Americans who think they're suffering in the current housing market should be happy they didn't buy Japanese real estate in the early 1990s.
Housing prices may be starting to fall in many parts of the U.S., but it's still nothing compared to the decline in prices in Japan. Between 1990 and 2005, land prices in Japan plunged by as much as 70% in some areas. But in the past year, those prices have finally started to recover.
Buying at any cost
The real estate bubble in Japan caused many of the same problems that prospective homebuyers in the U.S. have faced over the past decade. Just as rising home prices in America caused many borrowers to employ creative financing options, such as negative amortization and interest-only mortgages, some Japanese homeowners resorted to 100-year mortgages in order to buy homes at the peak of the bubble.
However, as a report from the University of Pennsylvania's Wharton School suggests, the landslide in land values may be over. Year-over-year prices for both commercial and residential properties rose in 2006 for the first time since the 1980s, and interest among institutional investors is heating up once again.
REITing on the wall
Real estate investment trusts have been one contributor to the recovery. Changes in Japanese law to allow the establishment of REITs have opened the real estate market to new sources of financing. Rather than relying solely on banks, which are still reeling from the market's long decline, real estate investors can tap into REITs for development projects. REIT shareholders, meanwhile, benefit from tax breaks and other incentives.
Japanese REITs have also attracted attention from institutional investors, including Morgan Stanley (NYSE: MS ) and Goldman Sachs (NYSE: GS ) , which seek further diversification within the Japanese financial markets. REITs gained popularity in the U.S. in part because their returns weren't highly correlated with stock market returns; similarly, firms looking for investments that won't move in tandem with the Japanese stock market have seized on real estate.
CD or REIT?
It's tough for American investors to invest directly in Japanese REITs. Even closed-end funds that specialize in global REITs, such as ING Global Real Estate (AMEX: IGR ) and Cohen & Steers Worldwide Realty (NYSE: RWF ) , have little exposure to Japan.
But you don't have to go to Japan to get on the real estate bandwagon. Everbank, a U.S. bank, is currently offering certificates of deposit whose returns are based on the performance of a Japanese REIT index. If real estate prices rise, you'll earn 100% of the index's return. If they fall, however, you'll still get your principal back -- just without any interest. With a term of 42 months, you're locking up your money for a reasonable period, but full participation in the REIT index is an unusual characteristic of these types of CDs.
The downside is that the index doesn't include the dividends you'd receive if you bought REIT shares yourself. For instance, if REITs are paying a 5% dividend annually and rise 5% in value each year, buying the REITs directly would give you a total return of 10%. However, because the index doesn't reflect dividends, the Everbank CDs would only give you a 5% return. However, even with this caveat, FDIC insurance and protection against falling prices may make this investment attractive for some investors.
Staying closer to home
On the other hand, if you're not comfortable with the uncertainties of international real estate investing, you might want to turn your attention to your own backyard -- literally. Since your own home is the biggest real estate investment you'll probably ever make, it makes sense to do everything you can to keep its value up, especially amid the challenges of the current price environment.
You'll find some tips on dealing with all kinds of housing-related topics in our Home Center. Whether you're looking to remodel or maintain your home, or thinking about selling while the getting's good, you'll get the help you need to make the decision that's right for you.
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