New Jersey Real Estate Report

From CEOs for Cities:

Driven to the Brink (PDF)
How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs

The collapse of America’s housing bubble—and its reverberations in financial markets—has obscured a tectonic shift in housing demand. Although housing prices are in decline almost everywhere, price declines are generally far more severe in far-flung suburbs and in metropolitan areas with weak close-in neighborhoods. The reason for this shift is rooted in the dramatic increase in gas prices over the past five years. Housing in cities and neighborhoods that require lengthy commutes and provide few transportation alternatives to the private vehicle are falling in value more precipitously than in more central, compact and accessible places.

From the Wall Street Journal:

As Gas Prices Spike, Suburban Home Prices Fall

Rising gasoline prices have affected much of American life –- from the cars we drive to the vacations we take. A new study, however, indicates that increasing gas prices may have the strongest impact closer to home — the houses we choose to live in.

In a report entitled “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” released this month by CEOs for Cities, economist Joe Cortright contends that while predatory lending and subprime mortgages had a hand in today’s housing crisis, higher gas prices played a major role –- and will have a much longer-lasting impact on U.S. consumers’ home-buying preferences.

“The rise in gas prices from less than $1.10 in early 2002 to more than $3 today has dealt a major blow to consumer purchasing power and weighs most heavily on those metropolitan areas and those suburbs where people have to drive the farthest,” Mr. Cortright notes in the report.

Higher gas prices negatively impact housing prices by sapping home buyers’ budgets and leaving less to spend on housing, and by making consumers less apt to bid more for homes in less centrally located suburbs, he explains.

The study notes that while initiatives by states and the federal government to ease the housing market’s woes will have some positive effect on the real-estate market in the months ahead, higher fuel costs will permanently impact the suburban landscape as more home buyers choose to reside in closer-in locations that offer shorter commutes and mass transit.

He point out that in metropolitan areas like Chicago, Los Angeles, Pittsburgh, Portland and Tampa, home prices have fallen more in farther-flung ZIP codes than in close-in neighborhoods. For instance, in Chicago, while housing prices have remained stable in close-in neighborhoods within three miles of the city’s central business district over the past 12 months, home prices have fallen 4% in “distant” neighborhoods 13 miles from the central business district. And in Los Angeles, while home prices have dropped 6% in close-in neighborhoods, they have decreased 10% in distant neighborhoods, according to the report.

From the Wall Street Journal:

The Biggest Housing Losers
May 12, 2008

You may not know it, dear reader, but Congress is playing you for a sap. During the housing mania, you didn’t lend money at teaser rates to borrowers who couldn’t pay, or buy a bigger house than you could afford. You paid your bills on time. As a reward for that good judgment and restraint, Barney Frank is now going to let you bail out the least responsible bankers and borrowers.

The Massachusetts Democrat’s housing bill passed the House Thursday, and it makes us wish we had splurged like so many others. In the name of helping strapped home buyers, Mr. Frank is giving lenders a chance to pass their worst paper onto Uncle Sugar. If both borrower and lender agree to participate, lenders can accept 85% of the current appraised mortgage value and in return get to dump up to $300 billion of those loans on the Federal Housing Administration (FHA). Guess which loans they are likely to dump?

Looking at the details in Mr. Frank’s 45-page first draft of this bill, FIS Applied Analytics estimated that taxpayer losses could reach as high as $27 billion, more than four times Mr. Frank’s estimate. The next draft, clocking in at 72 pages when it passed Mr. Frank’s committee, was miraculously scored by the Congressional Budget Office at “only” a $2.7 billion cost to taxpayers.

CBO lowballed it in part because it assumed that most people eligible for this assistance will not apply for it. It is true that some lenders may be wary of taking a 15% haircut off the top, but watch out if bankers and borrowers do take the taxpayers up on Mr. Frank’s offer. This is especially likely because at the same time that Mr. Frank touts the lowball estimate, he is also making mortgage servicers an offer they can’t refuse.
…
The plan seems to get more generous by the week, at least if you’re an ally of Mr. Frank. The monster he brought to the floor Thursday runs to hundreds of pages. State governments receive authority to issue $10 billion in tax-exempt bonds to subsidize home purchases and to help subprime borrowers refinance.

In a sop to builders, Mr. Frank also expands the low-income housing tax credit, and he creates a new refundable credit for certain home buyers. To help defray the cost to the Treasury, Mr. Frank raises taxes on multinational companies by delaying a scheduled reform. A law set to take effect this year would expand firms’ ability to claim foreign tax credits and thereby avoid double taxation. Mr. Frank would put it off for another year.
…
We can only imagine what else is buried in this tome, which deserves a Presidential veto. But the worst problem remains its invitation for bankers to dump their biggest losers on taxpayers. The Frank plan appears to take care of everyone in the housing market, except the renters and homeowners who lived within their means.

From the NY Times:

Spring in a Cold Climate

THE only way to know when the residential real estate market has “hit bottom” will be with a look in the rear-view mirror, according to Jeffrey G. Otteau, the New Jersey-based real estate analyst.

“It will appear from the shadows, months after it actually occurred,” when sales have picked up for several consecutive months, said Mr. Otteau, whose East Brunswick company, the Otteau Valuation Group, studies sales-contract data that it compiles from almost all of the state and provides monthly to subscribing brokers.
…
But the latest statewide numbers — from March — do make one thing absolutely clear: The turning point has not yet been reached.

“The clear signal,” despite a 9 percent increase in the number of sales in March over February, “is that the housing market has further to fall,” Mr. Otteau said in the newest report.

Home sales were down 27 percent from the previous March, which continued a pattern for 2008. They are running well behind 2007, which was itself a year of declining sales volume and dropping prices.

“It’s spring,” Mr. Otteau added in an interview. “The numbers always go up during the spring selling season, but you’re still talking about contract sales that are the weakest in recent history.”

The reports do not show shifts in average sales prices on a monthly basis. But given the sluggish sales pace, Mr. Otteau said prices would certainly continue to decline throughout the spring and summer.
…
Three years into this market malaise, there is no specific type of community that remains entirely immune, Mr. Otteau said. The latest statistics point toward deteriorating conditions even in downtown redevelopment areas that have attracted thousands of young professionals and empty nesters in recent years.

In Hoboken — the state’s pre-eminent example of transformation from tenement grit to condo glitz — the newest numbers hint at a downturn after a solid decade of robust growth: the supply and demand ratio has sunk to 43 percent, from 78 percent last year. There were 507 unsold homes on the market, a seven-month supply. And the average number of sales per month was down to 70, from 115 last year.

“Until pretty recently,” Mr. Otteau explained, “Hoboken was running counter to the rest of the market, mostly because of ‘overflow’ demand from New York.” He was referring to buyers who were fleeing higher apartment prices in Manhattan for relative bargains across the river.

Now, though, various factors have kicked in to abet a slowdown: tighter mortgage-lending standards; growing buyer unease over the continuing decline in home values; and the prospect of Wall Street cuts of 36,000 jobs, according to federal Labor Department projections.
…
But the graph of contract-sales activity that accompanies Mr. Otteau’s latest report tells a different story. In the three previous years, the line had climbed sharply to a peak in March; this year, the peak is more of a molehill.

He summed up his advice to brokers this way: “Expect the spring selling season to be late and brief, with only a modest increase in sales activity, and prices continuing to drift downward.”

Now Open, Part II!

Prior weekend thread closed due to comment overflow

This is the time and place to post observations about your local areas, comments on news stories or the New Jersey housing market, open house reports, etc. If you have any questions you wanted to ask earlier in the week but never posted them up, let’s have them. Also a good place to post suggestions, requests for information, criticism, and praise.

For readers that have never commented, there is a link at the top of each message that is typically labelled “[#] Comments“. Go ahead and give that a click, you might be missing out on a world of information you didn’t know about. While you are there, introduce yourselves to everyone.

For new readers that have only read the messages displayed on the main page, take a look through the archives, a substantial amount of information has been put online in the past year. The archives can be accessed by using the links found in the menus on the right hand side of the page.

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The FHA Mortgage Center website is running a “best real estate blog contest”. If you haven’t taken the time to vote, please do. All you need to do is click the widget below. If you’ve already voted, there is no need to vote again, and please, no ballot stuffing.

From the WSJ:

Keeping Families Above Water
May 8, 2008; Page A2

The latest flash point in the debate over the nation’s bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle for less than the full debt, even if it may cost taxpayers some money?

The White House and Treasury say “No!” House Financial Services Committee Chairman Barney Frank and other House Democrats, with the quiet backing of Federal Reserve Chairman Ben Bernanke, say “Yes!”

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody’s Economy.com estimates that one in roughly 12 American families with mortgages — four million in all — already owe more than the current value of their homes. They are said to be “underwater.” The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won’t, and are at risk of losing their homes.
…
In ordinary times, a lender shouldn’t need prodding from the government to do what’s in its self-interest. But these aren’t ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the “speculators” who bought homes they don’t live in or those who lent to them. And there’s broad agreement that those who bought more house than they’ll ever be able to afford are going to lose out. The debate revolves around the “preventable foreclosures.”
…
The White House condemns this as a “bailout” and says it won’t work. As the Treasury argued in a recent PowerPoint presentation: “Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators.” (It’s a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices — “a relatively novel phenomenon,” Mr. Bernanke labels it — and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn’t be underwater.

From the Star Ledger:

Meadowlands agency scraps EnCap project

After years of delays, cost overruns and diminished expectations, the New Jersey Meadowlands Commission yesterday killed an ambitious $1 billion project to build golf courses, a hotel and thousands of homes atop capped garbage dumps in Bergen County.

The commission’s members, contending developer EnCap Golf Holdings showed it cannot successfully finish the project, said they will seek to collect a $148 million performance bond meant to guarantee the cleanup of landfills in Rutherford and Lyndhurst.

The ultimate fate of the land — some 785 acres — has not been decided.

“EnCap is over,” commission Chairman Joseph Doria said after the board’s 4-0 vote in Lyndhurst. “We, I think, have given EnCap and all its entities the opportunity to perform. They have not been able to perform.”

In January, the commission granted EnCap the latest of several extensions to shore up its financing and to address environmental problems at the work site. The Meadowlands Commission’s vote yesterday morning to sever its relationship with EnCap came two days before the company’s latest deadline tomorrow.

New Jersey taxpayers stand to lose $51 million — the amount loaned to EnCap without repayment guarantees — as a result of the project’s failure.

Last night, in a brief meeting with reporters, Gov. Jon Corzine said the state would seek to recover its investment.

“First of all, we have to finish the remediation and hopefully be able to get to a conclusion that will allow us to get all of the money back,” Corzine said. “But there are legal agreements that are in place, so it’s not as easy as just saying we want to get our money back. We have to complete the remediation. We have to figure out what the long-run uses are going to be.”
…
Donald Trump, who took over management of the project on behalf of EnCap in November, called the commission’s decision “very unfair” and predicted a lengthy legal fight to come.

“This job will sit in court for years,” Trump said. “Lawsuits are being drawn up already. It’s a very sad ending to something that could have been great.”

He added: “This is why New Jersey doesn’t work.”

Preliminary April sales and inventory data for Northern New Jersey (GSMLS) is in. Please note that this data is subject to revision.

The first graph plots the unadjusted sales data (closed sales) for the counties listed. Please note the lower bound of the graph, it is set to 500, not to zero. I do this to emphasize the seasonal nature of the Northern NJ market.

(click to enlarge)

The second graph is another view at the sales data for the full year. Please note that this graph does cross at zero.

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The third graph displays only April sales, 2001 to 2008 YOY.

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The fourth graph displays an overlay of Sales and Inventory from 2003 to 2007.

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The fifth graph displays the year over year change in inventory on a month by month basis.

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The sixth graph displays the year over year change in sales on a month by month basis.

(click to enlarge)

The last graph displays the absorption rate (not seasonally adjusted), in months:

(click to enlarge)

The following map is from Fannie May and displays the change in home prices from the second quarter of 2006 to the first quarter of 2008. Fannie Mae says that New Jersey home prices have fallen 8.1%:

(click to enlarge)

The following map is from Zillow and displays an estimate of the percentage of recent purchasers (2005-2008) who are “underwater”:

(click to enlarge)

From Newsweek:

It’s Going to Get Worse
Economist David Lereah was once the housing market’s biggest cheerleader. Now he says the bust isn’t near over, and home prices still have a long way to fall.

Let me confess at the start: I spoke with Lereah frequently during the boom, and I always found him to be a smart, thoughtful observer. Sure, his assessment of the real estate market was consistently upbeat, but that’s hardly surprising given that he served as chief spokesman for a trade organization that believes it’s always a good time to buy a home. And the truth is I feel a little sorry for the teasing he has absorbed since the housing bubble burst. Yes, he did publish a book in 2006 with the unfortunate title “Why the Real Estate Boom Will Not Bust”—but he didn’t pick the title, the same way columnists like me aren’t always thrilled by the headlines our editors put atop our stories. And while I thought it was funny when my colleague Daniel Gross and others compared Lereah to Baghdad Bob, the Iraqi information minister who repeatedly announced his army’s military successes even as U.S. tanks were overtaking the capital, I can’t help feeling bad for him. But if you judge from the blogosphere, I’m in the minority with my sympathy.

It’s been more than a year since Lereah left NAR, so I called this week to check in. It turns out he has recently set up a new firm called Reecon Advisors, which is advising Wall Street firms and institutional investors about the real estate market. “Wall Street has an intense interest in [this], because they’re looking for when is the recovery going to come, and at what point does the cycle turn,” Lereah told me.

His answer: not yet. “We’re not at the bottom,” he says. “[People] want it to be near the bottom, but we’re not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There’s still supply out there in abundance … This thing is going to get worse before it gets better.”

Lereah says that the industry may begin to see a slight uptick in sales later this summer, which could signal the start of the recovery. Home prices, however, will continue to fall. According to the latest numbers from the Case-Shiller index, the average U.S. home has lost around 15 percent of its value since the market’s peak. “We’re probably going to end up with a 20 percent [decline], but if I’m wrong it will be even more than that,” he says.

(emphasis added)

From Bloomberg:

Bernanke Urges Action to Slow Jump in U.S. Home Foreclosures

Federal Reserve Chairman Ben S. Bernanke, seeking to end the worst housing slump in a quarter century, urged the government and mortgage lenders to intensify their efforts to avoid home foreclosures.

Bernanke, in a speech in New York yesterday, also reiterated his call for lenders to forgive portions of mortgages for some struggling homeowners. He said proposals should be “tightly targeted” at borrowers at greatest risk of losing their properties, and avoid providing an incentive for defaults.

The Fed chief also backed the idea of having the Federal Housing Administration refinance troubled mortgages, a concept included in Democratic legislation in Congress, without explicitly endorsing the bill. His remarks indicate a gap with the Bush administration, which has preferred to rely on industry-led efforts.

“Realistic public- and private-sector policies must take into account the fact that traditional foreclosure-avoidance strategies may not always work well in the current environment,” Bernanke said in remarks to a Columbia Business School dinner.
…
As the housing recession deepened, officials in Washington have offered a number of different proposals. Foreclosure filings rose 57 percent in March from a year earlier, according to Irvine, California-based RealtyTrac Inc.

“Conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply,” Bernanke said.
…
Bernanke did note that accelerating foreclosures may push home prices down further, hurting the broader economy and threatening the financial system. He anticipated the foreclosure rate will increase this year after such proceedings began on 1.5 million properties last year.

A quarterly Fed survey yesterday showed the share of banks making it tougher for companies and consumers to borrow approached a record last month in the aftermath of the subprime mortgage collapse. The Senior Loan Officers’ Survey found a net 70 percent of banks increased their loan rates over their cost of funds.
…
Bernanke warned that “to be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure.” Qualification guidelines could be set, such as identifying an amount of debt compared with income, or the extent to which the home value is below the mortgage amount, he indicated.

“Finding the right balance — particularly the need to avoid programs that give borrowers who can make their payments an incentive to default — is difficult,” the Fed chairman said.

From the Wall Street Journal:

Banks Toughen Terms on Loans
Both Consumers And Businesses Feel the Impact
By SUDEEP REDDY
May 6, 2008; Page A3

In a blow to an already wobbly U.S. economy, banks are imposing tougher lending terms for consumers and businesses across the board.

The Federal Reserve’s survey of banks’ senior loan officers, one of the most closely watched gauges of lending practices, found that the credit crunch is widening. The proportion of domestic banks tightening their standards was at or near historical highs for almost all loan categories, including credit cards and student loans.

The survey, conducted in April, showed that demand for loans weakened in most categories, though not as much as in the previous three months.

The lending pullback comes as the economy slows to a crawl. The banks’ hesitancy to lend could restrain consumer spending as well as investment by businesses that depend on borrowing.

About a third of the 56 domestic banks surveyed in April reported raising their standards for credit-card loans over the past three months, up from just 10% in January. Banks are being tougher on credit-score requirements and are reducing credit limits on card loans. In addition, 44% of banks, up from 30% in January, tightened standards for other consumer loans.
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Banks continue to get more restrictive in their real-estate lending as the housing bust adds to their losses. About 70% of banks said they tightened standards for new home-equity lines of credit over the prior three months. Roughly half of the banks said they tightened terms on existing home-equity lines of credit over the past six months because of home prices falling below their appraised values. Most lenders also cited loan defaults and a change in borrowers’ financial circumstances for tightening terms.

More than 60% of banks tightened standards on prime mortgages, up from just over half in January and 15% a year ago. At least three out of four said they tightened standards for nontraditional and subprime mortgages in the past three months. For commercial-real-estate loans, about 80% of banks tightened their lending standards.

According to the National Association of Realtors, the answer is no, it has always been a good time to buy…

…even during the darkest depths of the Great Depression. Unemployment was nearing 16% and approximately 8 million Americans were unemployed. Banks were in turmoil, with roughly 2,000 banks failing in 1931, including the New York Bank of the United States (the largest bank failure in the history of the nation at the time). You might think that in the midst of the worst economic downturn the world had ever seen the Realtors might would show some restraint.

Nope, it’s a great time to buy a home!

From Bloomberg:

Wall Street CEO Chorus Is Singing Out of Tune

It’s become fashionable in certain circles — primarily among administration types and Wall Street chief executives whose banks are losing gobs of money — to say that the worst is over for the subprime/housing/credit/economic crisis in the U.S.

Whether they express their optimism in baseball terms (“in the eighth inning or maybe the top of the ninth”), as a percentage (“maybe 75 percent to 80 percent over”) or in the form of a timeline (“closer to the end than the beginning”), these faith-based predictions contain the audacity of hope.

I mean, where’s the evidence? Let’s start with Public Enemy No. 1: housing. For all the false claims of a bottom in the last two years, real residential fixed investment, as it’s called in the gross domestic product accounts, keeps registering increasingly larger declines. In the first quarter, residential investment fell at a 26.7 percent annualized rate, the ninth consecutive quarterly decline and the biggest since 1981.

Home sales and prices continue to plummet. Until buyers step in to absorb the glut of homes on the market, compounded by foreclosed properties dumped on the market at a time when credit availability is constrained, it’s hard to see why home construction should pick up anytime soon.

The deterioration in the value of a household’s main asset has sapped consumer confidence and spending. Spending rose 1 percent in the first quarter, the smallest increase since the 2001 recession.
…
The financial strains will eventually abate, but the effects from the credit channel will linger, taking their toll on the real economy.

“Phase Two of the crisis is coming from rising unemployment, rising commercial real estate vacancy rates and falling profits,” says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. “This will precipitate problems in credit card, auto loan, commercial real estate and high yield corporate debt. We are in the eye of the hurricane right now.”

Even the eye isn’t looking so great.

From the AP:

Pre-emptive strike launched against more NJ rebate cuts

A pre-emptive strike is being launched against the possibility of additional cuts to New Jersey’s property tax rebates.

AARP New Jersey plans to rally at the Statehouse on Monday. It’s decrying talk of more cuts to the state-funded rebates, which help homeowners combat the state’s high property taxes, which average $6,800 per homeowner and are twice the national average.

“There are fundamental flaws in the state’s property tax system, and until those are resolved we cannot falsely balance the budget on the backs of the people struggling to pay their property taxes,” said Marilyn Askin of AARP New Jersey.

Democratic Gov. Jon S. Corzine has proposed eliminating rebates for households earning more than $150,000 to help slash spending amid budget troubles.

Under his proposal, households earning up to $100,000 would still get rebates averaging $1,115, while those making between $100,000 and $150,000 would get $665 after getting $960 last year. Renter rebates would drop from as much as $350 to $80, while senior and disabled citizens would still receive $1,266.

Now Open, Part II!

Prior weekend thread closed due to comment overflow