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TMFDeej (99.47)

This is not Japan

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December 18, 2008 – Comments (2)

 

Credit Suisse published an interesting, optimistic analysts' note this morning on how the current situation in the U.S. differs from the mess that Japan recently went through.

Of note:

- Property prices dropped by 80% from peak to trough in Japan, while the drop in home prices in the United States is unlikely to be worse than a total of 35%.

- The Bank of Japan was very late in recognizing the extent of the country's problems.  The country's monetary policy was tight for five years into the downturn and it did not begin its quantitative easing efforts until 11 years in.  The U.S. certainly has a recent, relevant case study to use when attempting to fix things.

- Credit Suisse claims that U.S. housing affordability is the most attractive on record (I personally am somewhat skeptical of this statement) and that it is 38% above the average since 1978.  The house price to wage ratio is still only "marginally attractive," but it does sit at 8% below the average level of 1980 to 1998, which is the period right before the current housing boom started.

Few can dispute that the Fed and Treasury are taking swift and dramatic action to help turn around the economy.  I have always believed, and still do, that they will be able to print enough money to prevent long-term deflation...at least the all-important wage deflation, and eventually stabilize the economy some time in late 2009.  My focus has always been on what the unintended consequences of these attempts to reflate the economy will have.  To me, a drop in the value of the U.S. dollar and the resulting inflation are a logical result of the United States current monetary policy.  Time will tell.

Deej

2 Comments – Post Your Own

#1) On December 18, 2008 at 11:14 AM, abitarePERFECT (29.75) wrote:

Prperties are going to fall to free in many areas, with no jobs houses will be empty. Conviently, MLS and others ignore foreclosures, auction or short sales and abandoned houses when compiling their inflated numbers. You can go to bidassets.com and see houses selling for near free.

 "Credit Suisse claims that U.S. housing affordability is the most attractive on record"

CS record is corrupted or more likely a lie.

Look at the Case Shiller index, if you do not understand how incredibly dumb that lie is.

The FED and Treasury cannot help"turn arround" an economy by printing and borrowing money. Becoming more Communist and socialist does not help an economy. Printing trillions does not help an economy, it creates mal-investment and destroys savings. 

The reason socialism fails is the government and "leaders" cannot accurately price assets or accurately or efficiently employ resources like the market. The government intervention in the market caused the asset bubble. Trying to create more bubbles or building bridges to no where is just going to end up destroying more wealth. 

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#2) On December 18, 2008 at 4:13 PM, DemonDoug (98.73) wrote:

- Property prices dropped by 80% from peak to trough in Japan, while the drop in home prices in the United States is unlikely to be worse than a total of 35%.

We're already past that here in California, and I would not be surprised to see a 90% drop in some zip codes.  There are some homes in the midwest rust belt that are basically worthless and have dropped far beyond that.  This is a rosy bullet point that is just flat-out wrong.

The country's monetary policy was tight for five years into the downturn and it did not begin its quantitative easing efforts until 11 years in. 

Relative to the 10-20% flood of dollars every year the Fed pumps in, this is true.  However Japan central bank data shows that M2 grew yearly after 1990.  Small growths, in the 3-6% range, but growth nonetheless.  They certainly weren't on a gold standard or anything.

Credit Suisse claims that U.S. housing affordability is the most attractive on record (I personally am somewhat skeptical of this statement) and that it is 38% above the average since 1978.  The house price to wage ratio is still only "marginally attractive," but it does sit at 8% below the average level of 1980 to 1998, which is the period right before the current housing boom started.

This makes no sense, and is wrong in any case.  Housing is "affordable" when home prices are 3x median income, as a general rule.  We are still no where near that nationally, although in certain regions (st. louis, columbus oh), they are at that level.  There have been times when house prices were less than that.  So to say that the house/price wage ratio is "marginally attractive" is to say that homes are only "marginally affordable" - not the "most attractive."

And anyway, we should trust this report coming from a company that is basically insolvent and would be worth zero if they hadn't had their own bailout by the Swiss Gov't?  They obviously are clueless when it comes to RE valuation, so this is basically a waste of time reading this report.

Deej, I'm starting to come around to the deflation camp.  However, if you look at japan, what they had were severe deflationary forces, with government policies that were hugely inflational.  Net?  A total of 8% inflation from 1990-2006.  Not yearly - in sum total.  So even after 5 years, those inflationary money pumping policies couldn't get the yen devalued.

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