated 50 thousand dollars!! If we had waited until I transferred up to find a house we would have been priced out of the market. I had friends who bought condos in the mid 80's that did lose over half their value. One friend rode it out, the other declared bankruptcy and gave the condo back to the bank. 14 years after we bought our home we sold it and moved. The price was that same $50k higher that we had earned in those first few months. There used to be a big building suppy chain called Somerville Lumber. At one time 7 of the 10 highest volume stores in America were Somerville Lumber stores. By the end of the 80's they had either gone belly up or sold off a lot of their assets I don't remember. That market was a disaster. It was also the time of the Savings and Loan crisis, remeber that?

But, as they say, one man's disaster is another man's good fortune. When the market collapsed a lot of people who had down payments saved up because they had been priced out of the inflated market suddenly could afford a decent home. That lesson stays with me to this day, I wouldn't even consider buying in this market.

[ex-Texan]

*BUMP*!