Boom2Bust.com

Turning Japanese

I was afraid this would happen. Back in 2005, I read an article on the Investment U website entitled “The Real Estate Bubble End Result: Is a Bust Headed This Way?” On March 28, 2005, Dr. Steve Sjuggerud talked about the Japanese housing bubble that popped in the late eighties, and the prospect of a housing bust in the United States. Sjuggerud wrote:

The first thing that concerns me is the basic economics. It’s reaching a point where most people can’t afford the median home. The second thing that concerns me is the strong belief that prices can’t fall. The Japanese thought the same thing in the late 1980s when their real estate bubble burst, and they’re still suffering terribly…

I checked the results of data on Japanese real estate going back to the 1950s (as far back as data in English exists), and I found that, with the exception of 1975, Japan home prices never had a losing year… Never that is, until the bubble burst and the bust followed. And with it, 17 straight years of pain…

Dr. Sjuggerud brought up the following example:

A guy in central Tokyo who borrowed $500,000 to buy an apartment still owes the full mortgage today, but his apartment has lost 80% of its value. A $500,000 mortgage on a $100,000 apartment… now that’s a bad place to end up.

Tracy Griffith: Sushi Queen

Three years on, and we may be heading towards that “bad place.” Earlier today, Reuters reported that more than 30% of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, according to housing market research company Zillow. Chris Sanders wrote in “Third of recent buyers owe more than home’s value: report” that 39% of homebuyers from 2006, who placed a median 10% down payment on the property, are now underwater (owing more than the house is worth). 30% of those who purchased homes in 2007 also have negative home equity, Zillow said in its quarterly home value report. Overall, less than 1% of all American homes are underwater at this point in time.

Stan Humphries, Zillow vice president of data and analytics, told Reuters:

With consecutive declines over the past five quarters, we haven’t seen the housing market bottom yet, and it may very well get worse before things get better. Even many markets that have been largely insulated from recent declines, like some in the Pacific Northwest, reported notable value declines in the fourth quarter.

The fourth-quarter Zillow report covered 125 metro markets and 67 million homes.