This article at efinancedirectory.com draws some interesting parallels between the US housing market today and the Japanese housing market during their housing crash of the 1990’s.

Price increases are nothing new, since home values tend to go up over time. What makes this housing bubble different (besides the fact that it is the largest bubble in U.S. history) is the dangerous disconnect between home prices and the basic fundamentals that typically rule the housing market.

For example, increases in home prices typically keep pace with increases in wages. But this has not happened. National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Average wages per worker, on the other hand, have only increased by 10 percent in the same period.

As a result, for almost the first time ever, individuals who are making the median household income cannot afford to buy a median priced home.

After this introduction the author examines some other factors that he believes indicate a disconnect between financial fundamentals and current home prices. These include the price difference between enting and a mortgage payment, subprime loans / bad loans, and overbuilding, his conclusion:

Almost every circumstance leading up to the Japan housing crash has been present in the U.S. during the last decade:

* Historically low interest rates
* Housing touted as a ‘can’t miss investment’
* Average home prices doubled
* Average home prices in the six largest cities tripled
* Lenders offered bad loans
* Government acted as a partner to industry
* Home price increases far outpaced wages and rents

After reaching peak values, Japanese home prices declined by an average of 40 percent. In the country’s largest cities, the declines were worse, averaging 65 percent. Homes in Tokyo lost 80 percent of their value and are still on the downward slide to this day.

Seems like a reasonable conclusion and one that I have thought was on the way for a long time, but I think there is a way to salvage things. The current foreclosure boom is largely based on subprime mortgages with adjustable rates that have now risen in cost to the point that he borrower cannot afford the payments any longer. It seems to me that if the lenders were to roll rates back to the teaser rate (or slightly higher) and lock it the rate of foreclosures / defaults could be stemmed. Yes, the mortgage companies would take a financial hit but I think it would be lower than if they allow the current rate of defaults to continue unchecked. To prevent such a problem in the future the use of sub-prime loans and ARMs should be scrutinized much more closely.

Perfect solution? No. Workable? I think so.

This entry was posted on Thursday, August 23rd, 2007 at 6:36 am by Chad and is filed under Big Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.