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:

Japanese-US-Housing-Bubbles_2011

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:

Japan-interest-and-mortgage-rate-graph-1

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?

Japan-housing-starts-graph-1

Source:  Global Property Guide 

Okay, well maybe home values have increased:
Japan-residential-urban-land-price-index-graph-1

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:

Japan-residential-price-against-rent-graph-1

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:

us_employment_part-time

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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