The Ghost of Housing Bubbles Past

Submitted by Rich Toscano on December 26, 2005 - 6:13pm

Adherents of the ever-popular "They're Not Making Any More Land" school of real estate valuation would be well advised to read this New York Times piece on the Japanese housing bubble and its aftermath. Unless it becomes more cost-effective to build waterborne cities in the Sea of Japan than it is to build housing developments in Temecula, Japan will remain considerably more land-constrained than Southern California. Yet neither this limited land supply nor Japan's extremely high population density (one might say that "everyone wants to live in Japan") managed to deliver the nation from a massive, 15-year housing bust that has seen home price declines of up to 50%.

This particular passage has a familiar ring to it:

Even many of those who avoided financial collapse found themselves marooned in homes that they never intended as lifelong residences. For many Japanese homebuyers in the 1980's, land prices had risen so high that the only places they could afford were far from central Tokyo. Many went deep into debt to buy tiny or shoddily built homes that were two hours away from their offices.

Very few homebuyers I talk to plan to be stuck with their low-quality converted condos or their hour-plus commutes for more than a few years. Almost without fail, their intent is to sell in a few years and use the profits to move up to a bigger/closer place. And yet this may not be their choice to make: a decline in prices would essentially trap such homeowners into staying put.

There are some who will leave, however. Owners who have enough equity to cut and run may do so, and non-traditional mortgage borrowers whose payments increase beyond affordability may be forced out of their homes. Those in the middle of the spectrum, though, might just end up like the gentleman profiled in the NY Times article. He has been effectively trapped in his apartment for 15 years and still owes so much that he expects to be there for another 10. And sadly, he is considered one of the lucky ones.

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Submitted by powayseller on December 26, 2005 - 7:39pm.

In Phoenix, in the 1980's, my coworker was trapped just like this with a mortgage greater than the housing value. She had bought her house during a prior peak. I'm not sure when, since I was young and fresh out of college and had not given much thought to housing or mortgages. Her dilemna was that the market had tanked, and selling would cause a loss. She hung in for serveral years, waiting for prices to slowly creep up, and then she finally sold and left Phoenix to be closer to her family in another state.

Submitted by KingKong on December 27, 2005 - 5:03pm.

A good article.

One interesting point is that real estate investment trust contributes to the recovery of the housing in Japan. But in US, we've already exercised this tool for a while and it is one of the reasons why commercial buildings are so expensive nowadays.

Submitted by KingKong on December 27, 2005 - 5:05pm.

Location, Location, Location.

This article highlights the importance of locations. It said that locations away from Tokyo dropped over 50%. Unfortunately it did not say how much drop in the Tokyo downtown area.

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