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If Japan Lost Two Decades From Its Bubble Popping, How Many Decades Should The US Expect To Lose?
The Harlem Community Development Corporation and AAREPNY hosted a
breakfast symposium on real estate last Thursday in which I was the
keynote speaker. The audience consisted of diverse cross section of real estate professionals -bankers, developers,
investors, lawyers… the usual fare. I fear I may have rained on the
optimism parade with my presentation, but I also feel a few salient
points were communicated. I have included portions of the presentation
here for the blog readers to peruse. One of the main themes of the
presentation was that of “lost decades”. How likely is it that we can
have 20 more years of housing price declines?
Let’s see if any of this sounds familiar, as excerpted from Wikipedia:
The Lost Decade (????10? Ushinawareta J?nen?) is the time after the Japanese asset price bubble’s collapse within the Japanese economy, which occurred gradually rather than catastrophically. The term originally referred to the years1991 to 2000,[1] but recently the decade from 2001 to 2010 is also sometimes included, so that the whole period of the 1990s and 2000s is referred to as the Lost Decades or the Lost Years (????20?, Ushinawareta Nij?nen).
The strong economic growth of the 1980s ended abruptly at the start of the 1990s. In the late 1980s,
abnormalities within the Japanese economic system had fueled a massive
wave of speculation by Japanese companies, banks and securities
companies. A combination of exceptionally high land values and
exceptionally low interest rates briefly led to a position in which
credit was both easily available and extremely cheap. This led to
massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.
Recognizing that this bubble was unsustainable, the Finance Ministry
sharply raised interest rates in late 1989. This abruptly terminated
the bubble, leading to a massive crash in the stock market. It also led
to a debt crisis; a large proportion of the debts that had been
run up turned bad, which in turn led to a crisis in the banking sector,
with many banks being bailed out by the government.
Michael Schuman of Time Magazine noted that banks kept injecting new funds into unprofitable “zombie firms“ to keep them afloat, arguing that they were too big to fail.
However, most of these companies were too debt-ridden to do much more
than survive on further bailouts, which led to an economist describing
Japan as a “loser’s paradise.” Schuman states that Japan’s economy did not begin to recover until this practice had ended... This led to the phenomenon known as the “lost decade”, when economic expansion came to a total halt in Japan during the 1990s
Paul Krugman was even mentioned in this Wikipedia article, as follows…
Paul Krugman described Japan’s lost decade as a liquidity trap,
in which consumers and firms saved too much overall, causing the
economy to slow. He explained how truly massive the asset bubble was in
Japan by 1990, with a tripling of land and stock market prices during
the prosperous 1980s
I suggest that Mr. Krugman compares his hometown to that of what he
considers to be “truly massive”, he is sure to be shocked! And as for
that myth that a booming GDP will lift asset prices, let’s see how well
that worked out for Japan over the last 21 years…
There’s a lot more to go over, but I’ll let you watch the video to
get the gist of it. I suggest that you expand to full screen and the
highest resolution that your bandwidth permits in order to see the
charts and graphs clearly…
Of course, I have laid out the shadow inventory system for paying
subscribers, so they can see what the current (as of December) backlog
and supply is, as well as estimates on how long it will take to clear
out the excess inventory. Click here to access the online spreadsheet. To subscribe, click here.
Related links:
- Why Is NYC The Only Major Condo Market Increasing In Price? »
- The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium
- I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Monday, January 17th, 2011
- Less
Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking
Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011 - As
Clearly Forecasted On BoomBustBlog, Housing Prices Commence Their
Downward Price Movement In Search Of Equilibrium Scraping Depression
Levels Tuesday, December 28th, 2010 - The
3rd Quarter in Review, and More Importantly How the Shadow Inventory
System in the US is Disguising the Equivalent of a Dozen Ambac
Bankruptcies! Wednesday, November 10th, 2010 - The Truth Goes Viral, Pt 1: Housing Prices, Economic Sales and the State of Depression
- Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
- Those
Who Blindly Follow Housing Prices Without Taking Other Metrics Into
Consideration Are Missing the Housing Depression of the New Millennium - Pay Attention to the National Association of Realtors and Their Chief Marketing Agent At Your Own Risk!
- The
Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks
Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! - Yes, Housing Prices Have Much Farther to Fall. We’re Talking Years…
- I
Told You Housing Was Going to Take a Downturn for the Worse. I’ll Tell
You Something Else, We Are in a Housing Depression! It’ll Get Worse
Until Market Forces Rule Over Government Bubble Blowing!
- advertisements -
Reggie
Very brave of you to present the stone cold truth to an audience of property interests. Reminds of Peter Schiffs 2005 'Disaster Coming' presentation to a similar US property crowd (surprised he got out alive!).
I absolutely agree with your decade or more of down for the US property sector (ditto Spain, Portugal and UK). It took 10 years after the 1929 Great Depression for property to show any pulse whatsoever or sign of life. This time I think we will undergo a fundamental shift, from property owning to renting and from credit/debt to almost entirely cash purchases. Without the credit/debt fuel the property sector and prices will never look the same again.
This bubble-madness will go down in history similar to the English Sought Sea, Dutch Tulip and Internet bubbles and never be repeated I suspect.
Anyway does this Japan/US evidence make you a deflationist?
If so welcome to the 0.0001% Club. It's a bit lonely and a bit tiring debating to a crowd of 99.9999% inflationists. Many top inflationists I still follow and read and deeply respect even if I think their hyper-inflationary views are 99.999% unlikely (at least until deflation has done its worst and run its course circa 2015-2017)
Actually, I'm in the stagflation camp and believe that I have already been proven correct. Loose money has driven up input prices at the same time that real assets prices are falling through the floor. It's not reported as such because it doesn't sound very sexy, butit is happening right in front of our faces. I have been warning of such for 4 years now.
Thank you Reg.
Principles before Pablum. You ARE the Man.
Reggie
good work, but with telling the truth about: the banks, fed, treasury, and government policy, and telling them like it is, do you expect to be invited back?
A "crack" in the Fed's meltup "dam"?
Black Swan looming?
Mideast unrest with spillover into Europe and USofA?
now for an alternative viewpoint. Asia is growing rapidly. Japanese equities look to be priced pretty fair in comparison to previous prices. If the japanese do succeed in tethering a giant solar collector above japan and sending down the power in microwave laser beams, and if they succeed in building robot slaves to run their factories, clean their houses, and satisfy their carnal desires, then the land of the rising sun may have another bull run in the future.
As a child, the Japanese intriqued me. They would be profiled on 60 minutes (and other media) as economically superior, overly hard working, loyal to a fault and industrious as hell. I was in Hawaii in 1987 and I've never seen so many american dollars -i'm figuratively saying fistfuls of 100's spent by Japanese like they were pennies. I think the Japanese bought Pebble Beach Country Club and other major American real estate landmarks. If only we could prosper like the Japanese. The 'buy american' loyalist cry was heard during the 80's.
Then the bubble popped. They were no longer a youthful society able to sum up the energy to innovate and create a different road to prosperity. Their day in the sun was over. There is still much wealth in Japan and strong industry. They are not 'lean and mean' anymore. They want to rest on their laurels.
Sound familiar---America 2000.......except we have the twin towers of defecit spending and a huge trade defecit (japan runs a trade surplus). We are aging. The emerging markets are young, full of fire and motivation. America's day in the sun is ending. Its not Armageddon UNLESS our policy makers cannot accept our country getting an 'economic demotion' and they do something stupid like interfere with the marketplace (Fed) or start a war (legislature --for not changing policy).
Making US population into shushi eaters instead of hamburger gobblers is the global solution. It would radically change the climate in the world. Japan's aged population would get wiped out overnight through lack of vanishing shushi imported into USA. The 'hikokomori' would have to climb out of their caverns and start learning to fish for the white whale. Japan's recession would be over.Texas long horns would all grow fins and start swimming into the gulf. The consumption of beef feedstock would fall like rain in bengladesh. The CO2 emission caused by red necked US beef farting in the ranges would diminish like the long lost erection of the Maya indians. The arctic would refreeze to Al Gore's relief cum frustration as it would incur freezing deep his earnings as weeping Cassandra. GW of ZH would wave the flag of old glory at Gettysburg and reconcile himself with Sarah Palin.
Japans domestic 30 year bonds yield 1%. 1% domestic deflation and 3% imported inflation= eat 1% on savings? Kinda/sorta. Or send your money overseas and watch the strong yen tear those returns down to nothing. The western world is now aging rapidly. Don't expect any ROI. There is no buy and hold anything anymore. The USA is an empire in decline.
Although I have to say, this might be kind of rough stuff over breakfast.
The key structural element linking the US and Japan (in damnation) is the No Bond Haircuts policy call. That is what leads to an endless bleedout as bankrupt firms drag the economy down.
Lost Generation...as Bill Gross at PIMCO already recently said, assuming a zero rate of return across all major asset classes is prudent, if not optimistic.
All ya gotta do is save 10% more of your income stream....so that's another chunk of disposable personal income gone....and then the wrecking crew comes for white collar salary cuts (because, you know, it's the public sector workers' fault that the Fed and the superrich are suicidally insane parasites)....you get the idea....
30 years of illusory growth due to crazy low rates and excessive debt = 30 years of 'ungrowth' especially with all the denial and continuing corruption eating our markets most precious benefit---integrity.
Be careful out there!
Well said Jim
Indeed, it has been a generation of the free lunch crowd, and my guts tell me you are right- it will take a generation to fix it.
But first we need to define the problem:
THE PARASITES HAVE OUTGROWN THE HOST.
Japan has a functioning, productive economy, infrastructure, and educational system.
nuff said
I am hoping that our demographics save us from a japanese and old Europe fate. Japan may have another lost decade or two ahead of them. I hope we base in real estate by 2015 in nominal terms and build from there.
Ever with the better demographics of the US I still wonder if the next generation will want or can afford the energy inefficent suburb lifestyle.
reggie---
you quote paul krugman in wikipedia 'the tripling of land and asset prices in the 80's'---i don't see that on your charts??? i do know the nekkei topped at 38K or so and is at 25% that today.
your real estate chart does NOT even show a close to a doubling in Japan ...what gives???
did real estate triple in the 1980s or go up 60% per your charts???
Don't use Krugman as a reference. The chart above is residential prices. Japan's commercial prices were more volatile.
Well done, Reggie. The whole country is running on borrowed money and borrowed time. Nothing has really been allowed to correct since 08.
In my area asking prices are all over hell's half acre. Nothing much is moving, and condos are a bad joke. The real price breaks are just beginning. This will get ugly.
It is not enough to analogize the situation in Japan merely by studying these kinds of charts.
The social parallels stemming from the end of the old order of job security and wealth are now becoming apparent. if you want to see what happens when a thin sliver of "haves" clings to control while younger generations are left to wither in an environment of economic hopelessness, Japan is the place to start.
Study the symptoms and look for the American version of hikokomori (mostly young men who lock themselves away in their bedrooms, fearful of society's expectations). I think we call them internet addicts.
This is the coming social lesson of Japan's QE.
Yes, they are an amazing byproduct of urbanisation to the max.
i read an article where it looked into the manga artists who create pillows with a unique image of a scantily clad pubescent girl, for these hikokomori to 'cuddle' and love. Curious.
The lesson is dont let your kids spend so much time with video games and tv/internet. Around my parts many parents still force their kids outside and even lock the doors to keep them out. Hikokomori syndrome results from passive parenting styles.
The median household income is now <$50k and falling. Given the possible elimination of mortgage interest deduction, I would venture that the median home price now would have to fall from $170k to at least $125k, or at max 2.5 x income. Even then, if we change or eliminate F&F, FHA, etc, and increase in interest rates would mean a lower price.
Going forward, financial institutions will not issue mortgages under even the old system of 20% down, 30 years. There is no financial risk incentive to do so; especially vis a vis the long bond. It would appear that the only solution would be to issue 10 year notes, 30 year amortization which would roll over with risk calculated anew at that juncture.
You have to look at the real numbers on declining income before you can possibly come up with a multiple to define a housing floor. There are other factors. At what point does declining income meet rising prices where at least two median reliable incomes are required to buy one house ? Will all that require background checks on the buyers to score not only credit but a stability score on a standardized index that predicts which marriages will last and how long will the credit applicants last in their jobs plus how long would it take to get a job with similar pay if something happened beyond the applicants control? Will a forensic examination of the employers be necessary to give the financiers the ability to score their income sources on a survivability index before financing could be approved? Does a house have to be a percentage of annual income in order to be affordable instead of the other way around?
How stable is the income if the private sector is engaged in a game of wage arbitrage between countries? How many jobs will be available in one pay range as technology, increased productivity and outsourcing eliminate even the professional level jobs?
No one seems to be able to answer most of those questions but I assume our nations quants are busy building algos for predictability based on limited and unlimited input.
Until firm policy decisions regarding labor arbitrage and taxes that help to bring about stability are made I would say all housing becomes unaffordable if financing is required to buy it and an income stream that is reliable is required to make the payments. In short, it has to go low enough for the majority of the people who want to buy to have the cash to make the purchase.
Where they will get the cash in an environment of inflation in the cost of living and deflation of wages may make a house the least desired and least affordable purchase for anyone. Since once one buys the property, ongoing taxes and rising utility prices along with rising Maintenance costs could easily make a house unaffordable even if the house was owned outright. That means housing prices have a long way to go before they stabilize. They won';t stabilize before employment variables are more predictable and quantifiable.
It may end up that traditional homes will be bulldozed for some other type of shelter that doesn't conform to what people traditionally visualize as a house.
I do believe that the days of a house being considered an investment are long gone which is not going to help with confidence which in turns make house pricing similar to security pricing. It will have to be bought on an exchange with transparent bids and asks. Buyers of homes should be allowed to hedge their cash with the same instruments that the bankers used to tear a hole in the fabric of the financial universe, with only one bet allowed per home and highly regulated of course :-(0)
House prices are inversely proportional to interest rates. As debt and deficits rise, as the FRN is debased by Quivering Lip (an act of Treason), interest rates will continue to rise.
Burn +1000 on your post.
It may end up that traditional homes will be bulldozed for some other type of shelter that doesn't conform to what people traditionally visualize as a house.
especially given that 1/3 of the McMansion is garage and as such you have been placed on auto watch or else get a handslap from your local HA. So now the 40' of 2 lane hiway in front of everyone's house is just, well, obselete while serving the present.
Great stuff Reggie
The chairsatan would argue that he has a print machine and so he can double household incomes whenever he wants.
The Chairsatan says he can levitate. The Chairsatan says his lip did not quiver. The Chairsatan was saved by Time Magazine once; maybe Jerry Springer can save him next.
No lost decades as the Japanese did not try to debase dollar, so there will be massive dumping of dollar instead + hyperinflation.
Thanks Reggie for the insight.
I think no comparison can be made between Japan and the US, as the situation in the US is much worse than in Japan. As TD often points out, we have now Central planning in the US and I always have to laugh when I hear people (specially on CNBC) speak about "the market". I only d'like from the so-called politicians an answer to the easiest question, which surprisingly nobody never asks: "who will pay back this debt ?" The answer is clear and our children and grandchildren will be very thankful to us but who cares today ?
I think the Fed knows they lost the game and will push towards hyperinflation from now. This could also end in a war, remember WW2 had a big link to the great depression.
We can't afford another war. We have 2 ongoing right now, exactly as Bin Laden hoped for.
Asymmetrical response. Simple, but peverse.
I guess the Shock and Awe sounded good when they wrote the script, but the bills keep coming in.
It is sad but true. This is the Last Hurrah.
Martin Armstrong's cycle work suggests that the current downturn in the housing market will bottom in 2032 - that's 21 more years of declining prices
Dang bronzie
Why that's just plain WRONG. My analysis points clearly to only 19 more years.
When I saw how fast the house prices were appreciating in CA during 1985 and on I was thinking there is no way this can continue - around 1995 it seemed ridiculous to think anyone would be able to afford a home in a few years. People bragged about making more on their home equity than at their jobs...
I'm no economist but it was obvious to me then. Now everyone (not here on ZH) is saying real estate will recover in the next few years. Wishful thinking.
A housing bubble ?? How can that be, Alan ??
1. Every commercial on CNN was Dietech (GM) telling you that they would outdo anyone else in getting you "free" money.
2. HGTV started up "Flip that house" (Now replaced with "Heal that ass")
3. And your Evil Twin was rambling irrational exuberance.
So, PhD in hand, Alan says no one could have seen the Housing Bubble coming. I guess Alan wouldn't know the subtle signs when a BM was coming.
To the point of the article, Reg, - the U.S. would be fortunate indeed to start on this slippery slope with the dry ammo Japan had.
- Japan did not need to borrow from foreigners
-Japan retained much of its industry and does so to this day.
-Japan already had all the social support networks in place- a far more homogenous society than the U.S.
And last, but not least, deflation on a slow, drip by drip basis is a good thing not a bad thing. Purchasing power increases for the individual.
A previous writer noted the U.S. is more on the path of Argentina. As the Quivering Lip Bernank continues with the destruction of the USD reserve status, and as the U.S. politicians fib while the ship of state lies dead in the water, we will be lucky to have the Argentine experience.
No country has ever printed their way to prosperity, otherwise prosperity would be easy indeed.
No bottom for CA residential this year or next. The math simply doesn't work for the optimists, sad to say.
Good charts at www.doctorhousingbubble.com
Germany will join the club , Reggie will draw the third line, much sharper, of course ... (disclaimer: I'm not smart, but there is a cumulative destruction of the capital and infrastructure in Germany, much worse then in the USA ... ). So don't bash your citizens as sheeple - competition is sharp....
Thanks for the insight. If we had honest accounting..., big if, I think Spain would lead in the race to the bottom. As you point out, the competition is fierce.
Spain already won that race :)
Now you can already buy 2 to even 3 houses for the price of 1, 3 years ago.
It's not too bad in Spain at the moment (wish it was worse as I'm there at the mo precisely to benefit from the carnage!). There's been a 30% plus price drop and lots of vacant property and halted developments. It's the 'eye of the storm' same as US and UK property, a slightly eery lull before the next BIG leg down i'm sure for many years to come.
Am watching the Ibex Index to be the lead indicator for when the next price drop should follow in property
Most comparisons I've seen show Japanese property prices rising and falling faster than in the recent US bubble and crash. Not sure why your result is so different. Guess I'll look into it.
US property prices are entirely likely to gradually decline in real terms over the next couple of decades. Average house prices ranged between 1.65 and 2.05 times average household incomes during the late 60s-90s, then suddenly shot up to 2.83 in 06 and were back down to 2.00 by 2009. After such a major collapse with so many foreclosures you would expect house prices to fall their lowest point relative to incomes in recent history, as they would have without intervention. But home prices have stayed at the high end of the recent historical range, because of the huge amount of government support through loose money (= subsidized general interest rates) and cheap government mortgage insurance (= additional subsidy specifically of mortgage rates).
Those general interest rates can only go up from here. And as we see in the news today, much to the ire of the realtors, even Obama and Geithner now realize that the choices for housing finance reform boil down to (a) take a big step to the right, (b) take two big steps to the right, and (c) take three big steps to the right. We are obviously facing a future in which cheap government mortgage insurance will gradually dry up, pushing up mortgage rates.
On the other hand the Fed seems inclined to keep interest rates as low as possible for as long as possible, and Obama seems inclined to do little more than discuss the broad outlines of GSE reform for the next couple years. So there is likely to be increasing liquidity seeking increasingly mediocre excuses for malinvestment for the next few years. We might se some increase in property prices, but if we do, it will be in the context of general inflation, and it will end with another crash when the Fed belatedly tightens.
You probably looked at commercial land prices. The graph above is residential.
I'd venture it could be a 5 - 10 year slide into a collapse of the USD, followed by the emergence of a two tiered monetary system. The top tier for the cartel, and the lower tier for us schlubs.
US is going Argentina, not Japan
Or does it compare to the US situation?
Japan's so called lost decade has been more that a decline in RE. It produced deflation on a larger scale.
Providing US citizens with cheap and affordable houses, irrespectively of the real price associated to living in the US, was the goal of the subprime crisis.
Reads very different from Japan's situation. There will be no lost "decade" in the US.
Providing US citizens with cheap and affordable houses, irrespectively of the real price associated to living in the US, was the goal of the subprime crisis.
Wow, Pollyanna! Your perspective is SWELL!
See, maybe I'm bitter and cynical and unfair, but it seems to me the goal of the liar's loans and NINJA approvals was actually just to generate fees and payments to an industry of RE agents and bankers on stratospheric loans/rates that their customers didn't understand, all the while knowing full-well that they were selling overpriced homes to people who couldn't afford them at rates which would become onerous.
Cheap housing? Not hardly even close, naw.
Define close.
Cheap housing, yep. When people can start fish for houses built for 140k for prices around 30k, that is what I call cheap housing.
Building homes is to be expensive in the US due to the general environment. Houses prices depend on the environment and the US has kept bettering the environment for decades now. Overpriced then? Not that much.
People who cant afford buying a house in the US? Yep, more and more people can no longer afford buying a house in the US.
The subprime crisis really helped in this regard, populating the housing stock with units that should not have been built in the US in the first place.
Actually, subprime was the last stop on the securitization express that resulted in lots of cheap money which then spent on housing, causing prices to rise in typical bubble fashion. This "velocity" in housing prices then caused the securitizers to look for another source of loans, and the last "not fully leveraged" crowd was the subprime borrowers. Lots of lipstick was applied to pigs, the forever-levitating housing prices would cure all ills, and it was off to the races. And while a lot of peple love to blame Fannie and Freddie for all the trouble, the truth is (check it yourself) is that the overwhelming majority of loans were made via private securitization not government sponsored. It was the Wall Street investment banks that blew the doors off and it had nothing to do with Freddie and Fannie. Check the facts. Then these clever boys created synthetic MBSs, CDOs (to dispose of the unsellable B class tranches), and other esoteric bullshit that in hindsight was clearly some form of rampant madness. Greed unrestrained.
So forget noble goals, and cheap housing and all that crap. We were had.
I dont care about the 'debate' private-public.
Noble goal? I simply stated goal.
Cheap housing? A reality.
People who want to repeat or implement their own version of the scheme will be interested in technicalities. I am not.
The reality is that the general environment keeps being bettered. A better environment means more expensive houses. More expensive that more and more US citizens could not afford.
A RE estate bubble was created in order to force the localition of houses in the US (quite a lot of countries participated to the scheme, attracted by the bubble)
The bubble popped. The houses are now located in the US. And not elsewhere.
Sold at prices that would not have allowed the construction of houses in the US in the first place.
Yes, some people were had in the story. Most are not located in the US, though.
Once again, just like the very same way the US robbed from the world in order to build its infrastructures, the US has robbed the world blind to increase its housing stock and ease domestic tension.
There's nothing "cheap" about housing just because people were permitted to get mortgages they couldn't afford.
Look: if I get a mortgage for a $10million house on my meager income, that doesn't make the house CHEAP. That just gives me an opportunity to live there for a bit.
In fact, if the loans had been honest/legitimate, housing prices would have remained lower than they became because RE agents and developers would've had to structure deals around customers of more modest means.
"Cheap housing" and "poor people buying houses" aren't the same thing. The way things worked out, they turned out to be opposites.