Most readers here will know what my answer will be, it’s a number I’ve quoted time and time again on the blog, 30%. It’s what I call the magic number for Northern New Jersey. If you calculate what the a home price should be through income and compare it with historical norms, you get an approximate 30% overvaluation. If you compare the equivalent rent of a home to the purchase price, you find that it’s selling for a 30% premium. Housing prices in Northern NJ have detached from their fundamentals and gone off on their own tangent, and done so by that magic number (and even more in some areas, my calculations were using census and other median data).
Saying Northern New Jersey home prices are poised to fall 30% is certainly going out on a ledge, however, it seems I’m not the only one who has calculated figures in that range.
Most overvalued housing markets
Sixty-five of the nation’s 299 biggest real estate markets are severely overpriced and subject to possible price corrections.
That’s according to the latest (third quarter) Housing Market Analysis conducted by National City Corp, a financial holding company, in conjunction with Global Insight, a financial information provider.
…
National City arrives at its estimates of what the typical house in these markets should cost by examining the town’s population densities, local interest rates, and income levels. It also factors in historical premiums and discounts for each area.
Overvalued Markets
Atlantic City, NJ 59%
Ocean City, NJ 47%
Edison, NJ 31%
Newark, NJ-PA 27%
New York, NY-NJ 27%
Trenton, NJ 20%
Wilmington, DE-MD-NJ 18%
Camden, NJ 18%
Allentown, PA-NJ 13%
For those of you that might not grasp exactly what a 30% reduction in home prices locally will mean. Take a home that is typically selling for $500,000 in this area, I’m sure I know exactly what image pops into everyones head. It’s a 40 year old cape that hasn’t been touched on a postage stamp lot, or even worse. Well, reduce that price by 30% and you’ll get what I think the true value of the home is, $350,000. Still expensive? Sure it is, this isn’t Oklahoma, we pay a premium to live in this area, but then again, we always have, nothing changed recently.
Caveat Emptor,
Grim
30% is a good starting point, but fundamentels can change (erode) & things tend to overshoot on the downside when reverting back to the mean.
Remember….North Jersey (employment) is heavily tied to RE & creative financing will be drying up (according to the FED).
30% may turn out to be conservative when looking in a rear-view mirror 10 years from now. We shall see.
Thanks again for a great blog GRIM & best wishes to everyone for the coming New Year!
IMHO, I could see a larger decline happening with the current trend of slower population growth and supply being added. Also,the current loss of good paying jobs in telecom and big pharma reducing high incomes in the state doesnn’t help to bolster prices. Also the psychology of bubble bursts often bring about a form of risk aversion. If IO’s and arms blowup in recent borrowers faces and bankruptcy forces them out of the real estate market ther could potentially be an over supply.
Could be worse.. there’s thousands of units being built all over and under construction. Any speculators in the market currently are most likely going to have cold feet before jumping into any new ones. It was just like tech fall out. Everyone wanted to have those IPO’s, but once they took a big dive, people still didn’t see a bargain and kept waiting, most of them just walked away from the market entirely because it was too ‘risky’..
Same should happen for housing. Many people will realize they don’t need 2nd or 3rd homes. Many “newbie” landlords are going to find out the hard way that they won’t be getting any return on their investment when their tenant calls them with all their problems.
Do you remember seeing those PETS.COM commercials? Remember the sock puppet when he sang “What goes up.. must come down..”? Little did that puppet know he was predicting his own demise.
As more and more publicity hits this market; it’s drawing more and more attention. It’s only a matter of time before a huge probe is done on the mortgage & RE industry. Appraisers over appraising. Companies over-lending. When that happens, you’ll see an immediate market reaction. Would you trust your money in a financial company that owns the debt of people who have IO loans?
Do you wanna be the sucker?
No one does.
-Richie
I agree with those numbers.
30-40% falls is necessary to get this insanity back to normal.
This is good and healthy. Many real estate pro’s (cheerleaders) would say otherwise.
A healthy correction is good to cleanse the excesses of thes housing market. So it goes down for 2-3 years like 40% so what.
If incomes do not start growing I don’t see how the fools using creative financiing to get in will ever break even or just go bankrupt. Tough luck.
here’s a good buy at the top story from south orange, nj. 2 bedroom condo unit on mews lane just closed for $450k. exact same unit with similar appliances and bathrooms was listed at $419k and 2 months later (today) dropped to $409k. The buyers of the $450k condo have already lost $41k or almost 10% of the purchase price in valuation. It’ll take them a few years to pay off that much principal. They aren’t going anywhere for quite some time. This is the downside of buying in today’s market. If you’re on the losing side of the bet, you’ll have no choice but to stay in your current residence for a number of years just to break even.
To anyone familiar with Hoboken, what are your thoughts on it falling dramatically and soon (by soon i mean next 6-9 months)
I own an 800 sq ft 1 bedroom and am feeling jumpy about selling it in the Spring.
I’ve been in Hoboken a decade so I was planning on moving home to Philadelphia burbs next summer/fall anyway.
Any imput appreciated guys !
Amazingly, I still see that buyers are overbidding on homes that have been on the market for more than thirty days in certain areas like Montclair, Glen Ridge, West Orange, South Orange, and Maplewood. As a former realtor, here is some advise: (1) if there was no offer made within the first week of the house being on the market, then the list price was too high; (2) if after seven days has passed, then the buyer needs to start questioning: What is wrong here? Evaluate and question to understand the seller’s motives—sometimes you get it, sometimes you don’t; (3) if the house has been on the market for 30 days or more, DO NOT make an offer above the asking price no matter what information your realtor is feeding you. Your realtor may convince you that you are bidding with some imaginary buyers—remember they always have someone putting in a bid on the same day that you are planning on making an offer. Please—no house is work more than the last comparable that sold in your neighborhood; (4) Always, always, always ask for comparables that have actually SOLD in the neighbor hood with days on market! Use the tools that have already been posted on this blog. Lesson in Action: In my quest to dump my last personal piece of property last summer, before the fall, I arbitrarily placed a high price on it and some person picked it up for almost $100K over my outrageous price—it took all but 2 days to have a contract in place and the buyer waived all rights to an inspection and mortgage. This is not a smart thing to do if you are a buyer—I think it’s stupid! I loved that house, but as the market heads south—I love the fact that the money is in the bank; (5) there is nothing wrong with renting while sitting and waiting this out. There are many landlords who have nice rentals—I picked up a rental house for less than a luxury apartment. Patience pays off folks; (6) People forget that once they buy the house, they have to maintain it! If you buy “Third World Charm” make sure you have the money to maintain it, an upgrade it! I see many of homes that will be targets for major price reductions because they failed to keep up their property. And if we don’t see a major bull market in real estate over the next decade—these people have the most to lose. Who wants to buy your dump in a buyer’s market.
–This market is in your hands!
Seems to me the if we start getting foreclosures that will be a big driver. Now a question. What are some of the good sites to find out what there is for foreclosures out there. Once you see them increase that will have the impact on the prices.
Thanks
I believe RE prices in NNJ is driven by Manhattan apt prices. Since NNJ is a suburb of NYC.
Do you guys know the how much is Manhattn overpriced???
The CNN report says 27% for NY/NJ. I think Manhattan is more than that.
The report says Nassau-Suffolk is about 43%. If that is true, it should be the same for NNJ towns around NJ transit’s Mid Direct Line. (So Orange, Maplewood, Summit, Chatham, Madison…..) Any thoughts……..
To stonepearl:
If you are not in a prime Hoboken location, get out of dodge!
If you are in a good location, then you may be able to skate until the summer, but the issue here is that you are going from a frothy market (NYC suburb) to one that is less so (Main Line PHI).
chicago
chaoticchild:
Wall Street money is going to start to flow within weeks. The next 12 weeks are going to tell the whole story of how NYC-area will unfold.
Inventory is going to surge in the next 8 weeks. We will see whether the bonus money gets put to work in real estate or in the stock market.
Personally, I think we will see mass hysteria in NNJ starting around late February.
hOW ABOUT BIDDDING 25% LESS THAN ASKING. wE ALL KNOW THE ASKING IS A RIPOFF ANYWAY.
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