Tag Archives: United States

US versus Japan housing values

A mirror in the real estate sun – Japan posts record trade deficit while real estate values go deep into the 1980s. US has decade long collapse in real estate values in spite of record low mortgage rates. The path of two lost decades in US real estate values is looking very similar to Japan.

The case of having a Japan like correction in our real estate market grows stronger as each year goes by.  The entire notion of zombie banks derives from the crisis in Japan.  Shadow inventory and the suspension of mark-to-market accounting are part of the life support that is keeping many US banks operating.  Two decades later, with low interest rates and no signs of real estate values going up, the Japanese housing market is virtually stuck in a holding pattern.  One thing is now different however as Japan is now starting to run trade deficits.  Japan recently posted a record trade deficit because of a strong yen and rising imports on fuel.  Yet the real estate market has yet to recover and is back to 1980s values.  Can you imagine housing values in the US going lower or sideways well into the 2020s?  Hard to believe but let us examine a few areas where the pattern is playing out on a similar note with new data.

US versus Japan housing values

If we examine the US housing bubble and Japan housing bubble we see a similar bubble bursting format:


Source:  Seattle Bubble       

Since the chart was produced US home values have moved even lower.  Japanese real estate values are going back to levels last seen in 1985.  Two lost decades are baked in the cake.  The US has already reached one lost decade.  When you examine items like the above you have to ask what will be the impetus for increasing US home values.  Are we seeing household wages go up?  If you listen to talks of the great car recovery story, part of it had to with rising car sales but a large part of it had to do with slashing wages.  How is that good for increasing home values?

Low interest rates a panacea for home buying?

Some seem to think that low interest rates are a cure all for everything ailing the real estate market.  Certainly the Federal Reserve believes this.  Japan has mastered the low interest rate world:


Source:  Global Property Guide 

The Bank of Japan has kept interest rates below 2 percent for nearly 20 years.  In fact, the Bank of Japan has had a zero percent target interest rate policy in place since 1999.  As you can see this has keptmortgage rates at incredibly low levels.  Surely with such low rates home building has taken off?


Source:  Global Property Guide 

Okay, well maybe home values have increased:

Home prices have retraced two full decades even in the face of decade long zero interest rate policies by a central bank.  For those that think Japan’s housing market is tiny think again:

global real estate values

Source:  Ministry of Land, Infrastructure and Transport   

Japan has one of the most valuable real estate markets in the world even after their housing bubble completely collapsed.  Over the long-term housing values are driven by local demand.  Bubbles of hot money can emerge like what is being experienced in Canada at the moment.  But these are unsustainable and by definition will burst at some point.

The case for rising rents

The next argument we hear is that somehow low interest rates and zombie like banks will somehow push rental rates higher.  Rents are mainly driven by what people can afford with their paychecks.  And so far, there is no indication rents are soaring in Japan:


I find this argument fascinating in the US as well.  Of course, once the bubble burst a premium was placed on renting as credit markets seized up and people switched to renting and were unable to obtain a mortgage.  Yet once that short-term premium is exhausted rental values begin to find a natural equilibrium.  Take a look at the Las Vegas market and you can see a tipping point in rents emerge.

When we hear about the issue with youth employment in the US we need only look at issues being faced in Japan as well:

“(CBC) It’s hard to fault Ueda for his lack of enthusiasm. This was supposed to be the year he followed Japan’s decades-long, springtime tradition that sees hundreds of thousands of students bloom into full-time workers.

“I couldn’t find a job, so I’m staying on in school for another year,” he admits with a shrug.

That makes him one of the more than 100,000 new university graduates — 20 per cent of the total — who hadn’t secured full-time employment as of May 1, according to a survey by the Japanese Education Ministry. Their ranks have been growing each year.”

Even with real estate values back to 1980s levels in Japan it is hard to purchase a home with no secure employment.  People always point to the low unemployment rate in Japan but this is somewhat misleading.  Japan has a giant part-time work force, nearly one third of their entire labor force.  These workers operate largely like contractors and surely that cannot be a boost of confidence to take on 40 year mortgage.

Our part-time work-force has also increased in the US:


Source:  Calculated Risk

There are many similarities in how the US and Japanese real estate bubbles burst:

-Massive central bank intervention to save too big to fail banks

-Ignoring bad performing loans thus drawing out shadow inventory or zombie banks

-Artificially low interest rates courtesy of quantitative easing by central banks

-Continuing price declines in the face of record low mortgage rates

-A rising part-time labor force

-Those who argued Japan only carried trade surpluses now see a record trade deficit (see rule on Black Swans)

-Decade long depression on housing starts

-Fast decline in home prices after bubble burst followed by slow and continued decline in real estate values

There are obviously many differences as well but the above is what is playing out.  The US has never had a real estate bubble of this magnitude so it is hard to predict how things will play out.  Yet we can analyze the data and hopefully arrive at some macro-economic conclusions.  We can look at similar situations and ask why our pattern is looking very similar to the bust in Japan.

What are other similarities and differences between the two markets?


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ALSC Approves Design Value Changes for Southern Pine 2x4s

Changes to other grades and sizes are pending further testing.

By: Brendan Rimetz  — Builder

The American Lumber Standard Committee (ALSC) approved today a reduction in some design value changes for visually graded No. 2 Southern pine 2x4s, but said it lacked the authority to change any other grades and sizes of the species until testing occurs.

The changes reduce by 25% to 30% some of the design values for No.2 2x4s, effective June 1, ALSC’sdecision said.

The decision marks a milestone in an almost three-month battle in which opponents of the plan, which included dealers, builders, and component manufacturers, voiced concerns over what it could do to the industry and fought against the process by which it came about. Dealers fear the changes in design values could affect the costs of projects by requiring more materials and could force customers to alter or cancel projects due to costs further hurting a weak industry.

ALSC—a quasi-governmental agency authorized to set grading standards for lumber used in residential and commercial construction—was asked by the Southern Pine Inspection Bureau (SPIB) to approve reductions in certain design values for several different dimensions of Southern pine. SPIB is one of many groups nationwide responsible for overseeing design standards. But in its decision, ALSC noted that rules on how a species of lumber performs must be based on tests involving a variety of grades and widths. But SPIB and a related testing group only looked at No. 2 2x4s, ALSC noted.

“The Board is constrained by this controlling authority to decline to approve the proposed design values for grades and and sizes of Southern pine other than No. 2 2×4 at this time,” it said. “In reaching this conclusion, the Board is mindful that testing is currently underway on a full matrix sample consistent with [the committee’s operating guidelines],” ALSC said. “The board urges SPIB to proceed with all deliberate haste to complete this testing analysis at the earliest opportunity.”

In the meantime, the No. 2 2×4 design values “are approved with a recommended effective date of June 1, which will allow for their orderly implementation,” ALSC said.

ALSC then sent out what amounts to an alert to the industry that the committee emphasized in parts with bold-face type and underlined sentences (here we’ve bold-faced and italicized them). “Although given the facts, circumstances, and controlling authority of this particular matter, the Board did not approve design values for the other sizes and grades and has recommended a future effective date, it cautions all interested parties to take note of all available information in making design decisions in the interim,” ALSC’s decision said.

“The values in the SPIB proposal represent approximately a 25-30% reduction. Many of the critics of the proposal acknowledged that some reductions were in order, albeit the magnitude of those reductions were disputed. All design professionals are advised in the strongest terms by the Board to evaluate this information in formulating their designs in the interim period.”

ALSC’s recommendation that affect groups respond immediately to the changes it approved contrast strongly with what those groups wanted. In December, a coalition of lumber and construction industry experts recommended ALSC should trust the wood already in use, slow its consideration of changes, and open up the review process. Aside from delaying a decision on Southern pine grades and widths other than No. 2. 2x4s, ALSC’s move today does none of those things.

According to Forest Economic Advisors (FEA), an consulting group focused on the timber and lumber trades, the changes could create a potential demand loss of 1 billion to 2-1/2 billion board feet of Southern pine. The economic group forecasts Southern pine to retain large parts of floor joist, roof rafter, truss chord, and beam and header markets. FEA also says prices are expected to move downward with the changes.

Potential winners out of these changes could be lumber manufacturers producing machine-rated lumber, since their products aren’t covered by the changes. Truss and component manufacturers using more lumber than needed for their products could also see the changes having a minimal impact on how they operate.

Those forced to buy new equipment or change the way they make their products could lose a lot in the form of money, time, and clientele.

For the past three months, the message from trade associations, companies, and organizations expected to be touched by the proposal has moved away from financial concerns and toward collaboration and the desire to have more input in the proposal and its process.

“The more people involved means the best ideas are put on the table and the best ones can be taken and put in the proposal,” says Kirk Grundahl, executive director of the Structural Building Components Association (SBCA), who attended the Jan. 5 meeting.

The lack of communication from the SPIB over the fact that it started conducting testing several months ago triggered concern at both the National Lumber and Building Material Dealers Association (NLBMDA) and the SBCA. In October, NLBMDA warned that the change could lead to “possible stoppage and delays to thousands of single-family, multi-family and commercial construction projects directly resulting from a publication of new design values for Southern pine; re-designs of buildings, units of buildings, and entire projects resulting directly from the publication of new Southern pine design values; and a significant reduction in the economic value of the Southern pine lumber inventory for dealers, component manufacturers, and builders.”

“The Oct. 3 notice by SPIB that was submitting the proposed revisions to the ALSC Board of Review for consideration on Oct. 20 creates legitimate concerns that we feel should be addressed now as a way of bringing transparency and accountability to this issue,” said the NLBMDA in mid-October.

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2010 Oregon timber harvest rebounds from record low

June 24, 2011

2010 Oregon timber harvest rebounds from record low 
By Oregon Dept. of Forestry

Although Oregon’s forest products industries are still struggling, a glimmer of hope appeared with increased timber harvesting in 2010. Overcoming a weak housing market and tightened lending standards, the 2010 harvest hit 3.2 billion board feet, a rise of 17 percent from 2009’s historic low of 2.7 billion board feet. A spike in lumber prices and increased log and lumber exports to China in 2010 drove up log prices by 21 percent, which fueled the uptick in harvests.

From 2009 to 2010, harvest numbers increased for every forest land ownership class except for the Bureau of Land Management. Forest industry, which accounted for 68 percent of Oregon’s total 2010 harvest, also recorded the largest gain in harvest. This category, comprising large, corporate landowners, added 219 million board feet in 2010. This brought the industry total to 2.2 billion board feet, an 11 percent increase from the 2009 harvest of just under 2 billion board feet.

Although forest industry accounted for the largest volume increase in harvest from the 2009 numbers, the other private sector—often called non-industrial or family forestland owners—accounted for the largest percentage growth in harvest from 2009 to 2010. Cutting 93 million board feet in 2009, these smaller landowners expanded harvests by 145 percent to a total of 228 million board feet in 2010.

Other notable increases in 2010 timber harvest include those of the U.S. Forest Service and State owner classes, each with an increase of 62 million board feet over 2009 totals. From 2009 the State total increased 26 percent to 297 million board feet, and the Forest Service total grew 32 percent to 254 million board feet.

Both State and Forest Service harvest totals for 2010 are the highest for those ownership classes since 2005.

With a harvest of 79 million board feet, the Native American tribes’ totals are up 14 million board feet from 2009 – the highest they have been since 2004.

As for individual county totals, Lane edged out Douglas for the No. 1 spot in the state, 455 to 436 million board feet. Lane County harvest grew 35 percent from 2009, most of this increase coming from forest industry, other private and U.S. Forest Service lands.

Western Oregon
The 2010 western Oregon timber harvest increased 18 percent from 2009 to 2.8 billion board feet. All western Oregon counties increased harvest from 2009 except Clatsop, Hood River, Josephine and Polk Counties.

Eastern Oregon
Eastern Oregon’s 2010 timber harvest increased 16 percent from 2009 to 400 million board feet. Eastern Oregon counties whose harvest increased in 2010 include Deschutes, Grant, Klamath, Lake, Morrow, Wallowa and Wasco. Klamath County led eastern Oregon counties with a harvest of 94 million board feet – a 23 percent increase from 2009.

China syndrome
The wild card in 2011 is China. The U.S. housing market remains depressed, non-residential construction is weak, and log prices have declined from recent highs. Resurgence in construction markets hinges on a broader economic recovery, but the nation’s economic recovery has hit a soft patch. Unless an unforeseen return in domestic housing demand occurs, log and lumber export levels, including to China, will drive log prices and timber harvests in 2011.

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Bernanke Cites Housing in Economic Outlook Speech

Bernanke Cites Housing in Economic Outlook Speech

Tuesday, June 7th, 2011 at 4:17 pm

In a speech on the economic outlook of the U.S. economy, Federal Reserve Chairman Ben Bernanke highlighted challenges in the housing sector as one reason why economic growth is weak:

In contrast, virtually all segments of the construction industry remain troubled. In the residential sector, low home prices and mortgage rates imply that housing is quite affordable by historical standards; yet, with underwriting standards for home mortgages having tightened considerably, many potential homebuyers are unable to qualify for loans. Uncertainties about job prospects and the future course of house prices have also deterred potential buyers. Given these constraints on the demand for housing, and with a large inventory of vacant and foreclosed properties overhanging the market, construction of new single-family homes has remained at very low levels, and house prices have continued to fall. The housing sector typically plays an important role in economic recoveries; the depressed state of housing in the United States is a big reason that the current recovery is less vigorous than we would like.

As we have noted before, with credit channels tightening for homebuyers and blocked for many small businesses, the construction sector is unlikely to assume its usual role in leading the economy out of recession, despite evidence of pent-up housing demand.

Bernanke also confirmed that the Fed will continue its accommodative monetary policy stance:

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. At the same time, the longer-run health of the economy requires that the Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability. As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.

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Real House Prices and Price-to-Rent: Back to 1999

Real House Prices and Price-to-Rent: Back to 1999.

by CalculatedRisk on 5/31/2011 12:35:00 PM

Case-Shiller, CoreLogic and others report nominal houseprices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here).

Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 1999/2000 levels.

Nominal House Prices

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2011), and the monthly Case-Shiller Composite 20 SA (through March) and CoreLogic House Price Indexes (through March) in nominal terms (as reported).

Nominal House PricesClick on graph for larger image in graph gallery.

In nominal terms, the Case-Shiller National index is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is slightly above the May 2009 lows (and close to June 2003 levels), and the CoreLogic index is back to January 2003.

Note: The not seasonally adjusted Case-Shiller Composite 20 Index (NSA) is back to April 2003 levels.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to October 2000, and the CoreLogic index back to November 1999.

A few key points:
• In real terms, all appreciation in the last decade is gone.

• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn’t like in 2005 when prices were way out of the normal range. In many areas – with an increasing population and land constraints – there is an upward slope to real prices (see: The upward slope of Real House Prices)


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller Composite 20 and CoreLogic House Price Index (through March).

This graph shows the price to rent ratio (January 1998 = 1.0).

Note: the measure of Owners’ Equivalent Rent (OER) was mostly flat for two years – so the price-to-rent ratio mostly followed changes in nominalhouse prices. In recent months, OER has been increasing – lowering the price-to-rent ratio.

On a price-to-rent basis, the Composite 20 index is back to October 2000 levels, and the CoreLogic index is back to December 1999.

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Case Shiller: The Housing Double Dip is Official



This morning’s Case Shiller housing data confirmed that the double dip is officially here.  This should come as no surprise as real-time trackers of this data have long predicted this.  Case Shiller reports:

“This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation. The National Index, the 20-City Composite  and 12 MSAs all hit new lows with data reported through March 2011. The National Index fell 4.2%  over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “Since December 2010, we have found an increasing number of markets posting  new lows. In March 2011, 12 cities – Atlanta, Charlotte, Chicago, Cleveland, Detroit, Las Vegas, Miami, Minneapolis, New York, Phoenix, Portland (OR) and Tampa – fell to their lowest levels as measured by the current housing cycle. Washington D.C. was the only MSA displaying positive trends with an annual growth rate of +4.3% and a 1.1% increase from its February level.

“The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit.  Excluding the results of that policy, there has been  no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.

In April 2010 I described why this scenario was likely to unfold:

“As I said above, the most likely scenario is the “work-out”.   Government stimulus continues to bolster the private sector in the back half of 2010, but the lack of direct aid in housing begins to weigh on the housing market in the second half of 2010.  Negative seasonal trends make for a very difficult H2 in housing and a tough start in 2011.  The economy appears fairly strong into the latter portion of 2010, but the dwindling stimulus ultimately pressures the private sector.  Demand for housing remains tepid as job growth is weak, the unemployment rate remains above 8% into 2011 and the negative inventory trends prove too much for the real estate market to overcome.  Ultimately, prices decline 7%-15% over the course of the coming 2.5 years.”

Prices are down 5%+ year over year so we’re officially into the double dip, however, it’s not over yet.  This alone will have the Fed very concerned.  If you’ll recall, the credit crisis was a housing crisis.  This data should have the Fed on the path to accommodation for the foreseeable future.  The banking system, as a result of this data, is likely to remain very fragile.

S&P estimates that the damage to the banking system from a double dip will amount to at least $70-$80B in losses.  Via S&P & Research recap:

“If a double-dip in housing of the magnitude we’ve imagined were to ensue over the next few quarters, rising foreclosures and delinquencies, combined with a higher volume of home modifications and redefaults, would potentially drive credit losses higher by $30 billion to $35 billion.

This would result in a five-year cumulative credit loss rate of 8.5% to 9% range in banks’ housing portfolios, approximately 0.5 to 1 percentage point higher than in our baseline forecast. Separately, a buildup of representation and warranty expense might increase costs by an estimated $33 billion. Another $6 billion to $12 billion in fee income might be foregone due to fewer originations.

Overall, we estimate that total cumulative loan losses to the U.S. banking sector from these risks could increase by $70 billion to $80 billion relative to a more benign baseline.”

Don’t expect the Fed to change their policy stance any time soon with this housing debacle going on.  And we should all hope they don’t resort to QE3 – it’s now looking like QE2 did less than nothing….

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Cheap Houses or Pricey Shares?


Interesting comments here from an article in The Economist this past week.  They touch on the relative value of real estate vs equities:

“Anyway, to take a more cheerful line, the fall in the housing markets is creating some bargains. A recent postshowed that US house prices look cheap relative to gold. The chart shows that they also look a much better bet than the stockmarket, on a long-term view. Judging by the latest plunge in pending home sales, it doesn’t appear that many bargain-hunters are interested.”

Given the 30%+ decline in housing and the incredible rebound in equities I can’t help but wonder if true value investors aren’t in agreement with the conclusions above.  Despite all the attempts to manipulate the real estate market, the government has largely failed in attempting to stabilize prices.  In other words, it’s undergone a much more natural price discovery process.  The equity market, of course, has been intervened in at every step of the way and the government has undoubtedly succeeded in propping up this market.  Various valuation metrics are at odds with regards to equities, however, it’s difficult to conclude that we’ve done anything other than engage in the same old tactics that helped create the unstable environment that existed before the equity market crash.  Given this risk and what I’d call a more natural price discovery process, it’s not unreasonable to conclude that real estate looks like a better relative value vs the broad equity markets at this juncture.

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