Just How Far Can New Jersey Home Prices Fall?

Most readers here will know what my answer will be, it's a number I've quoted time and time again on the blog, 30%. It's what I call the magic number for Northern New Jersey. If you calculate what the a home price should be through income and compare it with historical norms, you get an approximate 30% overvaluation. If you compare the equivalent rent of a home to the purchase price, you find that it's selling for a 30% premium. Housing prices in Northern NJ have detached from their fundamentals and gone off on their own tangent, and done so by that magic number (and even more in some areas, my calculations were using census and other median data).

Saying Northern New Jersey home prices are poised to fall 30% is certainly going out on a ledge, however, it seems I'm not the only one who has calculated figures in that range.

Most overvalued housing markets

Sixty-five of the nation's 299 biggest real estate markets are severely overpriced and subject to possible price corrections.

That's according to the latest (third quarter) Housing Market Analysis conducted by National City Corp, a financial holding company, in conjunction with Global Insight, a financial information provider.

...

National City arrives at its estimates of what the typical house in these markets should cost by examining the town's population densities, local interest rates, and income levels. It also factors in historical premiums and discounts for each area.

Overvalued Markets
Atlantic City, NJ 59%
Ocean City, NJ 47%
Edison, NJ 31%
Newark, NJ-PA 27%
New York, NY-NJ 27%
Trenton, NJ 20%
Wilmington, DE-MD-NJ 18%
Camden, NJ 18%
Allentown, PA-NJ 13%

For those of you that might not grasp exactly what a 30% reduction in home prices locally will mean. Take a home that is typically selling for $500,000 in this area, I'm sure I know exactly what image pops into everyones head. It's a 40 year old cape that hasn't been touched on a postage stamp lot, or even worse. Well, reduce that price by 30% and you'll get what I think the true value of the home is, $350,000. Still expensive? Sure it is, this isn't Oklahoma, we pay a premium to live in this area, but then again, we always have, nothing changed recently.

Caveat Emptor,
Grim

$889,900? Who are you trying to kid?

I drove past this place a few times when it was under construction. It's on Valley Road in Clifton, the Paterson side, about a mile or so from the Paterson border.

I knew it was going to be another stucco-slathered McMansion before the first coat of mud was slapped on it's facade. However, I did think that the home was being built for someone, I didn't believe that anyone would do this to a home in this section of Clifton to actually try to sell it.

Of course, proved wrong. The home was listed 40 days ago at an astonishing $889,900. I'm sure at this point you are all yelling "where is the link?", so here it is:

Listing Link

It's a typical stucco box on a cigarette property, something on the order of 60x450 or so. Good news though, it was reduced to $869,900 a few days ago. A real steal at that price.

Who are they trying to kid?

Caveat Emptor!
Grim

You Can Relist But You Can't Hide

I've been getting quite a few emails from readers with info on specific properties around Northern NJ. While I do keep a keen eye on my town, it's difficult to really get a feel for an area unless you are a long time resident. Anyhow, I received an email about a house that's been for sale in Clifton for quite some time now and decided that it would incredibly useful if folks would post up homes for sale in their neighborhood that have been sitting for a while.

The home in question is in Clifton near city hall, the home isn't on Van Houten itself, however the house is situated directly on it. The email piqued my interest because I drive by the house almost every day, and it's been for sale for quite some time now.

Realtor.com Link

It's currently listed at $359,900, which has been reduced from $389,900 at just about 90 days on market. Not much of a reduction. But, I know the house has been for sale for longer than 3 months. So I dig deeper and find the older MLS listing. Ahh, now that's the ticket, the original listing conveniently expired and it was relisted under a new MLS # shortly thereafter.

So what are the stats on the original MLS listing? Well, it adds an additional 183 Days on Market to the already high 90. More in line with what I remembered. However, the that listing was priced at $449,900 when it was placed.

So in reality, this home has been on the market over 275 days with a solid 20% haircut already. However, the MLS data doesn't really show how significant the reduction has been, nor accurately represents the time on market. (The person who emailed this to me had stated the original listing price was higher, somewhere near 459, but I can't find that data). So whenever you hear someone quoting DOM or reductions realize that it's more likely those numbers are understated rather than over.

I'd love to get more local opinion on other markets, so keep the information coming!

Caveat Emptor!
Grim

November Home Sales Drop

U.S. November Existing Home Sales Fall 1.7% to 6.97 Mln Rate

Dec. 29 (Bloomberg) -- U.S. sales of previously owned homes declined last month to the lowest level since March, adding to evidence the housing market is cooling.

Home sales dropped 1.7 percent to a 6.97 million annual rate from October's 7.09 million pace, the National Association of Realtors said today in Washington. The number of homes for sale increased to the highest level since April 1986.

Here is a link to the data:

November EHS Data

The largest drop was seen in the Northeast with a -2.7% drop versus last month, and a -4.4% drop versus last year (seasonally adjusted of course). Evidence is starting to pile up all around us. The bubble burst is going to be undeniable in the upcoming year.

Caveat Emptor,
Grim

Home Loan Apps Drop Again

Home loan applications fall to over 3-1/2-yr low

U.S. mortgage applications fell to a more than 3-1/2-year low last week amid a sharp drop in demand for loan refinancing even as interest rates held steady, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended December 23 decreased 6.8 percent to 554.1 from the previous week's 594.6. Volume was at its lowest level since the week ended May 24, 2002, when the index hit 516.9.

The group's seasonally adjusted index of refinancing applications dropped 11.2 percent to 1,259.1, compared with 1,418.1 the previous week. Volume was at its lowest level since the week ended April 12, 2002, when the index reached 1,246.1.

An adjustment was included in the data to help account for reduced application activity prior to the holiday weekend, the MBA said.

...

The MBA's seasonally adjusted purchase mortgage index fell 4.5 percent to 432.9 from the previous week's 453.1, its lowest level since February. The index is considered a timely gauge on U.S. home sales.

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I would love to know what the numbers were prior to the special adjustment. That just reaks of manipulation.

Caveat Emptor,
Grim

Housing Bubble Surpasses Tech Bubble

The housing bubble has surpassed the roaring tech bubble:

Bigger than the Tech Bubble

The dark blue line is consumer and business spending on technology (hardware and software), as a share of GDP. The light purple line is residential investment, as a share of GDP.

In the third quarter of 2005, Americans spent 6.1% of GDP on building new homes or renovating existing ones. That's a bigger share of the economic pie than tech got at the height of the boom.

To me, this has become a no-brainer. These levels of residential spending are not sustainable, guaranteeing a housing downturn in 2006 (incidentally, as far as I can remember, this is the first time I've made this forecast). And the downturn will likely be sharper than most people expect, including a drop in median home prices nationwide.

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Even more evidence of a housing bubble, yet the experts continue to deny.

Caveat Emptor,
Grim

The Japan Real Estate Crash Revisited

Bubble burst quickly, but the pain lingered
By Martin Fackler, NY Times

Fourteen years ago, Yoshihisa Nakashima looked at this sleepy suburb an hour and 20 minutes from downtown Tokyo and saw all the trappings of middle-class Japanese bliss: cherry-tree-lined roads, a cozy community where neighbors greeted one another in the morning and schools within easy walking distance for his two daughters.

So Nakashima, a Tokyo city government employee who was then 36, took out a loan for almost the entire $400,000 price of a cramped four-bedroom apartment. With property values rising at double-digit rates, he would easily earn back the loan and then some when he decided to sell.

Or so he thought. Not long after he bought the apartment, Japan's property market collapsed. Today, the apartment is worth half what he paid. He said he would like to move closer to the city but cannot: The sale price would not cover the $300,000 he still owes the bank.

...

Now the land in Japan is worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan's six largest cities, residential prices dropped 64 percent from 1991 to last year. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

Their experiences contain many warnings. One is to shun the sorts of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means. Another is to avoid property that may be hard to unload when the market cools.

...

Like their U.S. counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out.

"The biggest lesson from Japan is not to fall into the same state of denial that existed here," said Yukio Noguchi, a finance professor at Waseda University in Tokyo who is perhaps the leading authority on the Japanese bubble.

"During a bubble, people don't believe that prices will fall," he said. "This has been proven wrong so many times in the past. But there's something in human nature that makes us unable to learn from history."

Caveat Emptor,
Grim