Thursday, January 14, 2010

I Think We’re Turning Japanese!

The striking similarities between trends in the U.S. and Japan during and after their respective bubble epoch’s are well known by now… raging stock markets and raging property markets fueled by exuberant speculation on the part of “investors” and just about everyone else leading to a final magnificent debt-laden crescendo, the financial system on the brink of destruction and finally a government sponsored zombie-economy with a lifeless on-again off-again recovery.

In Japan’s case the initial “recovery” was only one of a string that would encompass the following 20 years (and still running weak!), all of which failed to restore economic trends to peak levels and lead to a constant struggle with deflation and disappointment.

First Japan was said to have experienced a “lost decade”… now they are closing in on a “lost score”.

The U.S. has just completed a lost decade of its own with both stocks and jobs declining since the late 1990s yet in a land of “jobless recoveries” and “getting back to even” you rarely hear about it in the traditional media.

We share similar demographic problems as well… over the last 40 years the population of people age 65 and older has exploded in Japan reaching a current record among all nations of 21%... over the next 40 the U.S. will see a nearly identical shift.

Given all the similarities it’s certainly plausible to expect our residential property markets, post-crash, to trend similarly as well, especially in light of the ongoing contraction of consumer credit and tightening of credit standards as well as the significant backlog of distress, both seen and unseen (shadow inventory, forced landlords, etc.), that is pent up in the U.S. property markets.

The following chart (click for super-dynamic zoom-able chart) shows Japan residential property prices (for six of its largest metros) shifted in time so as to align Japan’s bubble peak from 1991 with that of the United States from 2005.

I’ve also projected the future trend for the U.S. (the red series) by using one half the annual declines seen in the Japan residential property markets as a guide.

Notice that to date, the annual declines have been fairly comparable.

Further, if we continue to trend similarly, the U.S. will see an additional 25% price decline over the next nine years bringing us to a nominal value first seen back in 1998.

In this sense, the seven years of pre-peak “housing mania” home price appreciation would be wiped out over the course of thirteen years of post-peak decline.