No Housing Bottom Yet

"Relaxed lending standards, strong employment growth in export manufacturing, an exceptionally high national savings rate and the reaction by the Bank of Japan to curb such dynamic growth were all contributing factors in Japan's unsustainable run-up in housing prices," notes Grinis.

Sound familiar?

The national average home price in Japan increased 85% over 10 years beginning in 1981 while the national average in the U.S. increased 75% over 10 years beginning in 1997, says Grinis, who recently did a case study comparing the two housing markets.

But Japan's market came crashing down? Will ours? What can we learn from them?

"The biggest lesson is that the price of a home must ultimately correlate to what individuals can afford," he noted in his study. "If prices advance significantly ahead of wages, over time there will be a price correction. Since interest rates are a key determinant in housing affordability, the Federal Reserve will likely lower rates in the near term, particularly as a slowing housing market begins to impact the broader economy."

Because wages have not kept up with the inflated housing prices, we're due for a fall and, contrary to popular belief, it hasn't happened yet. "The typical cycle is about four years and we're only a year and a half in," notes Grinis. "It will be late '08 before the dust settles and you can call a bottom."

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