US Housing Hangover Or 20-Year Japanese Nightmare

In its schizophrenic manner, the media across the country lamented the housing-starts numbers, which were ugly: 571,000 annualized in August, down 5% from July, down 5.8% from August 2010, and down 75% from its peak of 2.3 million in January 2006 (Census Bureau, PDF). But for the housing market to heal, that number should be near zero for years.

19 million vacant units, that’s the problem (Census Bureau, PDF). While some people dispute that number, everyone agrees that the inventory of vacant units is huge. Whether it’s 19 million or 12 million doesn’t change the problem. It only changes the duration of the healing process. This is the hangover from the housing bubble when the industry built millions of units for speculators who never had any intention of living there. And now, no one lives there.

Housing is mostly zero sum: If I rent or buy something and move into that property, I also have to move out of the property I’m in. Hence, no net impact on the inventory of vacant homes. When people die, it increases the inventory of vacant homes. Household creation has the opposite effect. Yet, household creation has declined over the last few years and was even negative for a while, a new phenomenon in the U.S. that sociologists and economists are still wringing their hands over.

An optimistic scenario: Say, the industry is building 600,000 homes a year, household creation perks up to 1,000,000 a year, while 400,000 homes become vacant due to death, then things are in balance, and the inventory of maybe 10 – 18 million vacant homes will stay with us until termites eat it up. Which, come to think of it…. But if household creation doesn’t reach those levels, or if home construction ticks up, well then, good luck.

Stop building—that’s the solution to the housing market, other than termites and fires. But that’s not going to happen. Instead, home construction will remain in the doldrums, with irrelevant ups and downs, where each new home being built will extend the suffering of current homeowners as home prices will drift lower for years to come.

Housing bubbles cause decades of pain. In Japan, it burst in 1990, and land prices are still declining—though, like in the US, they’ve had minor and temporary upticks that gave everyone a lot of false hope.

Culturally, the Japanese are attached to land, not houses. The building is usually a “one-generation house,” designed to last 30 years and be torn down by the next generation. Hence, when the Ministry of Land, Infrastructure, Transport, and Tourism released its numbers on September 20, it reported on land prices (Nikkei, article in English). Nationwide, year over year, they were down 3.4%, the 20th year of straight declines, with residential land prices down 3.2% and commercial land prices down 4%. In 2010, land prices were down 3.7%.

The earthquake and tsunami added downward pressure in areas it affected, and in the most devastated regions, sales simply stopped. But even in western Japan, which was not affected by the disaster, the declines continued, despite additional tax breaks put in place last year and despite super-low mortgage rates. And even Yakuza, who’re heavily invested in the construction trade, are complaining.

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  1 comment for “US Housing Hangover Or 20-Year Japanese Nightmare

  1. Japan Fan
    Feb 21, 2012 at 4:16 pm

    Any idea why the yen was so low for about 6 months in 2006/07 – looking at the FX charts it was way lower than at any other time ever.

    I was thinking of buying a house in japan but a bit put off by the fact that the yen is about 20% above the highs of 5 years ago – however if the stats in this article are accurate and extrapolate back 5 years at similar rate of 3.5% year over year – then that would be a 17.5% decline in property price – so about offsetting the FX gain – so i guess now is as good a time as any in the past – though i suppose property will continue down at 3.5% a year while FX may at some time regain the JPY lows of 2006/07?

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