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This article by Kathleen McGinn Spring was prepared for the May 17, 2006 issue of U.S. 1 Newspaper. All rights reserved.

Has the Bubble Finally Burst?

‘After Labor Day weekend last year the bottom fell out of the market. says Peter Doolan, second generation owner of the 70-year-old Pennington-based real estate agency that bears his name. "Somebody turned the lights off after the holiday, but we didn’t know it until this year."

What is remarkable is that so many real estate agents, regardless of the towns in which they work, pinpoint the end of a meteoric four-year period of appreciation – some 12 percent a year, even more in 2005 – at pretty much the same point.

"Prices peaked in July or August," says Harveen Usab of Keller Williams. "August, 2005," says Pete Callaway, owner of Princeton’s N.T. Callaway. "Business is usually swift from Labor Day to Thanksgiving, but we saw few offers. We began to see a transition."

Bubbles always burst, of course, and the phase is a cliche. Or maybe it isn’t. Maybe the end always comes swiftly and completely without warning – maybe "burst" is just the right word. That certainly seems to be the case this time. Asked what happened, agents, for the most part, scratch their heads. Interest rates are still low, money is available, and just a few months ago anything with a roof was a candidate for a six-way bidding war. Real estate pros realize that prices couldn’t go up 25 percent every 24 months forever. But they have trouble fingering a villain in the abrupt end of this giddy spiral. Only one clear candidate emerges.

"Did you see the New York Times today?" asks Callaway during a phone conversation on May 9. "Look at the front page of the business section. There’s a ‘For Sale’ sign – in red. And there are icicles hanging from it." If the media did not actually apply the brakes to a runaway real estate market, it certainly could have had a role, many real estate professionals agree. "These things feed on themselves," is how David Schrayer of Coldwell Banker Princeton puts it.

The professionals are not upset by the drop, though. All agree that a leveling off is inevitable, and in the end a good thing.

Sellers may not be as sanguine.

Schrayer has a statistic that sums up the situation from the seller’s point of view. "There are now 107 $1 million-plus houses on the market in Princeton," he says. "Last month there were 90. Last year at this time there were 40, maybe." While the increase is not as dramatic at lower price points, inventory is up in most price ranges, most towns, and most kinds of homes. At this time last year Bill Harbach of the Doolan agency had virtually nothing to show in Trenton’s best neighborhoods. "Last year we had two houses in Hiltonia," he says. "Now we have 12."

Given the increase in inventory, time on the market has lengthened. Callaway says that his agents are telling sellers in the $1.5 million-plus category that a house that sold in 30 to 60 days a year ago may take six to twelve months to sell now.

"Houses in Princeton at anything close to $1 million sold immediately," says Schrayer of the market circa 2002-2006. "They (buyers) didn’t care if it was a crummy three-bedroom ranch." No more. Overall, time on the market for all homes, according to Joyce Belfiore of Coldwell Banker Princeton Junction, is 75 to 80 days, up from an average of 25 to 30 days last year.

Prices, meanwhile, are down. Schrayer puts the figure at 15 percent. Belfiore agrees. "Montgomery has dropped 15 percent," she says. Princeton Borough has cooled dramatically, 15 percent across the board."

"Prices are down 10 to 15 percent, even in West Windsor," says Usab of Keller Williams. "Everything is being discounted in this market." Not all realtors agree that the drop has been this large, but all do agree that upward price movement is over for now.

The kicker is that sellers do not yet know that the party is over. "What happened is that in the last two years people were getting anything they wanted to get for a house," says Martha Stockton, owner of the Princeton real estate business her family founded. "People began to say ‘my neighbor got this, why can’t I?’"

In every town in the Princeton area houses went for progressively more as each came on the market. If the house across the street fetched $700,000, the next house was priced at $725,000 or $750,000, and it too got its price. How could it be that, just when I’m ready to sell, the glorious appreciation spiral could be over, sellers ask themselves – and their agents. It’s a bitter pill to swallow, and agents say that most sellers have not yet even drawn the glass of water with which to choke it down.

"Most sellers haven’t gotten it yet," says Doolan. "They don’t want to believe that the air is let out of the balloon. They saw every house in the neighborhood go up. Sellers are in denial."

Those who want to sell in a reasonable time, however, can still do so. The keys are pricing – which involves coming out of denial – and marketing, which increasingly involves some degree of staging. A relatively new phenomenon on the East Coast, staging can involve anything from ripping out overgrown bushes and painting the front door to throwing out all of the out-dated furniture and renting replacements.

Pricing a home correctly is the biggest task each seller faces – and to do so he must not look to the recent past. There are indications that there were substantial hysteria-fueled price upgrades that sent relatively modest homes above the $1 million mark, and even more modest homes, some in need of major work, well above the $500,000 mark.

"The market is top heavy," says Stockton. To make her case, she turns to her computer and finds current listings way out of whack. "There are too many houses over $1 million," she says. "In my opinion there is too much inventory, much more than normal, and nothing is cheap. There are 196 houses on the market in Princeton, and 102 are over $1 million. Forty-six are over $2 million." On the other end of the scale, she finds that the least expensive Princeton house is a $274,000 one-room condo on Palmer Square.

The picture is the same in other towns. "In Hopewell Township there are 179 houses on the market," says Stockton. "Fifty-six are over $1 million and nine are over $2 million." There are 208 listings under $1 million in West Windsor, with the least expensive being a $236,000 condo in Canal Pointe. There are 19 $1 million-plus West Windsor listings, with the most expensive, a four-year-old Colonial, brushing the $4 million mark.

Rapid appreciation has left many potential buyers with nowhere to go – and provides the first sellers to grasp the new market realities with the opportunity of selling quickly to people who have been priced out of the market. "If there’s a three-bedroom, two-bath house and somebody’s asking $700,000, that’s a lot of money," says Stockton. "If that house were $500,000, it would go like hot cakes."

"The $500,000 buyer cannot buy a newer house," declares Arlene Feinstein of Remax Greater Princeton. "There is nothing in Princeton. Not even in Robbinsville. A house I sold for $200,000 in Robbinsville in 1995 is now listed for $615,000." Hamilton is getting expensive, too, she says, and forget West Windsor. "Just four years ago $500,000 was top end in West Windsor," she says. Now entry level is more like $650,000 to $750,000. Prices are lower in East Windsor, but, she notes, "inventory is low, so prices will rise." The bottom line, says Feinstein is that "inventory is high above $800,000 and low below $500,000."

This means that most sellers of properties at the very low end will find buyers quickly. "I listed a house on Leigh Avenue in Princeton," Feinstein recounts. "It was half of a duplex. One side was falling down and the other side was falling down plus. It was so bad. It needs tons of work." The seller had purchased the unit in 1999 for $91,000. Feinstein sold it in 24 hours for $305,000. "We had 12 showings in two days," she says. "We had two offers, and two more people wanted to make offers, but we said ‘no, let the first two fight it out.’"

Bidding wars like these are confined to the very lowest levels of the market. In every other range, sellers need to plot their asking prices with surgical precision. There is no room for error. Real estate agents are unanimous in saying that a house priced too high in this market will sit – and sit, and sit. "Some houses have been on the market for 180 days because sellers had past trends in mind," says Belfiore. "But the facts are what they are. If 20 houses in your range are on the market, and you’re at the high end, you’re going to have trouble selling. Pricing is crucial."

Stockton says that this is particularly true now, in the spring, traditionally the busiest time of year for house hunting families eager to be in place before the next school year starts. Calculating just the right price point is an "art," she says, and she is unwilling to divulge her formula. She is also unwilling to represent sellers who insist on pricing 10 to 15 percent higher than the price her research indicates to be right on target.

Other agents say that in the recent past they brought sellers three comps – prices at which very similar houses had recently sold – and used the top selling price as a starting point. Typically, the new entrant to the market was priced a little higher. Now, the process has flipped, and the lowest of the three prices is the starting point. Sellers are often being counseled to drop a little below the lowest comp if they want a quick sale.

"In the market we’re in now, houses are selling for less than asking price," says Usab. "I look for the lowest price in the past three to six months, and price there. I used to look at the highest price and the buyer would go with that price, or higher."

Priced correctly, a house will find a buyer – in this or any market, all of the real estate agents agree. But there is one condition in this market. With lots of choice in nearly every price range, the houses that sell quickly, and at full price, must show beautifully.

Sellers have always been counseled to cut down on clutter, to cover bright walls with paint in warm neutral colors, and to clean every nook and cranny. But now the preparation for sale is going farther.

"We stage every house we sell," says Bernard Smolowitz of the Keller Williams team of Smolowitz and Benedetti. He and his partner hire a professional stager to advise sellers on how best to present their homes. They pay for the service themselves and Deborah Benedetti says they like the idea that their clients hear advice from a professional, and that they do not have to strain their relationships with clients by pointing out clutter, clogged gutters, or hideous furniture.

"Sometimes it’s just a flower pot," says Smolowitz. "We had one recently where the suggestion was just to hang two pictures in the kitchen that showed cooking scenes." Their stagers often recommend that the colors of the books on the coffee table match the sofa. Sometimes slipcovers are advised for worn furniture. "They have never recommended buying furniture," says Smolowitz, "but they sometimes say ‘get rid of it.’"

There are cases where a house needs to be painted throughout, and the yard needs to tamed, but most of the staging fixes tend to be small things. "It’s crucial to make small investments," says Smolowitz. "The return is phenomenal."

Usab is also a firm believer in staging, and she takes a hands-on approach, keeping a cache of decorative items at the ready, and acting as a contractor when bigger fixes are called for.

"Very recently I listed a West Windsor house in the high $600,000s," she says. "The homeowners hadn’t done a lot." She accompanied them to Carpet World, and helped them to pick out wood flooring, carpets, and tile. "We ripped out the carpets and put hardwood floors downstairs. We painted the inside a warm beige, not too white. We changed the carpets upstairs, and tiled all of the bathrooms. It looked better than new." The improvements cost between $10,000 and $15,000.

"The house went on the market on a Tuesday at a broker’s open house, and got four offers," she says. "It sold for $20,000 over asking." The selling price, $700,000, was just a tad lower than it would have been in July or August, at the very height of the market, says Usab, but was probably more than it would have been a year before.

In Trenton, Harbach has just advised clients to do some outdoor staging on an attractive Glen Afton house that was totally obscured by overgrown shrubs. The homeowners are in the process of having the shrubbery chopped down, and are completing other fixes, including repairs to a slate walk leading up to the house. Harbach estimates that the work will cost not more than $5,000 and will "speed up the sale and double or triple the investment."

Belfiore sometimes recommends that clients work with Tracey Merrill, a West Windsor-based stager who has been sprucing up homes for four years. Buyers, Merrill finds, want the most updated home. She tries for that look without recommending that the kitchen and baths be gutted. "The best way to spruce up a bathroom is to put in new fixtures, brand new towels, a new shower curtain, and a fresh tissue box," she says. "It’s the little things. Put in nice switchplates, new rugs. It’s appealing to the eye and looks like you’ve done something."

Merrill often recommends props, everything from Oriental rugs to rocking chairs, and she is often able to pull them right from her own house.

"One house I did had a half-spiral staircase and a round entry hall," she says. "The owner had put a square chest on the rounded wall, and there was a pile of shoes in the other corner. I got rid of the shoes, put in a round Oriental rug and a rocking chair. I put a brass lamp on a table next to a pile of books and a serving bowl, and hung a picture on the wall. When I was finished, it looked like a home. Not a house, a home. It felt welcoming." She reports that the homeowner wept when she saw the transformation.

Better to weep with joy than with frustration as a cluttered, unappealing house sits on the market while its spruced up competitors find buyers. Still, not every real estate professional agrees with the trend toward staging.

Linda November of ReMax Greater Princeton finds that serious buyers can envision how their things will look in a house. "When people are in a room more than two seconds, that’s what they’re doing," she says. Staging is very expensive, she adds. This is especially so in vacant houses, where furniture and accessories have to be rented. Many agents think that buyers depend on the furniture as a guide to help them figure out whether or not their king-size bed or dining room set will fit, and where they can put their entertainment center. But November says that vacant houses are appealing to buyers because they indicate that the house is ready for a quick sale.

A quick sale – at a good price – is certainly the goal, whether or not it takes staging to get it. This spring that goal has eluded many of the sellers whose homes are counted in the mounting list of housing inventory in all of the towns in central New Jersey.

Callaway has words of encouragement for them. He thinks that the next period of appreciation will not be long in coming. He thinks that a bottom has already been reached and that the market will soon start to move up.

"It’s shifted to a buyer’s market, and sellers are thinking what they have to do," he says. In his 42 years as a real estate professional, Callaway has seen a number of up markets and a number of down markets. The last four years certainly featured rapid appreciation, he says, but he has seen sharper upswings. He has also seen far worse corrections. "Right now everyone’s just taking a deep breath," he says. "Once in a while everything levels off, and that’s what’s happening now."

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