Is the decline over or just beginning?

From NJBIZ (Great site if you aren’t already a visitor):

Home Mortgage Woes Are Spreading Fast

n the fourth quarter of 2006, mortgage delinquencies in New Jersey hit a four-year high, with 4.52 percent of all loans past due. That marked the highest level since the fourth quarter of 2002, when delinquencies reached 5.25 percent, according to a report released this month by the Mortgage Bankers Association (MBA) in Washington, D.C. The MBA also indicated that foreclosures started in the state were at a four-year high, with 0.43 percent of all loans entering foreclosure during the fourth quarter of 2006. This figure matched the last peak, which came in the second quarter of 2002.

“The speed with which these loans are falling over, and the depth and breadth of how many of these loans are falling over, is much greater than anticipated,” says Keith Gumbinger, vice president of HSH Associates, a financial publisher based in Pompton Plains.

The problem is most acute with subprime mortgages, high-interest loans for borrowers with poor credit that account for about 20 percent of the overall mortgage market, according to Gumbinger. Delinquencies are also creeping into the prime market and the Alt-A market for borrowers whose credit rating falls between subprime and prime, he says.

Much of the mortgage fallout stems from loose lending practices, says Gary Shilling, president of A. Gary Shilling & Co., an economic consulting and investment advising firm in Springfield. He says such practices include settling for a lack of documentation on borrowers’ incomes and assets, and writing loans for more than 100 percent of the value of purchased homes.

Shilling says mortgage delinquencies are coming to a head now because rates are resetting on mortgages that originated in 2005, when house prices were at their peak. Prices have since declined, leaving borrowers with little or no equity to fall back on.

In response, lenders have become “fairly indiscriminate” about reversing loose lending practices, says Shilling. “They’re tightening up across the spectrum, so it’s going to affect not just the subprime market, but also the Alt-A and the prime market.”

“When they tighten the standards, it is going to change the affordability for people who are purchasing homes,” says Bill Hanley, president of the New Jersey Association of Realtors (NJAR) in Edison and manager of Weichert Realtors in Metuchen.

This will create a ripple effect in the housing market, Shilling says. “You simply knock out that whole subprime market,” he says. “The people who would be buying the starter houses from somebody who wanted to move up are no longer available.”

With subprime borrowers representing about 20 percent of new mortgages, tighter credit standards could eliminate more than half that 20 percent from the housing market, Shilling estimates.

“There’s no question that the tightening of mortgage standards will push some home buyers to the sidelines because they won’t be able to afford homes without these highly leveraged, risky mortgage products,” concurs Jeffrey Otteau, president of The Otteau Appraisal Group, an East Brunswick-based real estate consulting company.

Otteau says the state’s housing market is on the road to recovery. He estimates that New Jersey currently has 59,000 homes for sale, compared with 68,000 three months ago. In January, he notes, home sales were up 10 percent from January 2006, and the market had an eight-month supply of houses, compared with a 10.6 month supply in January last year.

Shilling disagrees. He projects a 25 percent drop in house prices from their peak in October 2005. “Sales could be weak through 2008,” he says. “I don’t look for prices to bottom until the second half of next year. There is a tremendous amount of inventory.”

Shilling says that prices are also expected to fall because home sales peaked in September 2005 and the current spring season marks the end of the normal 18- to 24-month lag between a decline in sales and a drop-off in prices. Prices are already down about 3 to 5 percent from October 2005, he says. “We think there’s a lot more to go, because it would take even more than that to bring house prices back to the normal relationship they would have with incomes, with rents and with general prices.”

This entry was posted in New Jersey Real Estate, Risky Lending. Bookmark the permalink.

35 Responses to Is the decline over or just beginning?

  1. chicagofinance says:

    “From NJBIZ (Great site if you aren’t already a visitor):”

    I heard “” was a great site, but the administrator was too cheap to spring for real bandwidth, so I stopped going there. Penny wise, pound foolish. :P

  2. James Bednar says:

    $400-$500 a month.


  3. BC Bob says:


    Stop the nonsense. Markets change, popularity grows, bandwidth increases, etc… Time to institute a pay structure, a pay per view.

  4. crossroads says:

    did you e-mail Otteau a couple of weeks ago when he called the bottom? I think you mentioned you might. just curious

  5. chicagofinance says:

    James Bednar Says:
    March 26th, 2007 at 6:01 pm
    $400-$500 a month

    grim: Maybe if you cut back on the designer coral and the PCB fishing expeditions you could save money and skip the radiation pills.

    You gotta think outside the box…..or in your case the “tank”.

  6. Pat says:

    Survey (sorry if this duplicates any other post).
    “Most renters are not staying out of the housing market for fear that prices will go down; instead 40 percent said the main obstacle holding them back from a purchase was that they didn’t have enough money to afford a home, according to our poll. The share of renters citing that they didn’t have enough money was even higher among renters living in the Northeast and West, where prices are highest…

    The surveys were conducted from March 17 through March 18, 2007.”

  7. gary says:

    “Is the decline over or just beginning?”

    For the 95% of the nation, it’s just the beginning. For the NY metropolitan area, it’s over.

  8. BC Bob says:

    For new visitors. Gary Schilling wrote a great piece regarding housing. This article was posted here in the past.

    “A move from high to no or even low rates of house appreciation would probably force many to live within their incomes, with significant negative effects. Of course, the more house prices fall, the quicker they will accept the demise of rapid real estate appreciation and adjust down their spending.”

    “The 25% or greater decline in house prices we foresee will sire considerable consumer spending retrenchment that almost guarantee a major recession. Note the close link between the Homebuilders’ Sentiment Index, which has collapsed, and real consumer spending.”

  9. WaitingToBuy says:

    Check out and for a lot cheaper dedicated servers. I used both of them. is better.

  10. Clotpoll says:

    BC (8)-

    Schilling has been beating this carcass for some time now. Looks like he’s grasping for more technicals to confirm his bias. His logic has the sound of reason…but why aren’t his conclusions being reflected in corporate earnings? We’re all supposed to be waiting with bated breath for the pullback into single digits, but it’s not happening.

    I think the spread of housing’s problems triggering a recession is a valid point of discussion, but I also believe an egghead academician is not a person to look to for a balanced, reasoned argument. I wonder if Mr. Schilling is a bitter renter.

    That being said, David Lereah isn’t a reliable source, either.

  11. Clotpoll says:

    On second glance, many of Mr. Shilling’s charts are a bit on the dated side. I’d like to see the updated ones when they come.

  12. investorDavid says:


    why don’t you set up a PO box for donation?

    It’s not fair that the entire operation cost comes out of your pocket on top of your hard work.

    Let’s have a donation drive once a month.

  13. BC Bob says:

    “I wonder if Mr. Schilling is a bitter renter.”


    Is he a wannabe or just a member of the LOD’s??

  14. sas says:

    If you start accepting donations,
    I highly suggest anon donations.

    You may never know whom will give you a donation, but yet expect something in return.

    If its done totally anon, then no harm no foul. If it can be done?

    They still find floaters in the meadowlands.


  15. sas says:

    Too bad Intel doesn’t do investments in the USA anymore.

    I hope you are all teaching your kids how to speak Chinese too.

    “Intel plans $2.5B chip factory in China”


  16. James Bednar says:

    did you e-mail Otteau a couple of weeks ago when he called the bottom? I think you mentioned you might. just curious

    Didn’t get a response.


  17. investorDavid says:


    A good idea of Anon donation.

    But in reality, it doesn’t work.

    I once ran a site and ask for anon donation. I received Zero donation.

    And what can a person possibly expect by making a donation? buying a house cheaper?

  18. James Bednar says:

    You gotta think outside the box…..or in your case the “tank”.

    Broke down the tanks and moved the livestock a few weeks back. I’m tankless right now. Too many hobbies, too little time.


  19. sas says:

    ” Too many hobbies, too little time”

    back in my day, I use to say the samething…….. about womens.

    he he ;)


  20. Zhang Fei says:

    BCB: “A move from high to no or even low rates of house appreciation would probably force many to live within their incomes, with significant negative effects. Of course, the more house prices fall, the quicker they will accept the demise of rapid real estate appreciation and adjust down their spending.”

    Isn’t it possible that homebuying could *decrease* discretionary spending? After all, if you’re making mortgage payments on a second-hand home that are twice what you would have paid in rent, you’re not exactly flush with cash to buy stuff. In fact, I would think that renting gives you more scope to max out your credit cards, since you can afford bigger credit card payments with the balance of the money that isn’t being shelled out on mortgage payments. Somebody please point out the fallacy in my argument, since a pro like Shilling must have looked at more angles than me.

  21. Clotpoll says:

    Evidently, all it takes for an agent to sell houses now is to channel the supernatural (or whatever New Age drivel is the philosophy du jour). To wit:

    “The internet makes the strangest friends. It’s funny how someone can read your blog, offer you a job, and be happy to partner with you. That’s the way it was yesterday for me.

    Did you ever wonder how you get sudden energy? Or you can gain strength in negotiating? Well that’s the power I felt today. Whatever negative energy force was around me lifted, and I felt super human. Got my buyer their house, and did it quite by accident, will list a young couple’s house, and negotiated a nother house I’ve listed. So what’s different? Is it me? My office environment?

    No, I think it’s my Terminator jacket I bought from Universal. That’s it, I’m the Terminator Realtor. Watch out.

    So I hope my positive energy stays up, and I plan to keep the jacket on until Spring hits, or at least until I feel confident enough that I don’t need a thick skin to negotiate, but maybe it’s just me that’s the negotiator, and not the leather.”

    Lifted from a NJ agent’s blog. Shall remain nameless.

  22. Clotpoll says:

    Zhang (20)-

    Seems counterintuitive, but the first thing most homeowners purchase after closing title is a car. Second and third on that list are furniture and improvements to the home.

    The purchase of housing is a big stimulus to consumer spending. That’s why Shilling and his ilk are reading the tea leaves, looking for the spread in housing/mortgage weakness to affect the larger economy.

  23. Clotpoll says:


    Time to monetize.

    BTW…I have some really cool banner ads I’d love to try here. Nothing too obvious; just some nice, subtle, feel-good things along the lines of “this is your last chance this century” or “special 117% financing for qualified buyers”.

    You know…classy.

  24. RentinginNJ says:

    Otteau estimates that New Jersey currently has 59,000 homes for sale, compared with 68,000 three months ago.

    This is a patently disingenuous argument. October inventory is always higher than January inventory. After October, inventory starts to drop as listings expire and sellers give up for the season, intending to relist in the spring. January is always a lowpoint in the inventory year. This is a normal seasonal pattern.

    According to JB’s chart, this has been the case for at least the past 5 years.

  25. chicagofinance says:

    grim: FYI on three occasions today I posted something, it was accepted, I saw it in the thread, and then when I checked back later it was gone.

  26. Clotpoll says:

    BC (13)-

    He’s an academic…from a known Ivy-league enclave of Bolsheviks.

    I don’t claim him for my side; I hope you guys wouldn’t embrace him, either.

  27. Clotpoll says:

    Lots of 404 errors now.

  28. RentinginNJ says:

    Somebody please point out the fallacy in my argument

    Your argument is logical and makes perfect sense. What you leave out, however, is the psychology of “the wealth effect” on buyers. When homes increases in value, homeowners suddenly feel wealthy; and on paper, they are more wealthy. Why save money when your house is doing it for you? No need to save for retirement, your house is your ticket to a cozy retirement. Better yet, why not cash-in some of that newfound wealth? Buy a new car, take a vacation, or get that new 60” plasma TV.

    When home prices drop, people again see the need for savings and living within their means.

  29. syncmaster says:

    Clot #21,

    Why keep her nameless when her blog pops right up when doing a google blog search on the text you posted?

  30. sas says:


    This chicken neck is bought and paid for.


  31. James Bednar says:

    grim: FYI on three occasions today I posted something, it was accepted, I saw it in the thread, and then when I checked back later it was gone.

    Let me know if this continues today, I enabled page caching yesterday afternoon to try to reduce the server load. One unfortunate side-effect is that the cached page isn’t always redrawn. If performance improves today, I’m going to turn caching off.


  32. osnix says:

    [hosting topic] i don’t think that bandwidth is the problem here w/ post disappearing.

    if you are shopping around for a new dedicated provider, i have servers at rackshack/, serverbeach and i’d recommend for their price/performance/personal support over either ev1servers or serverbeach.

  33. James Bednar says:

    It isn’t bandwidth, it is both webserver and database load. WordPress is a completely dynamic PHP app, every page needs to be built through a mix of complex code and queries. Once concurrent users start to add up, neither the webserver nor database can handle the load generated.


  34. Clotpoll says:

    sync (21)-

    As you can tell, I’m one step above pure Luddite. I didn’t even know you could do that.

    That broad is nuts. And…she manages other agents.

  35. JY says:


    Can you compile the PHP? IIRC, it speeds things up about 10x.

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