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A
CAUTIONARY HOUSING TALE FROM JAPAN
by Michael
A. Nystrom
September 9, 2006
In
the summer of 1990, with my freshly minted Bachelor's degree from the
University of Washington, I went off to Japan to make my fortune. In the
late 1980's if you recall, Japan was the
place to be - Japanese management was all the rage, the Nikkei was
soaring, and Japanese businessmen were buying up impressionist paintings
and prime properties around the world at record prices. Americans were
fretting and wringing their hands at the prospect of being displaced as
the world's supreme economic power.
In spite of all these good economic reasons to stake
a claim in Japan, the reason I was there had little to do with all of
that. While I had heard of the "bubble economy" in college, I
frankly had no idea what it meant. (Having just graduated from college,
I barely knew my ass from a hole in the ground, and it was only after
leaving school that my true education began.)
The real reason I was in Japan was because I'm half
Japanese and I'd just graduated from college without a clue of what to
do with my life. So I set off to meet my relatives and discover my roots
in the land of the Rising Sun. While I had a job and a place of my own
in Tokyo, I spent a good deal of time at my uncle's house in Yokohama.
My uncle is a salary man (sarariman),
on the young side of middle age at the time, married and with two kids.
In many ways he was an average Japanese enjoying the fruits of a booming
economy. Japan was on the rise. Between 1955 and 1990, land prices in Japan
appreciated by 70 times while stocks increased 100 fold! You might
remember when it was claimed that the land under the Imperial Palace in
Tokyo was worth all of Manhattan, and that the land in Tokyo alone was
worth more than all the US.
Oh, so that's what they meant by a bubble!
In spite of the booming economy, my uncle, like many
Americans today, was shut out of the housing market. Prices always
seemed too high, but a pullback never materialized, so he waited until
the right time to buy. While he waited, prices spiraled up and away
until at last they were hopelessly out of reach. By the time I arrived
in 1990, his family was living in a government-owned, rent controlled
flat that was, by any standards, small: Two rooms that were each about
12 square feet, a small kitchen and a tiny bath to serve three adults
(including his mother) and his two kids. (Japanese rooms are multi-use
rooms, so at night when you're done eating and watching TV, the
furniture is put away and the futons come out and everyone sleeps
together on the floor). His was a unit on the first floor of a huge
concrete building that sat in the middle of a sea of identical
buildings. The picture below is not his actual building, but you get the
idea.
And now to the meat of the story that I've found
myself telling with increasing frequency of late: My cousin thought that
he would never ever be able
to afford a house in Japan, and that he would live out his dying days in
that little rented flat. In his experience, housing prices went only in
one direction: up. But by 1992, two years after the Nikkei peaked,
something strange began to happen - housing prices started drifting
down. Of course my uncle didn't know that the Nikkei had just put in its
all time high, and would
ultimately fall by 80% over the next 13 years. Anyone paying attention
to the stock market most certainly thought that it was just taking a
necessary and well-deserved breather, and that new highs were just
around the corner.
By 1994, housing prices continued to drift lower
until some units started to become, with considerable stretching and
creative financing, affordable. So that year, by taking out a two
generation, 60-year mortgage -- with his 16-year old son on the hook for
the remaining years that he might not be able to pay -- my uncle bought
his first home. The family had to scrimp, and both he and my aunt had to
work more hours, but they were finally, proud homeowners. And it was a
nice house - larger than their old house (but not much), in a nicer
neighborhood, and on a higher floor with a view of the treetops. I even
helped them move in. It was a happy day. I don't recall the exact price
he paid, but I remember thinking that it sure was a lot! Somewhere north
of half a million dollars. Those were the kinds of details were lost on
me at that age.
I left Japan in 1994, and didn't return again for a
visit until late 1998. In the intervening 4 years, housing prices had
continued to fall, and fall, and fall to the point where my uncle's
house was worth only half of
what he had paid for it four years earlier: A couple hundred thousand,
up in smoke, just as Japan's economy was mired in a 13-year
slump. But he stuck with his loan, hoping the
value will come back. And one day, it just might. So he makes his
payments each month faithfully, and when he can no longer make them, his
son will take over and pay off the remaining balance. And sometime, in
the remaining 48 years on the mortgage, the house may once again be
worth more than what is owed on it.
The reason I've been telling this story so frequently
is that, as
housing prices in Boston start to come down , my home-less friends
and acquaintances are perking up, excited that they may actually be able
to own a home of their own - something previously thought to be an
impossibility. But when I go out to the Sunday open houses with them,
what I see is still, in my opinion, overpriced. I certainly wouldn't mortgage
my life for 30 years for any of it. And so I
tell the story of my uncle, but for the most part it falls on deaf ears.
I have no problem in believing that housing prices actually can come
down, because I've seen it with my own eyes. Since I learned that lesson
from the Original Bubble Economy, I've since seen many bubbles, and this
chart, from the EWI special report on (Real
Estate: Boom or Doom) clearly depicts a bubble:
Since its peak in January of this year, the
homebuilders index has fallen by almost 50%, is hovering near its low
and threatening to break down further : See
Bloomberg Chart Here. Stocks always move before the news. As late as
this June, Time was still way behind the curve, featuring its "Home
$weet Home" cover:
But now the tidal wave of bad news is hitting the
media. The Dallas Morning News reports:
Never
in the history of the United States have so many home owners hocked so
much of their biggest asset, hoping that rising prices would let them
outrun their debt forever. The resulting picture isn't pretty. Last
week, Moody's Investors Service reported that the delinquency rate in
the home equity loan market rose 11 percent for the quarter ended in
April from the same period a year earlier.
According to Moody's, delinquent loans now represent nearly 7 percent of
the total existing pool of home equity loans. "This is the 11th
consecutive month that the home equity delinquency growth rate has
risen," Moody's Ben Garber said.
The
Moral of the Story
Most of the people I know today either glibly, or
grimly, believe that housing prices in the US will never come down - or
if they do, it won't be that much - just like my Japanese uncle once
did. The glib ones are those who already own a home and are just waiting
for the higher prices that they know are coming. The grim ones have been
shut out and believe that they'll never own a home, and so are ready to
pounce on the first opportunity they can afford to buy, even if the
house is not suitable either physically or financially. But I know that
just as prices spiraled up for years, they can also spiral down for
years.
The advantage my uncle had of renting a
government-subsidized unit was that he was able to save a lot of money
for his house. But had he waited only a few more years, instead of
jumping on the first thing he could afford, he could have bought twice
as big a house, or had half as large a mortgage. And his life would have
been quite different. My Uncle already learned this lesson once, and I
pass this story along so that you also might benefit from his
experience.
When I finish this article and post it, I'm going to
get on the horn to my friend T, who is a real estate agent in Seattle.
The last time I spoke with him, he told me that things were holding up
well in Seattle - business was brisk, and prices were still rising - a
big contrast to Boston. I'm going to get his perspective, and see what
kind of advice he's giving current buyers and sellers. And tomorrow I'm
going to call the agent for the house next door to mine, which has been
for sale now for about 3 months. I've never seen anyone visit it, and
I've never seen an open house, so I think I'll call the agent and see
what I can find out.
© 2006 Michael A. Nystrom
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Michael A. Nystrom
Cambridge, MA
www.bullnotbull.com
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