Japanese Stocks Look Cheap Compared with U.S. Land

In the past few weeks we've seen more and more articles predicting the continued downturn of the US economy and housing market. A particularly useful set of graphs was published in Business Week, the second of which illustrates the sharp jump in housing prices in the past few years.

It’s helpful to compare these prices to those for Tokyo residential real estate. From 1985 to 1991, Tokyo real estate prices went up almost 150%. By 2005, prices had retreated to 1985 levels, with the biggest losses posted in the three-year 1991-94 period.

It is often argued that a similar collapse is impossible in the US, especially in places like California. But it’s wise to remember that much the same thing was said about real estate in Tokyo in 1990, namely, that the city is the center of Japan’s economy, and land supply cannot be expanded. In short, real estate prices could never go down.

Prices of California homes went up 167% in the past 10 years, and in the past year have only dropped less than 10%:

While many people won't (or don't want to) believe the 20%-30% drop predicted by BusinessWeek is possible, if the Tokyo example is at all similar, there is certainly the possibility that those declines will be realized.

The Japanese stock market was one of the world’ worst-performing markets last year. The economy is not any better this year, but stock prices may have been already battered enough. Some bottom-fishing is now possible.