Don’t look now but home prices have fallen by 3 percent (-3.3 percent to be exact) on an annualized basis. This might not mean much to some but keep in mind we are talking about an asset class that has a track record of never reporting one negative year for multiple decades (that is until the recent housing bubble occurred). What is more disturbing is we are reaching new lows and the peak was reached back in 2006. To regain the 2006 peak home prices would need to rise by a stunning 45 percent. How likely is that with stagnant income growth and mortgage rates at rock bottom levels? The Fed is running out of ammunition here and this story has already taken place in history and not too long ago.
Japan had a massive housing bubble with too big to fail banks where the Bank of Japan jumped in and bailed out the financial sector. These banks failed to recognize their losses and the banking and real estate industries turned out to be a superb drag on the Japanese economy. Sound familiar? Of course some will point to the low unemployment in Japan as a sign of good times. However, 1 out of 3 workers in Japan work in what is considered a contract basis where they are assured no worker protections. This is similar to our part-time workers who would like full-time employment but are unable to find a spot.
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