I’m always intrigued by charts comparing a current trend to a previous era, or even to the experience of another country. So I was struck by a few charts I stumbled upon recently, all via the Pragmatic Capitalist blog, comparing the arc of the U.S. housing market to the experience of Japan during the 1990s, aka “the Lost Decade.” (I’m not suggesting that I just “discovered” the current U.S. situation is being compared to Japan, but that it might be worth a revisit of the debate.)
I’m not necessarily a believer in the axiom that “history repeats itself,” because my view is that it’s a limited menu—and future generations can learn from past experiences to make sure they don’t repeat the same mistakes (witness Fed Chairman Ben Bernanke’s preemptive efforts to avoid a repeat of the same restrictive policies that pushed the tottering U.S. economy into the Great Depression back in the 1930s.
There are similarities to the U.S.: Both countries enjoyed (suffered?) housing bubbles that were fed by cheap money and lots of leverage. And the central bankers in both the U.S. and Japan pushed short-term interest rates down to ridiculously low levels to both enable existing borrowers to refinance, and to stimulate new business activity.
Still, in Japan it took a decade for consumers and business alike to work down their debts to a level the economy could start growing again, which gave rise to the phrase “the Lost Decade.” Here’s a look at the current financial situation of U.S. households, from a recent study produced by the Federal Reserve Bank of San Francisco (and with a hat tip, again, to the Pragmatic Capitalist:
If you believe this chart, you see that U.S. households need to cut their debts in half to get back to the historical trend line. Now here’s a chart comparing the amount of leverage among U.S. households to the leverage taken on by Japanese companies (okay, it’s not apples-to-apples, but it’s the best proxy I found). This chart suggests the U.S. will spend the next nine years paying down its debts just to get back to a more historical norm:
Since Japan's debt boom occurred in the 1990s, and we have the benefit of analyzing their experience, what happened? Despite the Bank of Japan pushing interest rates to zero--yes, zero--borrowers spent the 12 years working down their debts, at the expense of raising capital and debt to fund new econmoic activity, at witnessed by this chart:
And finally (since this is a housing blog, right?) here’s an overlay of U.S. housing prices and Japanese housing prices back during the 1990s. Similarities, no? If so, this chart suggests that U.S. housing prices have roughly another 10% to 15% to fall, and will likely stay there for the next five years. Discuss.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.