Unfortunately, when the housing bubble bursts, it’s not going to just manifest itself in home prices correcting. We’re going to see alot of pain in many of the housing related industries, including construction, etc. Much of the job growth we’ve seen in the past few years has been directly related to the housing boom. When the boom goes, so do those jobs, putting further downward pressure on real estate, in a viscious positive feedback cycle.
I’m not sure how I missed this Businessweek piece last week, but it’s a big one that pushes Northern NJ into perhaps the riskiest position in the country.
Where a housing bust will hurt most
Hardest hit will be areas where construction is providing the most new jobs, not necessarily the places that have seen the greatest appreciation.
That’s raising a crucial question: If the housing market turns south, where is the economic damage likely to be the greatest? Places where prices fall a lot will feel the hit, of course. But the greatest economic impact may not come where prices slide the most. Instead, the regions that see the most pain probably will be those where homebuilding has been a major source of new jobs. A decline in housing could accelerate job losses in the entire local economy, as happened in Los Angeles in the early 1990s, when aerospace layoffs and an ensuing housing slowdown led to a 10% decline in overall employment.
Where construction is doing the heavy lifting
1) Bergen-Passaic, NJ 71%
2) Columbus, OH 68%
3) Buffalo-Niagara Falls, NY 62%
4) Riverside-San Bernardino, CA 33%
5) San Diego, CA 31%
6) Milwaukee-Waukesha, WI 29%
7) Phoenix-Mesa, AZ 25%
8) Oakland, CA 24%
9) Cincinnati, OH-KY-IN 23%
10) Los Angeles-Long Beach, CA 22%
Regions that are heavily dependent on housing for employment growth will suffer more than most when a downturn comes. And there’s no doubt that a reversal in the market will come eventually. Nationally, the economy’s dependence on housing is worrisomely heavy. Since the beginning of 2000, residential investment — i.e., the construction and remodeling of homes — has grown 32% after inflation, more than double the 14% growth of U.S. gross domestic product. Economy.com chief economist Mark M. Zandi calculates that one-fourth of America’s economic growth since 2000 is due to housing.
…
So there you have it folks, there is a good chance that Northern NJ might be the riskiest bubble market in the country. Not only does our housing market stand to fall rather significantly (20-30% by some estimates), but we may also lose a significant number of existing and newly created jobs.
Caveat Emptor!
-Grim
Great, let it crash. My wife and I had to go through hell a couple of years ago practically begging the sellers to accept our offer for a beat up Piece of S*** cape cod. F*ck ’em all. I really feel for first time buyers, it’s an absolute shame what they have to go through.
This piece has me a bit more concerned than I previously was. While I knew RE related jobs did spike here, I had no idea that the spike was this significant.
This almost entirely discredits anyone from using job growth in NJ as one of the reasons the bubble won’t burst here. The potential fallout due to lost jobs will only cause more pain. It won’t matter that home prices are going to fall, affordability will still be difficult due to a significant decline in jobs.
-Grim
I think we can say the same thing about NY metro area. I am in IT. When the .com bubble burst. 3 of my co-workers become RE agents in manhattan.
I have been saying that bubble is so bad in bergen county and so many jobs were all real estate related.
One friend just bought a house for $650K and plan to demolish it and build it bigger.
Well, I have been waiting for something like this for a year now.
Let it crash. so I can buy them back at 30-40% below the current level in 2 years.
Wow! North Jersey is right up there. Its interesting, I am waiting for a crash as much as anyone, but I think that it will be a lot messier and complicated than many are making it out to be. Nobody will agree on where housing prices should be for years. The economy as a whole will change, and in some way, that will affect all of us. So whats the next bubble going to be?
Agree, I firmly believe prices will fall significantly. However, with lost jobs, stagnant wages, higher rates, and tighter lending, there will be no support to keep housing prices propped up. The nail in the coffin will be the proposed tax changes. All of this combined will make real estate the worst investment you’ll ever make.
grim
A cold cold winter is approaching and I am not referring to the winter season.
LOL!
Prudence and thriftiness will be rewarded once again. Be patient.
i don’t think we’ll see housing crash overnight. i expect a slow slide starting now into at least 2008. these things IMO don’t unwind overnight. there are too many players at the table and too much money still chasing abysmal yields. a few years should allow the various pressures to work their magic.
I agree that this scenario will take longer than we all think to play out. One of the major players in the crunch will be the ARM recasting, and the IO and Neg Am IOs coming due. Since those types of mortgages are typically taken in 3 and 5 year flavors. Most people that took out typical 30y fixed mortgages can likely make the payments (albeit at a significant reduction in quality of life). It’s a very different scenario for those who have taken out ARM, IO, or NegAm products; if those payments skyrocket, it may push them well past the possibility of affordability. We’ll likely start to see the first wave of those coming due early next year (Q1 2003).
grim
I don’t think this first down wave in prices will take long something like 20% then maybe a little pause then it heads lower again.
This is the biggest bubble in history. The leverage associated with this bubble is enormous. Unlike the stock market many many many people are living off of this real estate bubble. When it slows dramatically many people will be unemployed and unable to find a job with this kind of pay. The NJ job market will stink. The pharma companies, Lucent, AT&T major providers of high paying jobs are under massive pressure.
This real estate mania is far worse than early 1990’s in my opinion.
We are already seeing price reductions of 10-12% from insane levels to insane levels..but we have another 30% to go on house prices and 50% on condos.