Buying a House with a 90-year Mortgage in Japan

Yesterday's NY Times included a story by Martin Fackler about Japan's devasting real estate bubble. The thought comes to mind--could it happen to US? He profiled a man named Yoshihisa Nakashima who bought a condo 14 years ago for a price of about $400,000. He was convinced it would go up in value, and moved there even though it was far from his job in Toyko.

Today there is no way out, the condo is not worth even half of what he paid, and he's got a $300,000 anchor keeping him there. The article maintains that the lesson is that it is easy to fall into a state of denial about real estate. "During a bubble, people don't believe that prices will fall," said a Japanese professor. "There's something in human nature that makes us unable to learn from history."

One particularly dangerous trend developing here is the interest-only mortgages, which allow homeowners to pay nothing on the principal for a few years. Japan had worse instruments, such as the three-generation loans, with a 90 or 100 year payment schedule, that when prices dropped led to even worse traps, many ending up in bankrupcy.

Japanese bankers say that the US Fed has done a much better job than Japan's central bank, moving nimbly with small rate changes to temper the market. "Avoid big shocks," said the professor, "That is the biggest lesson of Japan's bubble."