Housing: US vs Japan

What an odd OpEd in today’s NYT. 

Its value is the accompanying chart (below) but the rest of it is, how can I politely phrase this? Merde.


courtesy of NYT


I find all the happy talk in the accompanying article nonsense.

Why?  Three simple reasons:

1. Excess housing inventory is currently at or near historic levels.

2. The Housing Affordability Index is still very elevated. (The index measures
median household income relative to the income needed to purchase a
median-priced house). While it is off of its recent highs, it is still above its historic mean by significant amounts.

3. The House Price to Rental Ratio. As the nearby chart shows, we are not remotely close to normalized levels yet.
Ratio of OFHEO house price index to personal consumption expenditures on rent


Chart courtesy of WSJ


Also check out: Beware the housing bottom-callers    http://themessthatgreenspanmade.blogspot.com/2008/03/beware-housing-bottom-callers.html


Home Sweet Investment
NYT, March 18, 2008

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What's been said:

Discussions found on the web:
  1. michael schumacher commented on Mar 18


    did I mention inventory??

    Until something is done about that…….NO HOUSING APPRECIATION CAN OCCUR.

    Get it??? Got it????


    Now back to the pump fest


  2. OhNoNotAgain commented on Mar 18

    Why do I keep seeing the same image from Animal House that Barry keeps seeing ?

    “Remain calm !!! All is well !!!!”

  3. blin commented on Mar 18

    Great charts paralleling Japan vs. US home prices.

    Question…why is the chart one year behind?

    Acording to the legend.

    100 = US price index 1997

    10 years forward takes us to beginning of 2007…am i wrong?

    does the chart still have to be updated or have i missed something?

  4. Rantly McTirade commented on Mar 18

    That related article is yet another reason to hope George Mason gets its’ skull caved in in the NCAA hoop tourney; representing a school best known for North Korea-equivalent
    propaganda and idiotology(if in a 180-degree difference from NK)turns Cinderella into the Wicked witch of the West.

  5. ef commented on Mar 18

    If people really live within their means, those McMansions are toast…

    Retiring babyboomers don’t want them…
    Young people don’t want them…
    Families don’t want them…

    The pendulum is swinging.

    Small House Society ;-)

  6. wedwards commented on Mar 18

    Hey BR,

    With the net worth slashed to a near worthless level, I’ve heard that many BSC employees have already put their weekend homes (Hamptons & CT, I presume) up for sale.

    Could this be the beginning of the downturn for the high-end market in these areas + Manhattan?

    I would appreciate it if you keep an ear out for developments and let us know what you hear!

  7. Joe Isuzu commented on Mar 18

    I wonder how much excess inventory would be added to the market once people decided they could come out of the bunker and maybe get a decent price for their home. A turnaround seems a long, long way off.

    Just sitting here watching the equities love fest going on today….got me thinking. If I was the Federal Reserve and I was above the banking system and all the securities laws etc…..and I could create electronic “credits” in my untraceable accounts at will …..and I decided today was a good day to buy, buy, buy. Could I move the markets?

  8. Crazy Idea commented on Mar 18

    Hi BR,
    I sent you an unsolicited email about an idea for fixing this particular problem yesterday. So how stupid is it?

  9. ron commented on Mar 18

    RE homeowners in 1990 along with the political and financial establishment were not willing to accept the idea that home values would decline up to 80% in most markets and up to 60% in Toyko.
    The human reaction here in the states to our own tipping point regarding over valued assets is similiar and lets us know that we share with others on the planet the ability to only see what we want and that denial plays a important part in our financial life.

  10. Jay commented on Mar 18

    The “paper-gain-and-loss” -argument in the article doens’t feel so “paper” if you have cashed out your home equity and are stuck with LTV of 100% or more. And the “paper loss” limits people mobility, i.e. freedom to move (for job or other reasons), which is a real cost, not a paper one. jmho.

  11. david foster commented on Mar 18

    The belief that housing prices would increase at 10%/year (or more) forever has probably led to the construction of a lot of houses that are really *too big* to be needed or affordable. So, within the overall housing inventory figure, there are probably size categories among which the supply/demand balance differs. I wonder if anyone has done any analysis on the size mix of the inventory and the trends within size ranges.

  12. barack rodham mccain commented on Mar 18

    Things against US/JPN analogy….immigration + biggest cohort of births (c. 1990 babies) will enter the workforce/housing market in a few years.

    Things for the US/JPN analogy….JPN mortgage credit was never as loose as US.

    Dunno answer but think that without strong real income growth wringing out the excessive credit will trump population growth.

  13. jimcos42 commented on Mar 18

    Eek! Wait a minute.

    Re the chart called National Index of Real US House Prices, 1950-2007:

    Let’s say that homeowners might have realized a conservative 1% above inflation on their homes. That would make the index 161 in 2008. The forecast almost has it there.

    But the design/image of the chart suggests the downside is much larger. I’m not buying that one.

    The rise from 1985-2005 simply compensated for the long flat period from 1955-1985. So maybe we just have another 20 years or so of no real gains in real estate.

  14. Geoff commented on Mar 18

    The guy works for GMU for crying out loud! Did everyone forget what else goes on there? Try the Center for Regional Analysis on for size. You know who commissions most of their “research” on the housing market – ya, the NAHB. This guy is a little fells at a big university that is a shill for the industry. Why the NYtimes would publish such crap is beyond me, but clearly, they couldnt care less to spend five minutes vetting their sources. Jeebus!!!

  15. donna commented on Mar 18

    Housing prices will fall to the mean adjusted for inflation, so yes, they will fall that much.

    Asset bubbles always collapse. Always. It’s never different. Really.

  16. Aaron commented on Mar 18

    I am skeptical about any chart porn ( chart 2 – Real US house prices ) that shows a series “adjsuted for inflation” by using the CPI.

    Any asset measure with the CPI as the denominator will show as an anstronomical gain in recent years even when “adjusted for inflation”.

    Id like to see “real home prices” adjusted using the CRB.

  17. Mises commented on Mar 18

    Housing prices relative to Gold prices aren’t that high.

  18. Paul in NYC commented on Mar 18

    Housing prices relative to stagnant wages are very high.

  19. Dave commented on Mar 18

    Free Exchange on economist.com finds a problem in your reasoning:

    Barry Ritholz thinks this is off the mark, pointing to excess housing inventory, and housing affordability index and price-to-rent ratios that remain uncomfortably high. The problem with this argumentation is that it doesn’t distinguish between individual markets. Excess inventory is not evenly distributed. It’s high in Phoenix and growing in Detroit (as people leave), but is there excess inventory in the New York market? And across the nation, new home construction and permitting has fallen off a cliff, while population continues to grow.

    For what it’s worth, I still think you’re generally correct.

  20. Dave commented on Mar 18

    Sorry, I should’ve included this part of the critique too:

    And in desirable local economies, sustained labour demand along with frozen housing markets has pushed up rents, even as the broader economy has stalled. The combination of slipping prices and rising rents will eventually put homeownership back into play in resilient cities.

  21. dinastrange commented on Mar 18

    i am SO freaking tired of this comparisons and speculations. get a life people, set up some more regulation and stop following adam smith….the man was on crack.

  22. Roberts_Resources commented on Mar 19

    IMO, the housing bubble started with strong, almost astronomical demand for housing as the baby boomers entered the home buyers markets – I remember my older bro getting a 16% mortgage, then refi’s a couple years later at 11% and thought that was good. Also, the demand was strong for the next 1o years as the rest of the boomers entered the home buying phase. As psychology would have it…affluent boomers started buying 2nd homes which pushed up the secondary vacation home market. This fueled a tertiatry market (flippers/ speculators) which obviously could not be sustained, as demand vanished and we suffer. My opinion is that demographics played a much larger role than is given credit by the attached chart. Majority baby boomers are right now aged 50 to 60 and can for the most part sustain 2nd homes as values fall….Our situation, imho, not as deep as Japan, which has much older population and less children than even baby-boomers do…., also our Fed is more responsive re monetary policy than Japan. I’d like to see US population charts, specifically per capita at age 30-40 which are the primary home-buying ages, against a real home value chart, as someone commented above.

  23. Mike G commented on Mar 23

    The housing bubble started with strong, almost astronomical demand for housing as the baby boomers entered the home buyers markets

    Most bubbles are built upon some measure of ‘legitimate’ positive outlook for the asset class — demographics for US housing, Japan’s powerhouse economy in the 80s. It’s some combination of financial manipulation, short-term institutional incentives, criminality, lax regulation and societal ‘animal spirits’ and that cause them to accelerate into unsustainable bubbles.

    Why the NYtimes would publish such crap is beyond me, but clearly, they couldnt care less to spend five minutes vetting their sources. Jeebus!!!

    They headlined Judith Miller’s neocon propaganda about Iraq’s supposed WMDs for months, fawned over Powell’s bullshit-filled speech at the UN and continue to publish Bill Kristol. The NYT’s credibility is trash.

  24. Rycoka commented on Apr 8

    I’d like to suggest that we don’t have a housing bubble, we have a credit bubble, largely driven by places like China and Saudi Arabia not being able to absorb the profits they are making out of the Western eonomies. When there is a large amount of easy credit available, people will start to say “hey, I can borrow money at x% and then invest it and get x+y% return” – money for nothing; who wouldn’t give it a go. The old Aussie adage “safe as houses” suggests that people think homes are a great safe way of investing, and so long as homes deliver x+y% return everything is good. Unfortunately, incomes are only going up x-z% so eventually houses become too expensive for people to actually live in. This stops the x+y% returns and things get interesting. Suddenly people lending out money are looking at negative returns and credit starts to dry up. On the positive side China and Saudi Arabia still have to do something with their excess profits.

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