Good news for buyers, bad news for sellers: Home prices in North Jersey and nationwide are likely to continue to fall in the first half of 2009, and stay flat for several years after that, analysts say.
Prices for existing homes, which make up the bulk of the market, dropped about 7.5 percent in North Jersey in 2008 from 2007’s numbers, according to data from Standard & Poor’s Case-Shiller indexes and the New Jersey Multiple Listing Service. But home values in this region are still almost double what they were in 2000, before the housing boom began.
And values in the area are holding up much better than the national averages, which were dragged down by price declines of 25 percent or more in troubled, overbuilt markets in California, Florida, Nevada and Arizona.
Predicting the future of home prices is a tricky business (after all, it was only a few years ago that some people thought house prices could never go down). Home prices reflect a complex stew of forces — including the economy’s overall health, interest rates, mortgage lending standards and workers’ incomes, among other factors.
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“If you look at it from the long-term standpoint, one of the fundamental determinants of house prices is income — fundamentally, the ability of people to pay,” said LaVaughn Henry, a senior economist at the PMI Group in California.
After all, you make your monthly housing payments out of your paychecks. When housing prices rise much quicker than incomes, eventually would-be buyers can’t afford homes, and prices have to fall to more affordable levels.
That’s what we’re seeing now. From 1998 to 2006, when New Jersey incomes rose only about 10 percent, house prices in New Jersey rose 135 percent, according to James Hughes, a Rutgers economist. (Normally, over the long term, national house prices rise about 1 percentage point above the inflation rate, or about 4 to 5 percent a year.)
With the economy in recession, incomes are very unlikely to rise much this year. Employers are cutting jobs, not hiring workers or giving big raises to their employees.
“People aren’t going to be in a position to be purchasing homes if the recession continues and the already-high unemployment rate kicks even higher,” said Paul Merski, economist for the Independent Community Bankers Association.
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When a lot of households are being formed — as in the mid-1980s, with baby boomers starting families — the demand for homes pushes up prices rapidly.
But what happens when the baby boomers start retiring in large numbers?
“The big question is whether the boomers are going to want to move south, as their parents’ generation did,” said O’Keefe. If baby boomers’ properties hit the market in a big wave, that could push down house prices.
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“At the end of the day, a lot of what happens to northern New Jersey house prices will be driven by what’s happening in the financial markets,” said Henry.
And Wall Street has suffered a meltdown, with job losses expected to total in the tens of thousands. So financial professionals, typically the target market for luxury homes in affluent North Jersey towns, won’t be trading up to new McMansions anytime soon.
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During the housing boom, many homeowners got exotic loans with artificially low teaser rates, which helped them buy houses that they couldn’t afford. The result has been a disaster for the financial industry and the economy, destroying Lehman Brothers as well as a number of mortgage lenders.
These days, lenders have tightened their standards.
“Never again in our lifetimes are we going to see no-documentation loans, zero-down loans and all those toxic formats,” Hughes said.
That’s good news for the health of the financial system, but it means a lot of people who would love to buy simply can’t get mortgages.
That tends to depress house prices, because it lowers demand.
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Construction of new homes in New Jersey is likely to drop below 14,000 units in 2009, the lowest since World War II, O’Keefe said.
“I can’t imagine there are many builders who think that 2009 is the year to get ahead of the market,” O’Keefe said.
As builders sell off their inventory, the supply of new homes for sale will shrink.
“That will ultimately help to bring about stabilization in prices, because builders are not adding more units on the market,” Hughes said.
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The number of distressed sales has risen dramatically in New Jersey. There were more than 46,000 foreclosure actions filed in New Jersey in the 12 months ended in September, up 46 percent from the same period a year earlier.
“When foreclosed homes go on the market, that puts downward pressure on home prices because it increases the supply, and these homes are sold for fire-sale prices,” Merski said.
Short sales are also on the rise. In short sales, the lender agrees to take less than the amount owed on the mortgage, so a financially stressed homeowner can unload the property at current market values. Like foreclosures, these sales tend to depress property values nearby, because appraisers and lenders base price comparisons on recent sales in the area.
