Housing Bubble Deja-Vu

From the Record:

Area housing slump echoes earlier slide

House prices soar for years, until even small starter homes are out of reach for first-time buyers. The air seeps out of the real estate market, and property sales — and prices — drop.

Sound familiar? That scenario could be describing the housing market of this decade — or an earlier market cycle that took place in the 1980s and early 1990s.

Looking back at that earlier downturn offers clues to how this cycle will play out. One lesson: Housing slumps can last a long, long time.

“Economic wild parties are followed by prolonged economic hangovers,” said James Hughes, a Rutgers economist who follows the New Jersey housing market. “Anytime there’s a sharp run-up like that, you’re going to have to have a correction.”

In the 1980s, house prices rose rapidly as baby boomers began forming households and buying homes. At the same time, New Jersey was shedding its old identity as a manufacturing economy and creating thousands of new, well-paid white collar jobs as pharmaceutical and telecom industries flourished.

From 1980 to 1988, home prices rose 145 percent in the state, Hughes said. Then, around 1988, prices began to fall.

A recession that began in 1990 deepened the housing slump. For New Jersey, it was the worst economic downturn since the Great Depression, costing the Garden State 250,000 jobs and bumping the unemployment rate to 8.5 percent in 1992.

“That reduced housing buying power significantly,” Hughes said.

House prices in the state declined 8 percent from 1988 to 1992 before turning up again. But it took until 1998 before houses returned to the peak of 1988, Hughes said. And if you adjust for inflation, it took until 2002 for house prices to recover to their 1988 levels.

Overall, from 1998 to 2006, home prices in New Jersey rose 135 percent — almost as much as in the earlier boom, Hughes said.

As prices rose and houses became less affordable, lenders began offering exotic mortgages, such as interest-only, no-money-down and no-income-verification loans. Many of these products were aimed at subprime borrowers — buyers who couldn’t get mortgages in the mainstream market.

“The floodgates opened up,” said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains company that follows the mortgage market. “Many, many people who normally couldn’t jump into the fray did jump into the fray.”

But many of them jumped in with mortgages that were time bombs. The loans started out with reasonable interest rates that would adjust upward — way upward — in later years. Now some of those buyers are having trouble paying their loans. That situation is expected to worsen, as mortgage interest rates continue to ratchet higher on many loans over the next couple of years.

Since the peak of the market in late 2005, house prices in the state have declined by 5 percent to 10 percent, depending on location and other factors. High-end houses costing $1 million or more, in particular, seem to be languishing.

“If you bought two years ago, you’re going to sell for less than you paid,” said Jeffrey Otteau of the East Brunswick-based Otteau Valuation Group Inc.

Not all towns have suffered equally. Otteau said that the towns that have held more of their value include those in easy commuting distance of New York City, including much of Bergen and Hudson counties.

But most housing analysts predict there won’t be a rebound before 2009 at the earliest — and some say it will be 2011. That’s good news for buyers, but tough on sellers and businesspeople who depend on a robust real estate market.

“While there are some bright spots, for the most part it’s a bit gloomy,” Otteau said. He predicts prices in New Jersey to be down 7 percent for this year and 4 percent for next year.

And if there’s an economic downturn, housing will be even harder hit.

“If there’s a recession in 2008, all bets are off for housing,” Otteau said. “It would be a collapse.”

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22 Responses to Housing Bubble Deja-Vu

  1. RentinginNJ says:

    House prices in the state declined 8 percent from 1988 to 1992 before turning up again. But it took until 1998 before houses returned to the peak of 1988, Hughes said. And if you adjust for inflation, it took until 2002 for house prices to recover to their 1988 levels.

    Despite the length of the recovery from the last bubble, the recovery was actually helped along falling interest rates. During the 1988 peak, the 30 yr fixed averaged 10.34% it fell to 6.94% in 1998 and 6.54% in 2002. Even if prices didn’t fall one penny, a mortgage payment on the same house fell by 30% from 1988 to 2002 due to falling interest rates (and this doesn’t even include inflation, which makes the fall greater in “real” dollars).

    This bubble was built on low rates. In 2005, the 30 yr. fixed was at 5.87%. It would need to drop to 3.9% to achieve the same “cushioning effect” as we had last time around. Since rates are actually rising, this means one of two things;
    1) prices will need to fall farther since falling interest rates won’t be in play to act as a shock absorber and/or;
    2) This downturn will last even longer than the previous one (think Japan).

  2. crossroads says:

    great point Renting!
    everybody knows about subprime resets which generally happen in 2 years but what about those option arms people took w/ 3-5-7 yaers until a reset?

    lets not forget boomers retiring in 3-7 years. what will that do for inventory?

  3. Secondary Market says:

    my wife and i were in red bank yesterday, as we’ve been looking to buy a house there since may. inventory has remained high but homeowners and realtors are still ignorant to values. any way, i was this close to making a couple of low ball offers (upward 100k less than asking). We had a contract in hand when i told my realtor we should sleep on it; well, here i am today, still with cold feet and fears of recession which will keep me renting for at least another 2-3 months before i think about buying again.
    deep down i think this is the best decision and have to remind my self that 1 missed opportunity today will lead to 3 more in months to come.

  4. crossroads says:

    Where in Red Bank? I lived there from 92-94

    I tried to move back in 97 but it became Hip town and prices soared.

  5. BC Bob says:

    I sold RB, in 2005.

  6. Secondary Market says:

    i think we have looked in every corner of red bank, west side, east side etc. even spilled into little silver and shrewsbury. there are 2 homes we’re interested in. a large range near the tower hill condos and a rehab on marion street.
    prices are still insane there, it really baffles me, yes it is a great location but we’re still at 60 plus minutes to the city for work and 90% of the homes are 100 years old with little updates.

  7. chicagofinance says:

    Secondary Market Says:
    October 28th, 2007 at 9:32 am
    my wife and i were in red bank yesterday, as we’ve been looking to buy a house there since may. inventory has remained high but homeowners and realtors are still ignorant to values.

    SM: I rent in Middletown just over the Navesink. We were looking around the area in June/July when we moved from Hoboken. Just to be clear, there are revals happening and also two big employers in the area are on the ropes (HOV & Vonage). Couple this fact with the closing of the Fort and also Wall Street cuts, and this area is due for a slapdown of epic proportions. Not sure what you are looking for, but waiting until after the Spring selling season in 2008 can’t be anything but a good idea.

  8. Secondary Market says:

    im in weehawken right now and RB offers a central location for both sets of parents. you bring a good point about HOV, i was not aware Vonage was near by but i do know the town is worried about fort monmouth.
    we’re looking for 3br 2bath which seems to be a real challenge in the 350-400 range. i’d be willing to “stretch” a little in price but with taxes ticking up the way they are, i really want to wait for home owners with 1 bathroom to realize 419 is way too much.

  9. crossroads says:

    chifi and secondary,

    I grew up in Middletown and before Red Bank was known as Hip town we called it Dead Bank. The town had a miraculous turnaround and is surrounded by decent towns.but as chifi points out things could get ugly. I’ve heard there is alot of crime on the west side w/ Mexican gangs and such. If there is crime in good economic times what will happen when things get bad?

  10. JBJB says:


    Like Chicago, I rent across the river in Middletown and lived in Red Bank for 3 years before moving.

    Red Bank is a great town, but don’t be fooled into thinking it’s an easy commute to NYC. 60 mins plus is an underestimate. It’s at least 1:15 from RB to Penn Station on the express NJT, and this train is often 5-20 min late, and occasionally 30-50 min late. Unless you live close enough to the train station to walk, you will quickly realize it is very tough to park near the station, this will add another 10-15 to your commute. Tack on however long it takes to get from Penn Station to your job and it can easily get to 1:45-2:00 hr one way door to door. If you work downtown and can afford the ferry it may be a better option, but from RB to Atlantic Highlands or Highlands will take you about 20-30 min to drive in the morning.

    We’ve know many people who live in RB, took jobs in the City, and ended up quitting because the commute just wears you down. OTOH, we have also met folks who live in RB and LS who have done the commute for 20 years, but they tend to have one person staying at home or a job very nearby.

    Anyway, I don’t want to turn you off form RB and Monmouth County because it is truly a great place to live, especially in the summer/fall. But don’t underestimate the hassle it is to commute to the City from here, especially if you are going to be doing 5 days a week.

  11. Heart breaker comp breaker says:

    “If you bought two years ago, you’re going to sell for less than you paid,” said Jeffrey Otteau of the East Brunswick-based Otteau Valuation Group Inc.


  12. AwfulOrange says:

    I grew up in Middletown, Louis Circle just off the Navesink river. Even though I was in M-Town I still had a Red Bank mailing address. My parents still live on Louis Circle and my brother and his wife live on Chatherine Ave a block away. It’s a great place to live but the commute to NYC does wear you down.

    Shameless plug, my mother owns Early Years Preschool in Little Silver. If you have kids and are in the area give it a look.

  13. Confused In NJ says:

    There is so much talk about Creative Financing allowing people to buy homes in NJ with “Zero money down” and in some cases “Negative Amortization”. The old rule required PMI (Private Mortgage Insurance) anytime you had less then 20% of purchase price to put down. If PMI still exists as a requirement, won’t Insurance Companies take a hit on Mortgage Defaults? I don’t see any concerns published on PMI negative effects with massive Mortgage defaults?

  14. Secondary Market says:

    timely plug. we’re actually trying to figure in day care; although we do not have children at the moment. on avg. what would you say the avg monthly expense be for day care?
    thanks for the heads up, you’re right about west red bank, it might as well be tijuana. we drove thru to see how far west we’d settle to escape the lofty prices but the minute you cross the train tracks
    (literally) the town is drastically different.
    in fact the migration seems to seeping in to the east side. we looked at a great home on marion st. that was newly renovated and on the market since February. well, surprise to our realtor we opened the door to a house full of mexicans that have seemed to score a short term lease with the investors. i’m sure the intent was for a couple of laborers to rent out the space but there were mattress all over the place and looked like 5 families were living there. it was embarrassing and a true sign the “investors” that were trying to flip the home are desperate. best part, list price is 525,000 and the home has been reduced to a squatter pad for day laborers.

  15. Secondary Market says:

    here is the realtor.com link to the house i mentioned in post 14. i was going to offer 385K but after seeing all the sqatters renting, i think that is even too much. lol

  16. Hard Place says:

    RentinginNJ makes a great point in comparing apples to apples w/ level of mortgage rates.

  17. bergenbuyer says:

    I think the issue is that many people got a piggy back loan which eliminates the requirement of PMI. If you bought a house with 15% down, you needed PMI. If you bought a house with $0 down 80% ont he 1st mortgage, 20% on the 2nd, I don’t think you needed PMI. I could be wrong as I never did it and paid the PMI.

  18. Secondary Market says:

    17. you are correct, no PMI on 80/20’s and lenders were even doing 1 loan at 100% LTV with Lender Paid MI, which came at a higher rate.

  19. Disgusted with Realtors says:

    I’m sick of realtors. I had one for almost a year. She did nothing. I am now FSBO and am doing my own marketing and am sparking some interest. I had a realtor contact me and tell me he wanted my business I said now but that if he showed the house and sold it to someone I would give him 1%. He had the nerve to tell me that wasn’t enough and realtors would shut me out. I have new for you buddy – the housing market stinks and 1% is better than the nothing at all you are going to get. There is the housing problem right there. Greedy realtors. My house is at rock bottom price just to get rid of it. I have to cover the mortgage on it and that’s all I want to do. Greedy bastards.

  20. FH NJ says:

    I grew up in Middletown, sold after 6 yrs. there in 2005. I rent in Fair Haven but commute to the Middletown train. We use our parents address for the car(s). At 6:30am, it takes 12 min. to get to the train.

    The waiting lists in RB, LS and Middletown are LONG. Therefore, it must not bother too many…The commute, like anything else you get used to. We’ve been doing it for 15 yrs.

  21. FH NJ says:


    I send my 2 yr. old to day care in Middletown, convient to the train. I looked at about 12 different places (Middletown, RB, Lincroft, Holmdel) and they go anywhere from $200-$250 a week depending on there age.

  22. Secondary Market says:

    Thanks for the info. I’m going to sit tight for the next couple of months and hope for sellers to get their expectations in order and come back down to earth.
    quick update on the listing i posted in #15, my realtor told me 450K is the basement price the seller would go. she claims they are not in a rush and do not need to sell in any time soon. sure ok, so let 7 mexican families squatt in your house while you collect 2,000 bucks a month to carry costs. people who buy 450k homes do not want to see empty pizza boxes and mattresses littered all over the floor.

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