Will U.S. housing go the way of Japan?

Posted by: Dean Foust on June 16, 2009

japan.jpgI’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:

hsholddebt.png

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:

lvrgrat.png

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:

japandeleveraging.png

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.

usvjap.png

Reader Comments

fred

June 16, 2009 12:45 PM

well, that is an easy comparison. just a few things to remember though. The housing burst in Japan, was more a Real Estate bubble rather than housing per se, as in the US. Also, a big difference was that Financial institutions were behind the bubble with the so-called "tokin" a/c's (special money for speculation that every financial institution had to have). now, the Japanese people never leveraged themselves but as mentioned it was rather institutions, coporations that created the mess. the fact that those same corporations never really fired anyone, made things go much much slower, in order to keep social peace. Now, the Bank of Japan and the Japanese govt never acknowled the problem until 3 years AFTER the peak and the subsequent burst. Finally, demographics play a great role. In fact, the US has a much much healthier (positive) demographic than Japan never had. So, future generations in the US will "save" what seems to be "unsavable". So, I guess: a lost decade does not seems real. At worse, growth will be thamed at 1-3% for the next few years...

scooter2

June 16, 2009 9:54 PM

I broadly agree with your long term US projections but I looked at the Tokyo/Osaka house price crash and a lot of the 'average' drop was due to the crash in values of pre 1973(from memory)earthquake regulation apartments. The Japanese won't live in them and I gather there are a large number of empty ones - entire buildings in some cases. Interesting stuff though - thanks.

Strategery

June 17, 2009 12:16 AM

I think something has to give when it comes to the income/debt ratios. We should expect to see a double-digit savings rate at some point. The economy will have to rely more on government spending and business investment, and less on consumer spending. However, the demographics of Japan and the US are different. While Japan actually has a negative population growth and an aging population, the US population continues to increase. At some point, supply and demand will meet and house prices will stabilize and eventually rise. A lot will depend on policy; do we write off the loans, take the loss and move on or should we soften the fall, prop up prices and drag it out? The latter seems to be the path that we're on now.

real estate finance

June 18, 2009 7:54 AM

blog is presented in a nice way!!

hock

June 18, 2009 9:02 AM

US positives are better demographics & more optimistic culture. But negatives are lack of savings compared to Japan households US$15 trillion savings. Though Japan government debts are at 170% of GDP, US official government debts at 80% of GDP but that exclude quasi-govt debts, unfunded Medicare & Social Security of about US$99 trillion.
Overall US at households, firms, banks and government levels are too indebted to avoid a prolonged balance sheet recession.

Jack

June 18, 2009 11:57 AM

The US government is kicking the can down the road by giving cash to the banks to enable them not to sell their toxic loans. The cost of the government support is the crash of the dollar and dramatic rise of interest rates on US debts. Basically, the government is loading itself up with massive debts while putting the credibility of the country on the line. But the banks' bad debts are not going away. Eventually they must be paid for and bought down. The government and banks' plan is to do everything they can to keep the housing bubble from deflating (and possibly inflate it again) by blowing fresh money into it. Then they will claim the housing market is stabilized and the banks' toxic loans backed by houses are good again so investors will buy them at face value. The politicians will do everything they can to save the bankers so they can collect their kickbacks when they retire and become "consultants". But this plan will not work because the government will have a very hard time raising that much cash to inflate the housing bubble again. The rise in long-term interest rates is a very strong evidence of that.

mike bradley

June 18, 2009 12:34 PM

Another area to explore would be overseas investment by investors in both economies... during the Japan boom period japanese investors bought real estate and other investments in the US and elsewhere with cash leveraged off the strong Japanese investment markets, low interest rates and strong trade surpluses... likewise now we have had huge US investments in BRIC countries financial markets and real estate... The Japanese got caught in a double bind when world real estate markets tanked, causing losses in their leveraged real estate holdings. In their US investments they lost even more converting the dollars back into yen... multiplying their losses in terms of Yen...

US investors in BRIC markets might see the same thing happen to them in this worldwide period of economic downturn...

mike bradley

June 18, 2009 12:34 PM

Another area to explore would be overseas investment by investors in both economies... during the Japan boom period japanese investors bought real estate and other investments in the US and elsewhere with cash leveraged off the strong Japanese investment markets, low interest rates and strong trade surpluses... likewise now we have had huge US investments in BRIC countries financial markets and real estate... The Japanese got caught in a double bind when world real estate markets tanked, causing losses in their leveraged real estate holdings. In their US investments they lost even more converting the dollars back into yen... multiplying their losses in terms of Yen...

US investors in BRIC markets might see the same thing happen to them in this worldwide period of economic downturn...

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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.

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