New Jersey Real Estate Report

From Reuters:

House prices to drop much lower: Greenspan

big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.

Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.

“It’s a difficult situation, there is an enormous overhang on the real estate market,” Greenspan was quoted as saying. “Many buildings which just have been finished can’t be sold …”

“So far, prices have dropped only slightly. But it was enough to cause alarm around the world,” he said. “Prices are going to fall much lower yet.”

“However, it is too early to answer the question about a recession. We simply don’t know yet. It depends on how flexibly the economy can react,” he said.
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“There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States,” he said.

“The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure,” he said.

“Nobody could do anything about it, neither us nor the European Central Bank. We were powerless,” he said.

From the Boston Globe:

Predatory borrowers

THERE IS little doubt that the unraveling of the housing market will cause significant hardship to many homeowners who believed that the American dream would never turn on them or their biggest financial investment. Similarly, the pain inflicted upon unsuspecting and often minority borrowers by predatory lenders will also be devastating as housing prices deflate to more realistic levels.

Putting true victims of the housing crisis aside, there is a category of debtor that could be called “predatory borrowers.” These are individuals who have treated their homes like bottomless ATM machines and have played the housing game like “Wheel of Fortune.” These borrowers purchased homes with little money down, with perhaps no income verification, and at debt levels they knew they could not sustain if their homes did not continue to appreciate.

Like inebriated bar patrons who blame the bartender for serving them too much, a segment of today’s borrowers willfully chose to borrow beyond their means and are now blaming the lender. A number of these borrowers, now charitably known as “victims,” also chose to borrow on one house to buy another and collateralized their future in search of speculative riches.

There is little question that truly predatory lenders, whose sole strategy was to dupe unsuspecting and often unsophisticated individuals into borrowing, should be punished. But for those borrowers who mortgaged a lifestyle they knew they could not sustain, the system should not come to their rescue.

It is remarkable how quickly the sentiment surrounding the housing market has turned from embracing accommodating lenders who facilitated people’s ability to benefit from the unending price spiral of real estate to now vilifying the same lenders for making borrowing too easy. In an upcoming election year, politicians simply lack the courage to make individuals accountable for their actions. Rather, it is more expedient to blame faceless corporations for any negative outcome to the consumer simply because more votes come from homeowners than from corporate boardrooms.
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As children, we were taught that consuming too much cake and ice cream would have the consequences of a stomachache. But for many adults, who have gorged themselves on too much debt, their financial indulgence is now somehow someone else’s fault and they should not have to pay the price.

If the government does come up with some plan to bail out irresponsible homeowners, does this mean that Uncle Sam will get a piece of the upside if the market snaps back? While we are at it, should the government also provide a safety net to those in Las Vegas whose luck has gone sour at the poker table or unfortunate stock market investors whose risky stock purchases did not pan out?

It is time to separate the true victims of the housing meltdown from those who created their own house of cards. If homeowners own multiple properties, they should be excluded from government help, and the same should apply to those who have refinanced their mortgages to pull the maximum dollars out of their homes.

From the New York Times:

Will the Fed Reverse the Housing Slump?

The Federal Reserve sent the stock market soaring yesterday. So can it stop the decline in house prices, too?

Don’t count on it.

From the late 1960s until the year 2000, the price of the typical American house and the income of the typical family moved almost in lockstep. The occasional real estate boom caused house prices to rise a bit more quickly than incomes, but prices would always settle down again. In 2000, the median home cost about $130,000, roughly three times the typical household income — almost precisely the ratio that had held since the ’60s.

Then came a real estate boom unlike any before it. By last year, this ratio of housing prices to incomes had suddenly shot up to 4.5. For it to return to its old level, home prices would have to fall by an almost unthinkable one-third, and probably more in California, Florida and the Northeast.

There are good reasons to believe that the real estate slump won’t be quite that severe — more on that shortly — but there is also reason to think the slump still has a long way to go.

That’s the main reason the Fed went further than most Wall Street analysts expected yesterday, cutting interest rates by half a percentage point and announcing, in effect, that it is now on a recession watch.

And whether house prices begin falling noticeably or merely stagnate for years until incomes catch up, it’s clear that the real estate bust has become the dominant force in the economy.
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The exact path that house prices will take over the next few years is, obviously, unknowable. But there is a good deal of evidence to suggest that the typical home last year was overvalued by something like 20 percent. I wouldn’t necessarily argue with anyone who insisted on 15 or 25 percent.

The reason it may not be bigger is that mortgage rates remain a good bit lower than they were for much of the last generation. But they’re not so different as to suggest that home prices have returned to rational levels. Mark Zandi, one of the people who runs Moody’s Economy.com, ran an analysis for me this week in which he looked at home values, mortgage rates, tax rates and incomes going back to 1968. Taking all these into account, he found house prices were about 20 percent too high.

Interestingly enough, Frederic Mishkin, a Fed governor, made a presentation at the Fed’s annual Jackson Hole conference last month where he sketched out the effects of a hypothetical housing downturn in coming years. The price decline he chose was 20 percent.

The scariest part of a national decline like this is it could be more like 40 percent in some parts of the country. That’s almost difficult to fathom — and, in fact, construction would probably come to a halt in those places, cushioning the price drop locally and even a bit nationally. But I don’t think 40 percent is out of the question in a place like the southwestern coast of Florida.

Remember that all of these declines are relative to income or inflation. The median house price nationwide has already started falling a bit since last year, according to the S&P/Case-Shiller Index, the most accurate measure. If actual prices were to fall 10 percent over the next year or so and then do nothing for following five years, that would add up to a 20 percent decline, adjusted for inflation.

That would be a big deal. It would lead to lost jobs, less consumer spending and slower economic growth. It would be the worst housing downturn on record.

From New York Magazine:

Is New York’s Real Estate Bubble About to Pop?

A bubble’s destiny is to burst. Otherwise, it’s not a bubble. This year, however, the New York housing bubble—the ominously overinflated market that experts have been warning us about since the current run-up in housing prices began—has begun to seem more like a protective sphere. West of the Hudson, things are looking bleaker by the day: 180,000 homes fell into foreclosure nationwide in July alone, with up to eleven times that figure feared by the end of 2008. Sales of existing homes were down 17 percent in the second quarter; for the fourth quarter, Goldman Sachs forecasts a 15 percent nationwide price decline. “We’re in the worst housing recession in 40 years,” says Nouriel Roubini, professor of economics at NYU. “It’s an absolute disaster.” In our charmed city, meanwhile, the weather—for the moment, anyway—appears to be fine.
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As Gyourko’s colleague, Harvard professor Edward Glaeser, puts it, New York’s boom is “driven by the reinvention of the city as a center for idea creation in finance and a playground for the prosperous.”

But what if the prosperous stop prospering and don’t feel like playing? Though some experts believe that the current subprime-mortgage mess will be contained, it points directly to our Achilles’ heel: what Inman calls “the deadly marriage between New York City real estate and Wall Street.” Housing-wise, financial types are a dream demographic—they generate wealth for clients and snap up extravagant abodes for themselves—but it’s easy for the market to get addicted to yearly infusions of investment-bank bonus cash, and the withdrawal can be painful. After the 1987 stock-market crash, Manhattan median home prices plummeted by 26 percent. Should the current liquidity crisis spread, New York real estate could theoretically crash without a single subprime foreclosure in the five boroughs: Others’ grief could catch up to us via bad brokerage-house bets and the plummeting profits and pink slips that come with them.
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There are other, wonkier, reasons to be afraid. If we look at the instruments economists use to take a market’s temperature, many point to an imminent bust. For one thing, we appear to be reaching the peak of a so-called Minsky cycle. In Hyman Minsky’s ingenious model of asset bubbles, economic stability breeds riskier and riskier investors: First come the “hedge borrowers,” who play with their own money; they are followed by “speculative borrowers,” who have enough cash flow to keep the lender at bay but not enough to cover the principal investment, and finally “Ponzi borrowers,” who are, as the name suggests, borrowing to refinance other debts they can’t meet, in the wild hope that the market will keep climbing. The Minsky model is remarkable for having been proved the way we like our economic models proved: recently, the hard way, and twice. We cycled through it in the eighties with junk bonds, and in the nineties with tech stocks. As it happens, the latter-day brownstone-flippers, financing each new property with the last one’s equity, are the dictionary definition of Ponzi borrowers. In fact, it’s almost unbelievable that the obvious junk-bond and dot-com analogies would ever pass us by. But such is the boom mentality. First you think the bust isn’t going to happen, then you think it’s not going to happen to you.