U.S. housing market -- Bumping along the bottom, but not “Japanized”?
Sep. 28, 2011
Kengo Tahara
Economist
Japan Center for Economic Research
1

The recovery of the U.S. (and also European) economy from the financial crisis of 2008
has been very slow -- slow enough to raise questions about whether either or both areentering a lost decade. This scenario is being labeled “Japanization” or “Japanesedisease,” in reference to Japan in the 1990’s.

Deflation (or disinflation) and prolonged

sluggish growth are regarded as key symptoms of “Japanization.”
Japan experienced a long period of stagnant growth after the bubble collapsed in
1990’s (so called the “lost decade”).There indeed are some troubling similarities toeconomic conditions today in the U.S. and/or in the euro-zone. In the U.S., households
are more busy deleveraging (paying off old debt, cautious about new debt, and buildingup savings) than in spending money. Business, faced with a demand shortfall because
consumer spending growth is so low, is pulling back on investment plans. And thepublic sector (federal, state, and local) is busy cutting spending to limit deficits andbudget shortfalls. One consequence is the Fed is providing plenty of liquidity – banks
have money to lend at historically low rates (mortgages hit 4 percent in
mid-September). But consumers, business, and the public sector aren’t interested inborrowing.
These conditions result in an economy growing very slowly (not more than 1 percent
growth perhaps through the first half of 2012). If the economy is growing slowly, job
growth is even slower. In turn, that makes it difficult for households to keep up withmortgage commitments. Therefore, foreclosures are not slowing down. Foreclosed
homes being auctioned holds down new construction rates, and keeps downward
pressure on home prices for a 4th straight year, and possibly a 5th straight year in2012.

Japan, after the bubble collapsed, experienced more than 10 years of fallinghome prices. Nobody in America hopes they are at least halfway through right now.
Rents are different (Fig. 1). Why are home prices continuing to fall but rents starting torise? Basically two trends contribute to this result. First, a tax law was changed morethan two decades ago, limiting the tax deduction on mortgage interest for secondary*This article is partly based on the comments by Ken Goldstein, an economist at TheConference Board.

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Sep/28/2011

homes. It remains for the home the owner occupies but not any units the owner rentsout. The result has been a low construction rate for rental units for almost twenty years(Fig. 2). Now, soft economic conditions are pushing new households into rental units
and forcing former home owners into apartments. The result is falling vacancy rates
and rising rents, even as home prices continue to fall.
The government has been for a long time encouraged homeownership as an“American dream” (entrepreneurial spirit or capital participation) as mentioned above.
That is now changing, in the wake of the worst housing downturn in more than acentury. What support remains for homeownership is now targeted to low- andmoderate-income homeowners “and renters.” And the FHFA (Federal Housing
Finance Agency) is now considering converting some of the foreclosed houses torental units, which seems reasonable given these circumstances. In addition toopportunity costs, this is an attempt to limit repair costs that would otherwise occur if
the unit remained vacant for a longer period of time. In the process, home buying andrenting may improve sooner.
Still, the overall weak state of the economy, it is going to take more time for housing torecover, no matter what changes are made in programs to aid lenders or home buyers.
The foreclosure process is still under way, weighing on the housing sales market. Morethan two million households have already lost their homes and potentially anotherthree to five million could be forced into foreclosure. High levels of unemployment andvery sluggish job gains are forcing some families closer to the brink of losing theirhomes, and the equity they have already paid into them. Meanwhile, it is impossible
today for a potential home buyer to obtain a mortgage without a significant down
payment, at least 10 percent down and as much as 25 percent. Again, without more
job or income growth, it is difficult for a household to accumulate enough to make that
down payment, especially for young families.
Demographics condition is one of the (encouraging) differences from Japan’sexperience. The population is growing at about 0.9 percent every year in the UnitedStates. In Japan, the population grew at only 0.3 percent (annualized) during 1990-95
and now declining. This might be a part of the reasons housing rent is picking up unlike
Japan. And it’s of course one of the important factors in the potential growth of thewhole economy.
In conclusion, the housing market has already suffered a four year down turn. But it isunlikely to continue for another six years. Thus, the outlook is not for a lost decade, asoccurred in Japan. Why? 1) home price depreciation has improved affordability; 2)Mortgage rates are very low (4 percent for well qualified buyers with a significant down

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Sep/28/2011payment); 3) Preferential tax treatment of mortgage payments;

4) Favorable

demographics; and 5) Still significant foreclosure rates but rates nonetheless that areslowing. Still, housing remains weak and will take more time to start to recover, just not
another six years. How soon real recovery begins depends on recovery in the labormarket, which in turn depends upon improvement in the overall economy.
Rogoff & Reinhart looked at many crises across the globe over the past centuries.
Their principal finding from this important research is that financial crises have deeper
and longer impacts than purely economic crises.

2008 saw the worst recession inalmost a century. Second, at its core was a near financial meltdown. Third, the U.S.
economy is also undergoing major fundamental restructuring. These factors help
explain why the housing market is in such bad shape. They do not however, support
the notion that a very prolonged period will necessarily precede recovery. The U.S. will
not suffer a lost decade.
Last point: Could anything shorten the time frame? Yes and it does not necessary
include action from the government. One proposal is that the banks, the mortgage
lenders, forgive some of the loan allowing the distressed home owner to continue
paying and not have to lose the home in foreclosure. Here is how this works. If thebank is forced to foreclose and throw the family out of the house, they have to put thathouse up for sale at a foreclosure auction. They might receive as little as 20 cents onthe dollar, depending on the auction bidding.
The idea is that the bank would be better off getting 70 cents on the dollar from thehomeowner. If they forgive a portion of the loan, the homeowner has a better chance ofstaying current on payments, staying in the home, and not losing equity. Homeownerwins. Banks win. And with fewer foreclosed homes on the market, supply would be
more in line with demand, prices stabilize, and new construction could begin.
Homeowners would jump at this kind of program. Banks are resisting. The Federal
Reserve could use some capital to make the deal sweeter for banks. It could happen. It
would have positive effects. And it doesn’t require any action from a deadlocked
congress. So why haven’t they tried this? Some banks are as yet unwilling to accept
less than 100 cents on the dollar, risking getting far less at an auction.

Kengo Tahara is an economist in Japan Center for Economic Research(JCER). He
joined JCER in 2008 after receiving a master's degree and completing the course
requirement for the doctoral program in agricultural economics from the University of

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Sep/28/2011

Tokyo. For the last three years he specialized in business forecast for Japan'seconomy. He has worked as an economic intern at the Conference Board in U.S. sinceJune 2011.

Figure 1: Housing rents in Japan (left) and the United States (right)
2010=100105100260952509024085230802207521070200651906018019801985

1982‐84 =100

270

1990

1995

2000

2005

Sources: Statistics Bureau (Japan); BLS (U.S.)

Aug. '11
2000

2010
C.Y.

2002

2004

2006

2008

2010
Monthly

Figure 2: Composition of housing started (left) and homeownership rate (right)
100%

70

90%

Buildings
with 2+
units for
rent

80%
70%

Buildings
with 2+
units for
sale

60%
50%
40%

One‐family
units

30%
20%

%

69
68
67
66
65
64
63
62

10%

610%

60

21980 1985 1990 1995 2000 2005 20101980 1985 1990 1995 2000 2005 2010

Source: Census Bureau

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