New Jersey Real Estate Report

From the WSJ (Hat Tip ChiFi):

Home Prices: There’s No Quick Recovery Ahead

So, is our long national nightmare over? Has the housing market finally hit bottom?

There has been some muted — albeit exhausted — cheering from homeowners in recent weeks. But before we break out the champagne, look out for further potential problems just down the road.
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Prices may — may — be nearing the bottom in many markets. But beyond the headlines, there are plenty of reasons to stay cautious. There may even be fresh dangers just ahead.

And even if prices have stopped falling, it may be years before they start rising sharply again.

First, late spring is traditionally the strongest season in the real-estate market.

And it’s hardly a surprise the market saw some green shoots this time around. It’s enjoying not one, but two, gigantic taxpayer subsidies — an $8,000 refundable tax credit, or gift, for first-time buyers, as well as those cheap mortgage rates. The Federal Reserve has been spending billions of dollars to keep interest rates down.

Both are only short-term fixes. Any sustained economic upturn would be expected to send long-term mortgage rates rising again, dousing the real-estate market with fresh cold water.
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The picture on inventories isn’t as good as it sounds, either. A lot of unsold homes have simply been put up for rent instead, especially in the most difficult markets like Miami. The result? A glut of empty rentals as well.

New waves of foreclosures and distressed sales may be coming, too. In states such as California, it can take many months for delinquencies to turn to foreclosures, which means last winter’s bad news may still be coming down the pike. Meanwhile, vast tranches of teaser-rate mortgages are due to reset later this year and in 2010.

As for the economy: Both unemployment and household debt levels remain at extremely high levels by the standards of postwar history. Either is bad news for housing. The combination is very bad.

Dean Baker, co-director of the Center for Economic and Policy Research, argued in a recent paper that the fundamentals still aren’t great. It still remains cheaper to rent than to own in many markets, he says.

The biggest bubbles usually produce the deepest busts. And the 2002-2006 bubble was a doozy. The bad news may have ended after three terrible years, but maybe not. Japanese housing prices still haven’t recovered from the late 1980s bubble. Western U.S. markets took six or seven years to recover after the last big bubble burst there in the early 1990s.

Yes, there are some hopeful signs, but don’t let them fool you into thinking it’s all clear. It might not be. As ever, anyone making a major financial decision needs to think more about his or her own situation than what “the market” is doing. A real-estate purchase needs to make sense on its own terms. And measure it on cash flow today, not the hope for capital gains tomorrow. When you factor in all the costs, is the purchase cheaper than renting?

If you get a cheap mortgage and you are aggressive on price, you may get a bargain. That’s especially true if the owner has to sell. Foreclosures and other distressed sales are selling for about 20% below the rest of the market. There are opportunities out there. But you can afford to take your time to shop around.

From Crain’s:

Shadow units cast pall

New York City’s condominium market may be in even worse shape than the commonly used yardsticks show.

In Manhattan in the first quarter, sales were halved from year-earlier levels even as more apartments flooded onto the market, leaving it choking on an 18.6-month supply of units. Meanwhile, in the recently red-hot neighborhood of Williamsburg in Brooklyn, sales in the period plummeted by 70% as even more units expanded the property glut there.

As bad as those figures look, they may actually overstate the health of the market. Industry experts point to a growing mountain of so-called shadow inventory that is not reflected in the data. This includes units that are held by developers in soon-to-be completed buildings, as well as those kept off the market by banks and by individual owners who are waiting for conditions to improve before they tack up “For Sale” signs.
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“We are undercounting the housing stock,” says Jonathan Miller, chief executive of appraisal firm Miller Samuel Inc. “And when you have more inventory than the market can absorb, it places pressure on prices.”

In a report on Manhattan residential real estate this spring, Mr. Miller estimated that in addition to the 10,445 condominiums that showed up in unsold inventory, there were as many as 7,000 shadow units.

An analysis conducted by Crain’s, with help from Mr. Miller and brokerage firm Aptsandlofts.com, shows the scope of the problem in two bellwether neighborhoods: Williamsburg and Manhattan’s financial district.

In the latter, there are currently 410 condominiums for sale. But according to Crain’s research—which involved tabulating all the units in a dozen financial district condo buildings—there are also nearly 1,000 units lurking in the shadows. In Williamsburg, meanwhile, feverish building has helped put 2,820 units on the block this year, according to Aptsandlofts.com. But there are almost as many again not yet accounted for; 2,760 units will come on line next year.
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With shadow inventory adding downward pressure to prices, some developers are abandoning hopes of selling their units and are offering them as rentals instead. Rather than collect lump sums at sale, as planned, they will collect monthly rents—and rack up big losses. But at this point, even the rental market is glutted, and the stream of new units shows little sign of slowing.

“More inventory will continue to lower rents,” says Marc Lewis, president of Century 21 NY Metro, who believes that Manhattan vacancy rates are closer to 5% than the 2% reported by most industry players.

Given the dismal market and a lack of financing, few new buildings—if any—will be started in coming months. But scores of properties that were already under construction before the credit crisis of 2007 will hit the market in the next few years.

From the WSJ:

High-End Homes Frozen Out of Budding Housing Rebound

Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. “I can’t even tell you how many I’ve been in over the last two months,” says Joe Stacy, a local real-estate agent.

But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. “We’re extremely oversupplied,” says Sherry Molitor, a local real-estate agent. “Sellers are struggling to realize that we’re back to 2001-02 prices.”

The divide between the mass market and the high-end — generally defined as homes that cost above $750,000 — partly reflects the effects of Washington’s housing-rescue plan, which is producing winners and losers.

Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.

Sales at the lower end are also helped by the large number of foreclosed homes that banks have dumped at fire-sale prices, which has pulled down values of neighboring houses and sparked bargain hunting. Prices in both Las Vegas and Phoenix are down more than 50% from their peaks of several years ago, according to the S&P/Case-Shiller index.
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To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared to 4.4% of the housing market in 2007, according to the National Association of Realtors.
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Inventory of expensive homes is rising. Overall, the inventory of unsold homes in June was enough to last 9.4 months at the current selling pace, down from 11 months a year ago, according to the NAR. But the supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.
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A recent survey by the NAR found nearly three-quarters of real-estate agents said buyers were purchasing smaller houses due to tighter credit requirements. “We’re in a ‘trade-down’ environment for the first time since the 1930s,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
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Having lost large amounts in the stock market and on real estate, “a lot of people are licking their wounds and hoarding their cash,” says Sally Daley, a real-estate broker who sells luxury homes in Vero Beach, Fla. She says many customers are asking, “Do I really need this big a house?”