Tuesday, April 11, 2006

Spring isn't thawing the chilly Northeast Market

From Inman News (and a hat tip to Ben Jones at The Housing Bubble Blog):

A housing chill in the Northeast

Only a few months ago, at midnight on Dec. 31, Joseph and Kianna Jackson gently clicked their champagne glasses together in their New Jersey apartment and made a resolution for the coming year: They vowed to make an offer on their first home by March 15 -- their daughter's second birthday.

But like so many other New Year's resolutions, their promise has so far been unkept. As mortgage rates crept higher in the first two months of 2006 and sales in their local market slowed, the Jacksons decided to postpone their home-buying plans because they think prices could be a lot lower in the summer or fall than they are today.

"A year ago, the market was super-hot and it was hard to find a Realtor or builder who would even return our calls," says Joseph Jackson, a self-employed computer-programmer.

"But now, I'm getting a couple of calls a week from people who want to sell me a home," Jackson says. "I just tell them to call back in a few months, and I'll let them know whether I'm interested in buying again."

While real estate agents from Brooklyn to Boston say that the Northeast's housing market will remain strong, it's the decisions made by families like the Jacksons that will ultimately determine whether the region's sales and prices gains simply moderate or come to a screeching halt.
With inventories nearing 10-year highs in some Northeastern markets, "buyers are reclaiming some of the bargaining power that they had lost as prices soared over the past several years," says Lawrence Yun, an NAR economist and managing director.
"The most softness in values will be felt in the priciest markets, like Boston and New York City," the economist adds. "Those are the areas most at risk from rising interest rates -- their prices are already so high that a lot of buyers who could qualify for a mortgage at 6 percent won't be able to qualify as rates move toward 7 percent later in the year."

As price gains cool, a handful of Northeastern markets have found themselves at the top of some dubious lists.
Like many real estate analysts, Dreier said it was "too early to tell" whether the recent slowdown in sales represented a mere pause in housing's long run-up or the start of a long-term decline.

"The year," said Dreier, "is going to depend on what we sell from March to July."

This goes out to Joseph and Kianna. Congratulations on your decision to wait, Lord knows it was a tough one to make. Don't give in to market pressures, you've made the right move. Stay strong, hold tight, and don't lose those champagne glasses. You'll need them to celebrate a purchase made under your own terms.

Caveat Emptor!


Anonymous UnRealtor said...

Do folks think builders who tear down a home and build a new house on the same lot will be affected by the downturn?

It seems that even if the market drops 20%, it would still be profitable to buy a ranch on 1/3 acre, knock it down, build a colonial in its place, and sell it for twice as much.

Does anyone think this will stop during a market slowdown?

4/11/2006 08:31:00 PM  
Blogger grim said...

Builders? Builders have been doing teardowns and major remodels long before the bubble. They'll likely be doing it long after.

There is profit to be made by the builders, but only because they've got the equipment and manpower on hand already.


4/11/2006 08:37:00 PM  
Anonymous UnRealtor said...

So it seems I'm screwed with trying to find a 'fixer-upper' in a nicer town.


Hopefully with some luck, and with enough builders busy working on other houses, I can squeeze a deal in there.

4/11/2006 08:44:00 PM  
Anonymous Anonymous said...

It's getting mighty frigid these days. ice cold.

Do not bid or look at a house until you see "Real" price drops of 25%.
When you feel you are getting harassed by realtors and builders then wait another few months to let them stew in stagnation.

4/11/2006 08:51:00 PM  
Blogger Richie said...

Do folks think builders who tear down a home and build a new house on the same lot will be affected by the downturn?

It all depends on how much they paid for the lot. I've seen quarter-acre parcels in my town sell for $400k with a house on them (that was knocked down and rebuilt). They're all building 4000sq.ft. monsters on these tiny lots hoping to get $850k plus once completed.

I feel that most of the smaller builders carried interest only loans and consruction loans (which are mostly IO) to buy, build, and renovate.

It costs roughly $60-$80 to build; so if they paid $400k for the lot, and $300k to build, they're at a $700k break even point.

But that's only if the supply & demand are in their favor. With many other homes available now; no one wants the 4000sq.ft. monster that's surrounded by cape cods.

The hard part is when the builder buys the lot at the height of the bubble and the market goes sour. Everyone knows they'll pay a "premium" for new construction, but with so many choices, some people would actually rather take the house that's in "good" condition so they can personalize it to their likings.

There's 2 homes in my neighborhood that were knock-downs that are racing to completion; even working on Sundays. They are both completely out of place in terms of their surroundings.


4/11/2006 09:35:00 PM  
Blogger Richie said...

The media is still out of touch.

For example, at this moment MSNBC's home page reads "housing market to cool in 2006".

Go directly to their real estate section and they still have a section on "America's Housing Craze" from July of 2005.

4/11/2006 10:10:00 PM  
Blogger bairen said...

These are the 7 steps I am doing before buying a house today.

1) Not buy in a bubble zone and be willing to move to another state.

2) Review the housing market reports that show if the area is under or over valued. In the investing world there is such a thing as margin of safety. Make sure the area you want to buy in is considered to be no more then fairly valued, preferably at least 10% undervalued by at least 2 different studies.

3) Research the undervalued areas to see if their well paying jobs are expanding, if companies are relocating to it, does it have a diversified economy. As well for crime rate, recreation, quality of life. There are lots of good reasons why some areas of the US are undervalued. Avoid them.

4) Does the area also have major colleges and universites plus good hospitals and local school districts?

5) Will a paycut for taking a job in the new area be more then offest by savings in income and property taxes, and other fixed costs?

6) Visit the area and talk to locals. It's amazing how much info a local in a non Northeast area will give you if you tell them you are thinking about relocating to their area.

7) Ask yourself would you actually want to live in the area for years?

Only then would I think about making an offer. And I would only do that after visiting a few different areas around the US I'm considering. And I would go for a 30 yr fixed and not get crushed if short term rates keep rising. If I can't find anything I like better then where I currently live, wait a few years and buy in the carnage of all the shortterm arms resetting in 07 and 08.

Disclaimer: This is not advice, only what I am doing.

4/12/2006 01:20:00 AM  
Blogger NJGal said...

The Jacksons deserve credit - they prove that just because you have kids you don't "need" to BUY a house. I'm with them!

4/12/2006 07:18:00 AM  
Anonymous UnRealtor said...

Richie, having costs of $700K and selling for $800K is not an attractive proposition.

But in 'high end' towns, that 1/3 acre lot can pay off big for a builder.

A builder recently bought a small house on 1/3 acre in Short Hills for $900K. Tore it down, built a new 5BR house (that fits fine on the 1/3 acre lot), and has it listed for $2.6M.


That's quite a profit.

If I'm going to compete with that, I'll need LOTS of luck, and patience.

I'm not looking to spend $900K, but that's just an example of what I'm dealing with.

Some areas of that town are "historic" which means you can't knock down the house, so there may be some opportunities there, for those willing to engage in a 'money pit.'

4/12/2006 09:57:00 AM  
Anonymous UnRealtor said...

Correction, that house os on .7 acres, not .33 acres, but the same point applies.

4/12/2006 09:58:00 AM  
Anonymous UnRealtor said...

Bairen, good post. I'm doing many of the same things as well. Already looked in another state, and will go to another this summer.

And aside from the job market aspect, there's the factor of who wants to work in NY City when someone is likely to scream "allah is greatest!" while blowing themselves and the whole train up.

Areas that are 'less appealing targets' are also a factor, for me.

4/12/2006 10:04:00 AM  
Anonymous Anonymous said...

Those fixer uppers are going to builders... like this total dump in allendale which was listed for $619 and sold for $720 recently

4/12/2006 11:01:00 AM  
Blogger skep-tic said...

builders may have a problem doing as many spec-teardowns over the coming years if banks aren't willing to finance them. outside of boom times, isn't the typical teardown scenario where a buyer is lined up in advance? seems to me that if this is the case, then builders face the same problem every other seller does

4/12/2006 11:15:00 AM  
Anonymous Anonymous said...

Unrealtor: I have always agreed with you, however on this thread you talked about a listing price that a builder has as "quite a profit"...yeah if someone pays him the ask...which I doubt. I think everyone who is seeing a lot of builder activity in towns their interested in, will be pleasantly suprised by what a builder will be willing to take for a house next year and beyond. (they will be "giving back" some of the profits that they made in this bubble RE market. I will bet the house on that one!!!

4/12/2006 04:27:00 PM  
Anonymous Anonymous said...

ps: Housing values are subjective values and in a bubble will (as they have) overshoot, the inverse is equally true...like I said I will bet the house on it.

4/12/2006 04:30:00 PM  
Anonymous UnRealtor said...

"Unrealtor: I have always agreed with you, however on this thread you talked about a listing price that a builder has as "quite a profit"...yeah if someone pays him the ask...which I doubt."

That house will sell for over $2M, I can virtually guarantee it (and I'll post the closing price here when it sells).

They're knocking down a gorgeous $2M house on Old Short Hills Road, to build a $6M house. It may sell for less than six, but they will still make a lot of money.

4/12/2006 08:18:00 PM  
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