Since writing today's story about how real estate investors are driving up foreclosures, I've been thinking about what could have been done to avoid this mess. I started researching what happened in Japan, where the real estate bubble burst in 1991 and is only now starting to show some significant signs of recovery. I happened upon this excellent 1995 New York Times story about lessons to be learned from Japan. Here are some of the key points in that story still relevant to what's happening in the U.S. today:
* Property values were cut in half and people are still stuck in homes they bought at prices too high. Even 14 years later many of these people can't sell their homes because they owe more than they can get from a sale.
* Speculators used paper profits (from real estate or the stock market) to buy homes and stock using risky financial vehicles, increasing prices in both the stock market and real estate market. In the U.S. we had two separate bubbles -- the stock market bubble that crashed in the early 2000s and the real estate bubble that just burst.
* Between 1991 and 2005 real estate prices in Japan fell 64% and just started showing signs of recovering in 2005. Prices in some parts of the U.S. have fallen by 50% already.
* At the height of the bubble in 1991, Japan's real estate market was valued at $18 trillion or four times that of total U.S. property values at that time. The U.S. property market in 2005, when the article was written, had tripled to $17 trillion. I haven't seen any figures indicating the peak in U.S. real estate values before the bubble burst in 2007, but I'm sure they'll be available soon.
* Japanese used risky mortgage loans to buy homes when the market was hot that are not much different from the types of loans many real estate investors used in the current U.S. mortgage mess. In Japan they actually took 50- and 100-year mortgages to afford the higher and higher housing prices. Today banks are introducing 40- and 50-year mortgages in the U.S. to help people stay in their homes.
Japanese economists quoted in the Times story thought the U.S. would be less likely to get into this mess because they thought the Fed was better at managing the economy, yet the Fed is staying mum and showing no signs of leadership right now. Hopefully the Fed will come up with some ideas that can shorten the time for recovery. Japan has been in and out of recession since 1991. Is this U.S. economy truly stronger or will we be facing a similar fate?
Lita Epstein is the author of more than 20 books including the "Complete Idiot's Guide to the Federal Reserve."
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Reader Comments (Page 1 of 1)
10-30-2007 @ 11:43AM
carl milton said...
Dear Sir/Madam,
I notice from your blog that you post regarding Japanese property. I work for property showrooms and we are currently producing many articles, statistical studies,International Property News and other resources concerning the property investment industry. We also have over 40,000 overseas property listings from all over the world.
I would like to invite you to use, review or link to any of the resources you see on our site when composing future blog submissions.
regards
Carl Milton
Propertyshowrooms.com