Your house is worth less than it was two years ago, and it almost certainly will be worth even less two years down the road.
There, that’s the bad news.
You may have sensed it as you saw the “For Sale” signs go up in your neighborhood, and linger as the seasons turned. The truth may have begun to sink in as you realized that you hadn’t heard a bidding war story in ages. But, if you are like most New Jersey homeowners, you haven’t yet reached the stage of acceptance.
“For the most part, people are out of touch with what has happened to the value of their homes,” says Jeffrey Otteau, president of 30-person East Brunswick-based Otteau Valuation Group. This is so, he says, because media reports, based on median home prices, have provided false hope. He expects that sometime in 2008 most homeowners will finally begin to believe that they will not get the price that their neighbors got two years ago for houses very much like their own.
“In some markets median prices are increasing,” he says. This was true as recently as last spring when median home prices in the greater Trenton area were reported to be up over 10 percent. But, somewhat paradoxically, this doesn’t mean that the value of your house is going up.
This is so for two reasons. One is simply seasonality. “High end home sales go up in the warm weather months,” says Otteau. “These are discretionary purchases. The buyers are moving up from a second or third home.” These buyers, the people who have no urgent need to move, like to buy in the spring and move in the summer so that their children’s school year is not disrupted. High end sellers, in turn, like to put their houses on the market in prime outdoor weather. “These are the sellers who are likely to have elaborate landscaping, and pools,” says Otteau. “They like to put their homes on the market when the azaleas are in bloom.”
The second reason, the one that is lost in media reports, is that the median prices reported are never apples to apples. “As new homes are built, and existing homes upgraded, you’re comparing this year’s newer homes with last year’s older homes,” says Otteau. “Median price is a very imprecise calculation. It has very little usefulness. It won’t tell what’s happening to an individual house. It’s not a reliable indicator.”
Existing homes, whether they are 50-year-old split levels or hilltop mansions, whether they are in the most desirable neighborhood, or the least desirable neighborhood, have not gone up 10 percent in value, he says. Some have held steady, but most, in every town, have declined.
We sensed that something like this was going on before we called Otteau. Area residential real estate appraisers, asked to comment on what they were seeing as they went about the business of pegging a home’s worth, begged off. All gave the same reason: “I don’t want to be seen as the person who delivered the bad news,” each and every one said.
Otteau, who founded his company in 1976, provides reams of statistics and analyses to back up his report of what has occurred in the New Jersey housing market since it peaked in 2005, and what it is likely to do going forward. He is frequently out in the field, appraising houses. “You have to be, if you want to stay in touch,” he says, but he also consults on real estate valuation all around the country.
The voluminous information the Nutley native, who attended Fairleigh Dickinson University, has compiled on New Jersey real estate has implications that go far beyond home prices. He says that the decline in home values — especially in the most expensive stratas, where it is the most dramatic — is just a symptom of a state in trouble. The reasons for the decline range from high rates of taxation, to a loss of high-paying jobs, to municipalities’ rejection of smaller, more affordable housing, and particularly their rejection of mixed use developments around train stations.
The full impact of these political issues will not be felt right away. Meanwhile, the bad news for the homeowner who needs to sell soon, and who was looking forward to a nice bidding war, has an upside.
“This is a great time to buy,” says Otteau. “Say your house was worth $500,000, and it is now worth $450,000. If you are moving up to what was an $800,000 house, you can probably get it for $80,000 less.” Beyond the discount, which only gets higher in successively pricier segments of the market, there is the huge factor of financing. “Interest rates are close to 50-year lows,” says Otteau.
But the decline in prices is enough to seriously sadden the homeowner who watched his neighbors’ homes go up 10 and 20 percent a year, and who decided to wait just one or two years before cashing in himself.
Time on market is a key indicator of the strength of a housing market. In the recent past, the time could be measured in minutes. Literally. In 2005 a nice house on a good street would go on the market at 10 a.m. on a Sunday and have 11 serious offers before noon.
The 10 buyers who lost out would be even quicker to unholster their check books when the next house hit the market. Bids went higher, and higher. Veteran real estate agents would report losing strings of seven, eight, or nine sales, as contracts were written up by competitors whose clients were just a little quicker, or who offered just a few thousand dollars more.
Now, Otteau’s research finds, a New Jersey home with a price tag of less than $600,000 sells in 9.5 months on average. A home on the market for $600,000 to $1 million sits for 12.3 months. It only gets worse — much worse — from there. At $1 million to $2.5 million, it is likely that it will take 20.4 months to sell a home. Then, at above $2.5 million, the wait will be 26.4 months. The numbers for Mercer and Middlesex counties are pretty close to the state averages.
“There is paralysis,” says Otteau. “Buyers are reluctant to buy, and sellers are reluctant to accept the prices that they can get.”
The Bubble Bursts. On average, a $450,000 house in New Jersey increased 87 percent in value between 2000 and 2005. Its value went up to $500,000 by the end of 2000, and just kept on going in an unbroken arc. By the end of 2003, it was worth $721,000. As 2005 dawned, it was worth $815,000; and when that year ended, the price was up to $937,000.
Otteau’s research finds that the market went into reverse in 2006, sending that $937,000 home down to $853,000. He projects that there will be a further drop, of 8 percent, by the end of 2007. He expects another 6 percent cut in 2008 and a 2 percent decline in 2009. By then, the $937,000 house will be worth $723,000, and at that point, he says, the New Jersey housing market will have found its bottom. He sees a 3 percent upside in 2011.
Otteau is quick to point out, however, that these projections could change. Interest rates are an important factor. If the Federal Reserve keeps cutting rates, it could revive the wilting market, and help it to rebound more quickly.
Not every part of New Jersey will be affected equally by the declining real estate market. No town is gaining at this point, but some will see smaller declines, and will rebound more quickly.
Princeton is one of these towns, and so, perhaps surprisingly, is Trenton. Even more surprisingly, the disparate towns, on either end of the economic spectrum, have a bright future for exactly the same reason. Although Trenton has a ways to go before its ship — or in this case, its train — comes in.
“One of the dramatic shifts,” says Otteau, “is that home buyers are expressing a clear preference for living in a town with a sense of place, with a clearly defined downtown with a concentration of retail, so that they can avoid traveling and shopping on a highway.”
Princeton, says Otteau, “is the complete package.” With a well defined downtown, a plethora of restaurants, and scores of stores, it is exactly what home buyers are looking for.
Trenton, he says, “is a certainty, a sure thing.” The city has made a good start on its Renaissance, in his opinion, but will need up to 20 years to complete the process. He has a similarly optimistic view of the future in New Brunswick, Asbury Park, and even Camden. “Gen Y, the children of the Baby Boomers, want to live downtown,” he says. And, he points out, Gen Y is an even larger cohort than their parents. There are some 78 million young adults in that generation, compared with 73 in their parents’ generation.
Trains Make All the Difference. One reason that Otteau is so high on Trenton is that it is a major rail hub, and is in the process of building a large new train station. Nearly every Amtrak, Acela, and long distance train in the Northeast stops in Trenton, making it the fastest route into New York City and Philadelphia, and a gateway to Boston, Washington, D.C., and beyond.
Trains will only grow in importance to the state as high-paying suburban jobs leave. The lure of many New Jersey rural, semi-rural, and suburban areas was jobs. “Eighty percent of New Jersey office buildings were built in the 1980s,” says Otteau. Homes followed as employees opted for a lifestyle that put a good job just five to ten minutes away from a big house with a big lawn.
But these good jobs are “leaving New Jersey at a fairly alarming rate,” says Otteau. “High-paying suburban jobs are disappearing. The reasons for the exodus, he says, include astronomical costs for both consumers and for employers. “Business taxes rank third among the 50 states,” he says, “and housing costs are so high that they force employers to pay higher salaries to attract workers.”
As an example, Otteau reports that in 1990 20.2 percent of the country’s pharmaceutical jobs were in New Jersey. By 2006 that was down to 13 percent. The decline in telecommunications jobs with the dismantling of AT&T has also been dramatic, as has been the drop in information technology jobs — down 23.1 percent since 2000, year of the Y2K scare, which was followed by the bursting of the high tech stock bubble in 2001.
The jobs that New Jersey is adding are largely those that do not pay well, says Otteau. While manufacturing jobs are down 27.7 percent in seven years, for example, leisure and hospitality jobs are up 11.8 percent.
This means that lifestyle preferences are joining with economic imperatives and making housing near a train station — a speedy conduit to big cities — increasingly attractive. Put a bar, a pizza joint, a dry cleaner, and stores — the more the better — near that train station, and home buyers will come. It’s what they want, and will increasingly seek in the coming decade.
“The Field of Dreams housing market is over,” says Otteau. “It used to be, build houses and they will come. Not anymore.” Time is the most valuable commodity to Gen Y, and these young adults don’t want to spend it stuck in traffic. He has compiled charts showing that the housing market in towns with a rail station are almost always more robust than they are in towns without one.
There are two reasons that Otteau is a passionate proponent of transit villages like the ones under discussion in West Windsor, Hamilton, and North Brunswick. The first has to do with the New Jersey housing market’s increasing dependence on good jobs in nearby big cities best reached by rail. The second is affordability. Housing prices rose 87 percent between 2000 and 2005, but salaries were only up by 13 percent. Meanwhile, the average New Jersey consumer’s monthly expenses come in at 50 percent above those of American consumers as a whole.
But Gen Y will be well satisfied with a much smaller house than the ones built in the preceding decade. “They’re getting married later,” Otteau points out. They don’t want or need four bedrooms, and they probably can’t afford to keep them heated. “People in Gen Y eat out 24 times a month on average,” he adds. They don’t need big kitchens. What young professionals want, he says, is a little condo near a train station.
While their parents might have wanted a 600-square-foot family room, Gen Y is looking for a 600-square-foot home, says Otteau. “Gen Y is comfortable with 600, 700 square feet,” he says. “That’s all they want. A studio or a one-bedroom.”
He thinks that the people behind some of the transit village proposals in central New Jersey are making a mistake by including two-bedroom units in their plans. Doing so creates fear in the community that already-burdened schools will be flooded with new students. But if the housing units are small, which is what Otteau is convinced that likely buyers want, there should be few children.
Having looked at transit villages in other areas, he says that “the typical buyer is a single professional or a married couple, both professionals and without children. Someone who wants to live near a train is a commuter, devoted to a full-time career.”
Besides, he adds, “people don’t want to raise children in a condominium. They don’t want to have to take them downstairs in an elevator. They don’t want to do without a back yard.”
Right now, there are few areas in central New Jersey in which young professionals can afford to buy a house. Small, relatively low-priced condos in transit villages could substantially boost the supply — and keep these young professionals in the state.
“Transit villages would breathe new life into the housing market,” says Otteau, “particularly when they are mixed use.” If planners downsize planned residential units, they can stop worrying about additional school enrollment.
“There’s a solution here,” says Otteau, “unless the real reason that towns oppose transit villages is that they don’t want any development at all. There’s a lot at stake. If New Jersey doesn’t adopt transit villages, its fate is sealed. Jobs will go to other places.”
The European Model — Coming Soon? Not only are home prices declining. Not only are lovely homes failing to attract even minimal interest. But bigger changes are coming. Otteau says that this is just the beginning of an enormous housing shift.
“Young and old are outmatched in this housing market,” he says. Each year fewer and fewer New Jersey residents earning the median income for their town can afford the median-priced home in that town. He sees first-time home buyers becoming older, and predicts less mobility, longer ownership, and fewer trade-ups, and, at the same time, more remodeling. He thinks that 40 and 50-year mortgages will become the norm, and that houses will become smaller and more utilitarian — no more two-story foyers or seldom-used living rooms and dining rooms.
What’s more, Otteau says that New Jersey, where 67 percent of residents now own their homes, will become a state of life-long renters. “In Europe,” he points out, “only 10 percent of the population owns their homes.”
The Best Strategy Now? While the European model — as well as the transit village model — may be a decade or more away, there is something that sellers in a down market can do right now to give themselves a good shot at moving their homes quickly.
The first step, accepting that the housing boom is over for now, is painful. For those who can get past that, Otteau’s advice boils down to two words “right pricing.” He suggests that sellers get in touch with a real estate agent, and accept his or her opinion on their home’s value in this market. The benchmark he likes to use is the price of the lowest-priced direct competitor. This may be easy to establish in a development of 100 basically identical homes, and more difficult on a block with a mix of large and small, decrepit and recently-renovated houses.
The agent will take everything from bathroom remodels to garage configurations to energy-saving features into account in determining value and identifying direct competitors. Once the lowest priced direct competitor has been identified, the smart seller will put his home on the market for a little less than that price.
“Sellers who price their homes lower sell them for more money,” says Otteau. He has done detailed analyses that prove this point. In one study, he analyzed 188 single-family homes priced at $1,250,000 to $1,750,000 on the market in Hunterdon, Morris, Somerset, and Union counties in the first half of 2007. He found that those priced at approximately $1,495,000 sold for a median price $1,455,000 in an average of 32 days. Meanwhile, similar houses priced at approximately $1,650,500 sold for a median price of $1,404,621 in 142 days.
Optimism has its place, but it also has its time. Otteau’s in-depth study of the New Jersey market indicates that this is not the time to price homes with a rosy view of the market. But the sting of the bad news he delivers should be substantially tempered for most sellers by a look into the rear view mirror.
Yes, the housing escalator has stalled, but it also rose far and fast. Still more good news for those heading out of state is that the escalator has not only stalled, but has reversed course and is zooming toward the basement in many other parts of the country.
This is not the time to set a sale price record for your block, but it could be a great time to move up to an even nicer block.
Otteau Valuation Group, 15 Brunswick Woods Office Park, East Brunswick 08816. Jeffrey Otteau, president. 800-458-7161. E-mail: firstname.lastname@example.org. Home page: www.otteau.com