Skyrocketing Prices Pulling New Jersey Market Down to Earth
John and Susan Scerbo of Northern New Jersey put their five-bedroom house on the market more than a year ago. It’s still for sale, even after the couple cut the asking price from $695,000 to $649,000.
“We got caught in a tough market,” said John Scerbo. “Buyers are slow to act, and there’s enough inventory out there that they can take their time looking.”
The overheated 1999-2005 housing market cooled quickly in 2006, and real estate experts expect property home price gains and sales to remain slow in 2007, both nationally and in northern New Jersey.
“A lot happened during the boom, and we have some paying back to do yet,” said David Seiders, chief economist with the National Association of Realtors.
In North Jersey, house prices are expected to be flat or down slightly - around 3 percent or less - in 2007. But even with the downturn in prices and sales volume, 2007 is likely to be a historically solid year - not quite as big as the record-breaking years we’ve seen recently, both nationally and in New Jersey.
“The perennial demand for housing in the New York area really insulates the market from any major correction,” said Sean Maher, an economist with Moody’s Economy.com. “In addition, prices moved up so quickly during the boom years that most homeowners are still sitting on big gains.”
With New Jersey mortgage costs more than many buyers can handle, Karl Kern of Kern & Rogers Realty Inc. and Mark DeLuca of Mark DeLuca Realtors in Teaneck both say prices in the Bergen County area dropped about 5 percent in 2006. Both said another drop of 3 percent or so is possible in ‘07.
Tough as the softer prices may be on sellers, they come as welcome news for buyers.
Bob Walters, chief economist for Quicken Loans, predicts that prices will remain soft for 2007 and 2008. Kern has a similar view. After 2007, Kern predicts the bear market will become an “inchworm” New Jersey housing market, with prices inching forward slowly.
“I think it’s the nature of the cycle of real estate that we’re not going to have a boom again for a long time,” Kern said.
The housing slowdown has also had a big impact in the construction market, where activity is at the lowest level since mid-2000. Reflecting home builder pessimism is Hovnanian Enterprises Inc. of Red Bank, the state’s largest home builder, which was forced to cut prices in many of its communities in 2006 and dropped two major proposed projects.
The company has been forced to scale back construction in the face of a wave of contract cancellations by prospective buyers, many of whom can’t sell their current homes. As a result of these cancellations, contracts dropped by more than a third in its fiscal fourth quarter.
In another sign of trouble, a dropoff in demand for home mortgage loans meant Kara Homes of East Brunswick filed for bankruptcy last fall.
The condo market has been especially hard hit, according to the National Association of Home Builders. In a recent survey, half of condo developers reported that they had cut their prices - typically by 5-7 percent - to boost sales.
For all the pain of the downturn, there are some underlying fundamentals that tend to shore up demand for housing. These factors suggest that this downturn won’t be as deep as the housing decline of 1980, which was caused by high mortgage rates, or the slump of 1989-90, caused by a recession.
For one thing, rates of conventional home loans are expected to remain in the 6-6.5 percent range, a historically low level. And the economy is growing, with unemployment below 5 percent.
But economists expect a slow housing market - which has fed economic growth for several years - to be a drag on the U.S. economy this year for the following reasons:
- There are signs that some of the people who bought houses in the boom years of 2001-2005 may be in over their heads. The Mortgage Bankers Association reports that delinquencies have shot up, with adjustable-rate mortgages the main culprit. In some of these cases, homeowners took out no-down-payment home loan products or interest-only mortgages, which keep payments low in the beginning of the loan’s life, then rise.
- Remodeling activity will be up, in part because homeowners can pay for it by borrowing money with home improvement loan funds, as their equity grew so much during the boom.
- Area home builders are continuing to construct rentals. As prices soared and locked out many would-be buyers, demand for rentals has increased.
SOURCE: NorthJersey.com