Thursday, September 22, 2005

So what happens when prices fall?

I received an email from a concerned reader last night. The concerned reader wanted to take the time to let me to know that I am entirely wrong, that residential real estate values never go down over the long term, that real estate is and always has been a 'good investment'. He concluded by telling me that I'm basically just trying to scare off people.

He was partly right. I am trying to scare people, more accurately I'm trying to scare some sense into potential buyers. Consumers are getting a biased message from the media and from real estate professionals. Real estate professionals have a vested interest in keeping the market going strong. The more prices go up, the higher their commision checks get. I, however, have no vested interest in the market, I am standing on the sidelines as an unbiased observer. If I come off as sounding doom-and-gloomy, it's only because that is what I honestly believe.

So back to me being entirely wrong, and prices never declining. Sorry everyone, I wish it could be that way, but it's not. Not so long ago a bubble did burst, and real estate values plummetted, and they still haven't recovered. Where? Japan. When? Late 80's How Bad? >50% Did Prices Recover Yet? No, not even close....

To help tell my story, I'm going to ask that readers open the following link to an article by Standard and Poor's Global Fixed Income Research Group, it was just published and contains some good information on the Japan Real Estate Crash. It's not the only source, you can find quite a bit of information on the Japan Crash through Google or any other search engine.

Go ahead and read through until you get to the chart on Page 2, you'll know when you find it, if not, it's the one that looks something like Mount Everest.

Well, there is it, what else can I say? Residential land prices fell over 50% over a 6 year period, and then proceeded to slowly drop and stagnate for some 10 years more. Only recently (and with some fanfare) have prices "blipped" upward, ever so slightly.

So sit, think about this for a while. Look at that asking price again, but this time, cut it in half. Wow, that's alot of money to lose, a significant risk. I certainly wouldn't want to be paying a mortgage for a home that isn't worth half what I paid.

I know, I know, everyone is still saying it can't happen, it just can't, not here because "things are different here." I'll stand on my soap box and yell out that it can, it did in the past, and it is happening here right now. We're not so different.

Take some time to research what happened in Japan, and what the experts (those who have no vested interest in the real estate market) are saying about our bubble. Think hard, really think hard about being the greater fool that buys into this market.

Caveat Emptor,

Wednesday, September 21, 2005

Cambridge Crossings Crazy in Clifton

It's hard not to notice the super high density Cambridge Crossings when wriving through Clifton on the Garden State Parkway or on Route 46. This development has always been a touchy subject for Clifton residents (no need to get into that here). It was built a few years back and if I recall, did sell rather quickly. The place isn't so bad actually, as long as you don't mind the density, however definately not my style at all.

I've always kept an eye on the Clifton listings, and recently, have noticed an explosion in the number of Townhomes for sale in this development, it seems as if the entire place is for sale. Looking through GSMLS/NJMLS/, I nearly ran out of fingers and toes counting all the homes for sale in that development, it seems like the entire place is looking to cash out while prices are high, and why not, some of those owners are looking to double their investment, not bad if you ask me. But who are the greater fools that are buying? (If you are reading this blog, I really hope you aren't planning on being a fool anytime soon).

Lets take a look at a few representative homes in this development:

Prices seem to be ranging from the high fours to the high fives depending on the model.. Reasonable? No, not really, but then again the market is in mania, so people are paying mania prices.. But what did the owners pay?

Taking a look at the tax records for that area (George Russell Way, Whiteweld Terrace, Devonshire Drive, etc), lets look at some representative sample sales prices (These are not of the homes listed):

2 George Russell Way $190k
18 George Russell Way $190k
22 George Russell Way $186k
36 George Russell Way $230k
42 George Russell Way $190k
57 George Russell Way $196k
59 George Russell Way $228k

5 Devonshire Drive $186k
39 Devonshire Drive $228k
40 Devonshire Drive $228k
48 Devonshire Drive $229k

I'm sure you are all getting the point here, the average price paid for any of these units is $186-$230 thousand. So what are they selling for?

Double? More than double? Who is paying these prices and why? It's no doubt that these listings are piling up and just sitting, are there no greater fools in Northern NJ that will buy these homes? 500? 600? Now, granted, I would love to be the guy who sells a unit for $550k who bought it 4 years ago at $200. I could have sat on the deck drinking margaritas for the past 5 years bringing home over 50 thousand a year in profit when I sold. Sorry folks, that boat (and the margaritas that were on it) have long since departed the dock, and the next few years aren't going to be the same pleasure cruise. So to those looking to buy, do you really think these homes will hold their values? I really hope you don't think they'll be selling for a million in the next five years.

Caveat Emptor,

P.S. is an excellent site for Northern NJ folks looking for quick and easy access to tax & sales information. I'm only a user and have no vested interest in them.

Northern NJ Hits Top


I'm calling "top" of the market for Northern NJ, from here on out I think we're going to start to see an even greater increase in inventory and the beginnings of a significant drop in prices. If you haven't sold yet, there isn't a better time to lock in the gains, if you are thinking about buying, my suggestion is to hold off, you've got nothing to gain and everything to lose.

September GSMLS Active Listings

Bergen 688
Essex 1734
Hudson 90
Morris 2314
Passaic 1274
Somerset 1465
Sussex 1509
Union 1552
Warren 779
Total 11405

Bergen 782
Essex 1881
Hudson 94
Morris 2487
Passaic 1339
Somerset 1609
Sussex 1580
Union 1690
Warren 803
Total 12265

This is a 7.5% jump in inventory for the first 21 days of September. At this rate we may see a 10% increase this month. Now, I'm not a "Realt*r" or even a real estate professional, but I do know some basic economics, and what this is showing us is that supply is increasing. If demand doesn't increase to match, prices come down.

So how does demand look? Sales look to be taking a hit compared with last month, GSMLS sales for August came in a 3662, the September numbers to date are only at 2040. Given the 9 days remaining in the month, I'd estimate this months sales to come in at somewhere around 2900. If this isn't evidence of demand dropping, I don't know what is.

GSMLS doesn't give a good picture for certain counties, namely Bergen and Hudson, so here is the NJMLS data:

September Active NJMLS Listings

Bergen 3623
Essex 341
Hudson 343
Passaic 674
Total 4981

Bergen 3832
Essex 364
Hudson 365
Passaic 713
Total 5274

The active listings increase looks to be similar to the GSMLS numbers (keep in mind there are overlapping listings, you can't simply add these figures together).

Now, it's easy to be persuaded to call "TOP" on a quickly increasing market, a number of people thought the housing bubble peaked last year, but I preferred to gather my own data and wait until I saw a real downturn develop. It certainly wasn't last month, but September definately looks like the peak. One last tidbit, keep in mind sales data is a lagging indicator, the peak very well may have been August or even July in certain counties.

Caveat Emptor!