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US Housing Hangover Or 20-Year Japanese Nightmare
In its schizophrenic manner, the media across the country lamented the housing-starts numbers, which were ugly: 571,000 annualized in August, down 5% from July, down 5.8% from August 2010, and down 75% from its peak of 2.3 million in January 2006 (Census Bureau, PDF). But for the housing market to heal, that number should be near zero for years.
18 million vacant units, that's the problem (Census Bureau, PDF). While some people dispute that number, everyone agrees that the inventory of vacant units is huge. Whether it's 18 million or 12 million doesn't change the problem. It only changes the duration of the healing process. This is the hangover from the housing bubble when the industry built millions of units for speculators who never had any intention of living there. And now, no one lives there.
Housing is mostly zero sum: If I rent or buy something and move into that property, I also have to move out of the property I'm in. Hence, no net impact on the inventory of vacant homes. When people die, it increases the inventory of vacant homes. Household creation has the opposite effect. Yet, household creation has declined over the last few years and was even negative for a while, a new phenomenon in the U.S. that sociologists and economists are still wringing their hands over.
An optimistic scenario: Say, the industry is building 600,000 homes a year, household creation perks up to 1,000,000 a year, while 400,000 homes become vacant due to death, then things are in balance, and the inventory of maybe 10 - 18 million vacant homes will stay with us until termites eat it up. Which, come to think of it.... But if household creation doesn't reach those levels, or if home construction ticks up, well then, good luck.
Stop building—that's the solution to the housing market, other than termites and fires. But that's not going to happen. Instead, home construction will remain in the doldrums, with irrelevant ups and downs, where each new home being built will extend the suffering of current homeowners as home prices will drift lower for years to come.
Housing bubbles cause decades of pain. In Japan, it burst in 1990, and land prices are still declining—though, like in the US, they've had minor and temporary upticks that gave everyone a lot of false hope.
Culturally, the Japanese are attached to land, not houses. The building is usually a "one-generation house," designed to last 30 years and be torn down by the next generation. Hence, when the Ministry of Land, Infrastructure, Transport, and Tourism released its numbers on September 20, it reported on land prices (Nikkei, article). Nationwide, year over year, they were down 3.4%, the 20th year of straight declines, with residential land prices down 3.2% and commercial land prices down 4%. In 2010, land prices were down 3.7%.
The earthquake and tsunami added downward pressure in areas it affected, and in the most devastated regions, sales simply stopped. But even in western Japan, which was not affected by the disaster, the declines continued, despite additional tax breaks put in place last year and despite super-low mortgage rates. Even Yakuza, who're heavily invested in the construction trade, are complaining.
To read more: Yakuza: 'We Have To Evolve Our Business Model'
Wolf Richter - www.testosteronepit.com
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I still think housing is over priced in the cities. Maintenance on condos are ridiculous priced. $800 bucks a month, while condo is 200k. Its a big mess in housing market. I enjoy freedom of renting. But buying now like buying a brand new car when they had cas for clunkers. they try to suck you in. no thanks keep those house. i'll buy then with cash one day.
When you build a house, that's not part of GDP (b/c it's an investment). However, when you live in your house, the rent you would otherwise be paying to live there *IS* part of GDP, even though it's completely fake. This makes sense economically, but as vacancies increase GDP will be pushed lower and lower.
In general, I agree. In specific, the problem is that all real estate is local. A lot of the empty units are speculative units in Vegas, Arizona and South Florida. The people to fill them up just aren't there and may never be there. Places that are experiencing job growth and population growth, though, need more housing. Additionally, if I'm living in Topeka, and have a good job and a nice lot, I may want to build a house on it that's the way I want it.
Once again...
1. Several GenXer families get together and form a corporation. Call it something like "Tyler's Hippie Commune Corporation, Inc." (THCCI).
2. THCCI buys a house from the bank. The families move into the house together.
3. THCCI quickly pays off the house in full. (Since there are 4 or 5 or 6 people working, and only 1 mortgage to pay off.)
4. THCCI nags the bank to tear down the house next door. THCCI nags the city to make the bank tear down the house next door, since the house next door is moldy and rotten and possessed, and poses a danger to public health and safety.
5. The bank tears down the house next door, which it wasn't able to sell anway, and which was merely costing it money in city taxes and city fees to mow the yard. THCCI plants a garden there, and saves the planet.
6. THCCI and all the other little CCIs get together and successfully lobby their Congressman for the Act Ending the War on Cannabis And Those Other Drugs We Enjoy, Including LSD, And Other Great Psychedelics That We Haven't Had For So Long That We Can't Even Remember Their Names.
7. THCCI plants Cannabis in the garden and starts inventing stuff.
8. THCCI invents The Next Great Thing that creates the Next Great Thing Revolutions (as in Agricultural Revolution, Industrial Revolution, and Computer Revolution).
9. Everyone lives happily ever, including their Congressman.
The evidence says that our production economy of the post-WWII era has been replaced with a total loss consumption economy. I think of the story, related by a Coin and precious metals dealer on his radio program, about a housing development in Scottsdale, AZ. The developer was in arrears on the loan. Most of the houses had never been sold and occupied. What was the solution? Houses in that development were bulldozed to get a new loan to build more houses. This is the kind of corruption is something that no economy can survive. 50 years ago, this would have been called organized criminal activity.
http://georgesblogforum.wordpress.com/2011/07/27/purpose-driven-defects-hidden-players/
Probably 50% of all homes vacant for at least a year will be bulldozed. Deterioration, vandalism take their toll. Especially in the Sun Belt, mold is a killer.
The problem is exacerbated by the banksters who are delaying foreclosure as long as possible so as not to pay condo or association fees, rehab costs, or the larger issue of acknowledging true value vs. mark to myth.
As one high level bankster friend told me "we expect the Government to come to the rescue"; not for mods for homeowners, but by the GSEs buying the loans at original value.
There is little mold in the sunbelt because it's too dry. You must be thinking of the Gulf States.
"Stop building—that's the solution to the housing market"
Shut.It.Down.
I take it one step further...... Let the RE agents and builders go bankrupt. Problem solved.
Kids today ain't gonna be buying houses, certainly not McMansions. Many already graduate college owing the equivalent of a mortgage payment with their student loans and other debt. Remember how "real estate never goes down, even in a depression" back in the good ol' bubble days??
Why not give houses for free?
Or give it to community housing and don't give them money?
Who gets the free houses? I'll take one and let my current one go into foreclosure
Those properties are owned, bundled and split to Infinity. Pension funds invested. Banks need to pay association dues and put them all on the market.
It's good to live like Japanese - You live longer wating stock market to go UP
"But for the housing market to heal, that number should be near zero for years."
Nonsense. There is not one, but instead many thousands of housing markets in the United States. An empty house in Arizona is of no value to an individual who just got a job in North Dakota.
Hence "near zero". North Dakota is doing great, but lets be realistic about how many houses you really need to build in order to capture the few bright spots in the sea of darkness.
I hate the old diatribe that because Japan went through 20 years of real estate depression that the U.S. will experience the same fate. For the record, I hate real estate and all realtors, but the U.S. has one game changing difference - we have fairly large immigrant population inflows.
Some of Japan's problems come from a stagnant to declining national population. The article says it very clearly: "Housing is mostly zero sum". The U.S. has the baby boomers retiring now, but at least the overall population is growing every year. Japan cannot replace their retiring buyers. This gives U.S. property some inflationary tailwinds. I'm not saying RE won't go down (because it will), but it will follow a better long term path than the Japanese. Let's just say US. real estate will suck less than Japan's last 20 years and leave it at that.
Total income generation (even in nominal terms) has been mostly flat to slightly positive as of late. If you follow the historical 3x median income number, house prices have another 15-17% to fall before we get stabilization.
DISAGREE. Number of people unimportant. Only number of jobs important. Unemployed people do not purchase houses. Immigrants only add to unemployed.
"Unemployed people do not purchase houses."
they don't pay rent either but try telling that to the people currently touting rental real estate as a good investment
I love it when people tell me that rents are going up - laughter is good for the soul!
US/Japan aren't strictly comparable. Commercial, not residential real estate was the main problem there.
During the decade 2001 - 2010, US population growth was 0.9% annually, the lowest since the decade of the 30s.
I think Japan is the *best possible* outcome the US could hope for. In Japan, the issue was primarily commercial real estate, which doesn't affect household balance sheets as much as residential. As mentioned in an earlier reply, during its first lost decade, Japan had a backdrop of worldwide economic growth and oil in the teens. Also, unemployment remained low (even now, it's around 5.5%). None of these are true of the US.
japan's first two decades of decline came when the rest of the world, which imports japan's exports, was, generally speaking, in expansion. the decline in the u.s. real estate market, to date, largely coincides with the global depression.
debt elimination, largely through bankruptcy and restructuring of debt (principal elimination and bond holder/mortgage holder haircuts) with associated vast increase in transparency in the financial sector to reduce counterparty mistrust, is the only way out.
Sorry, that doesn't work. IF the USSA had a thriving manufacturing economy, what you describe could work to a significant extent. However, the USSA has been shipping manufacturing jobs offshore like crazy for years, so your idea has exactly ZERO chance of working.
Get over it. The USSA is finished. The predators picked it clean.
Good article, thanks for the insight. The beauty of the depressed market is you can get a mortgage for 1-2% in Japan. Another factor is most home mortgages are co-signed in Japan, yep you put somebody else's neck out for your house if you walk. Kind of keeps you from walking far.
Even Japan's Yakuza are smarter than our own Benkuza and Krugkuza and Obamakuza.
Many of the Commercial Properties loans are beginning to roll over. The next 4-6 years will be loads of pain for property owners both residential and commercial.
true... but what i see around me are banks that allow the borrower to simply make interest payments after note maturity rather than declare a default. in many cases the banks don't want the property... too far underwater.
"Housing is mostly zero sum: If I rent or buy something and move into that property, I also have to move out of the property I'm in. Hence, no net impact on the inventory of vacant homes."
I know that you include "mostly," but I think that there's a lot more instances of folks combining living spaces than we're willing to admit.
Clearly, however, there will be a LOT of folks whose retirement strategies involved selling their homes that will be still trying to figure out what went wrong. I was ALMOST one of them...
Folks combining is a big factor in Japan currently - adult children moving back home with parents.
Also the 30 year duration home the OP talks about is a thing of the past in Japan - new residential construction is entirely different..
I want to puke when I hear real estate people talk their game. 10,000 baby boomers retiring a day, 85% of last year's college grads living at home, less full-time jobs in the US than 1997...where is that greater fool going to come from to buy your house 5 years from now?
Take advantage of the lowest interest rates in generations so you can overpay now rather than pay less next year or the year after.
An empty house represents destruction of capital/resources, e.g., water, electricity, taxes, and eventually the house itself when termites, rats, and racoons make it unliveable. Knock them down and make community vegetable gardens out of the lots. Beats a meth lab.
I gots to live somewheres, ya know ...
Some people have pet rats, you know...
and some meth labs upgrade some neighborhoods. but in general ....
in five years, every hood in Merika will look like Paper Street (if you need to ask, you are on the wrong site ...)
Wrong site?
Nah. The Tylers live on Paper Street.
So African Americans will be living like real Africans once again?
yeah I know, that's racist.