The recent rise and fall of the U.S. housing market is not that different from Japan's multi-decade housing crash. We'll compare the two bubbles here…
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The recent rise and fall of the U.S. housing market is not that different from Japan's multi-decade housing crash. We'll compare the two bubbles here and see if there is anything that the U.S. can and should learn from Japan's fallacies.
There is some debate regarding when the U.S. housing bubble began. The majority of economists mark 1998 as the beginning of the problem. This is when home prices first started to accelerate at an unreasonable pace. Inflation-adjusted home price appreciation exceeded 10 percent that year, particularly in West Coast metropolitan areas.
Source: Office of Federal Housing Enterprise Oversight
Although home price appreciation has been non-uniform, it is obvious that the U.S. is embroiled in a national housing bubble.
Ten states documented more than 80 percent price growth in inflation-adjusted terms between 1998 and 2006. Eleven other states saw appreciation as high as 80 percent during the same period.
Nationally, the median home price increased an average of 45 percent (when adjusted for inflation) in the last decade. The unprecedented run-up was caused by a number of factors, which include, but are not limited, to mania for homeownership, speculative frenzy, lax lending standards, low interest rates and the tech crash.
A similar situation occurred in Japan in the 1980s. Home prices doubled across the country and tripled in the largest cities. At one point, the land surrounding the Imperial Palace in Tokyo was said to be worth more than the entire state of California.
Source: Japan Statistical Yearbook
Japan home prices peaked between 1990 and 1991. Prices collapsed after this period, falling back to pre-boom levels. In Tokyo, prices fell by more than 80 percent. Some cities are still experiencing declines to this day.
The same thing will probably happen in the U.S., and has in fact, already started happening. During the third quarter of 2007, prices declined in 171 of the nation's 330 largest metropolitan areas. Many economists predict prices will fall by as much as 50 percent nationwide. The largest price drops are expected to occur in the most overvalued areas.
Low interest rates, easily obtainable credit and speculative mania helped to fuel the real estate boom in Japan, just like it did here. The fall was hard for Japan, and worse yet, it took a long time for prices to hit bottom.
This was partly (though some say mainly) the fault of the Japanese government. Japan's Ministry of Finance attempted to regulate the economy through the banks. They were keen to help the banks from filing bankruptcy and began to subsidize failing banks and similar businesses. The Ministry was very slow to allow the lenders to take responsibility and banks took advantage, making bad loans into late 1997.
Bailing out the banks and propping up the economy was Japan's fallacy. If we allow U.S. politicians to bail out our banks by expanding the capabilities of the FHA and lifting caps on Freddie Mac and Fannie Mae, we will delay the inevitable price correction just like Japan did.
A true correction will not occur until all bad debt has been liquidated. Making sure this happens as soon as possible should be our government's goal, and a hands-off policy is the only way to achieve it.
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