Not too many months ago, every economist, real estate agent, and homeowner was frantically wondering in agonized whispers, “When’s the bubble going to burst?” Now that day has dawned. Folks aren’t getting quite as much for a house or office building as they did 18 months ago. Now the question is: “How far will prices slide?”

James Hughes, dean of Rutgers University’s Bloustein School of Planning and Public Policy, provided some answers, when he spoke at “Construction and New Jersey’s Economy,” an industry event that took place on Friday, December 1, at the Trenton Marriott.

Hughes’ career has grown right along with his profession. He grew up in Elizabeth, and went to Rutgers to study public planning. But once there he was told that the only slot for such studies was in an obscure section of general engineering. Hughes accepted the challenge and graduated first in his section. “Of course, I try not to tell folks that there were only two of us back in l965,” he laughs.

After two years in the Army, Hughes returned to visit friends at Rutgers, and professors invited him to enter the university’s new two-year master’s program in planning. Just as he was finishing up, Rutgers formed a Ph.D. program in the discipline. He completed it, and stayed on as a professor. With Rutgers professor since l971, Hughes has written 31 major reports and authored or co-authored 33 books dealing with the relationship of housing, demographics, and economy.

The real question, as Hughes sees it, is whether this latest l998 to 2006 housing boom will mirror the previous one, which peaked in the third quarter of l988. In his opinion, today’s boom is a similar, but differently-driven animal, and will probably have its own characteristics.

Eighties explosion. Between l980 and l988 New Jersey’s housing market took an unprecedented leap. Buildings couldn’t fly up fast enough. Commercial, residential — every structure made money. Of course, loan rates responded. Home mortgages in l980, from the few banks still offering them, rose to 18 percent with more than 50 percent down required.

New Jersey home prices soared a whopping 145 percent during this period, leaving Hughes to quip that Garden State homeowners made more money asleep than awake. But ours was an anomaly. While the rest of the country’s buildings appreciated, housing prices for the same period across the country rose 45 percent — a boom by any measure, except compared with New Jersey.

“This led to the vast overbuilding of commercial offices along U.S. 1,” says Hughes. “A lot of owners, particularly the condo people, were riding for a fall.” After l988, prices began to hold firm. In l991 the market declined 7.7 percent from its peak. Big booms require long recoveries. It was not until l998 that houses again reached in nominal dollars the same price of a decade ago. But since that time we have experienced a 33 percent rate of inflation. (Very real even if economists no longer dare talk about it.) Thus in actual spending power, houses did not recover their l988 glory-day prices until 2003. So, is such a bust model looming in our futures following the l998-to-2006 boom?

Demographic differences. “The baby boomers and the baby boom echo (their children) are the 800-pound gorilla in the housing market,” says Hughes. The baby boomers were the force behind the purchase of the many McMansions that currently crowd our landscape. But now this top heavy group is shifting from top lifetime earners to fixed income retirees. Many will be moving out of state, or to smaller homes and will want to sell.

However, a new and swelling demographic factor may save the baby boomers, says Hughes. A large immigrant population is growing in numbers and longevity. Currently one out of every five New Jerseyans is foreign born. Many of these new residents are eying those McMansions — and just may save the prices for the boomers.

This time?. Homeowners fearing a repeat of the post-1980s bust can hide their worries under the bed, says Hughes. Not only do we have a fiscally healthy immigrant population, but we also have other advantages. New Jersey home prices have not been pushed up by speculators the way they have been in other place — Las Vegas and Miami, for example. There have not been long lines of buyers waiting to snap up residential properties, and resell them two months later.

Additionally, the gap between home appreciation in our state and in the rest of the nation is substantially less than it was during the 1980s boom. From l998 to 2006, while New Jersey home prices rose 131 percent, America trailed more closely with a 91 percent rise.

As Hughes sees it, prices will indeed decline, probably until some time in 2009. At which point, watch out for another upswing, peaking in 2016. What goes around, comes around. Probably the best advice is to enjoy your house. Treat it like a home, and not like a speculative investment.

— Bart Jackson

The Big Picture

Michael Hudson, a real estate analyst who provides commentary on PBS radio program Marketplace, is speaking on “Real Estate, Crash, or Soft Landing” on Thursday, December 7, at 7:15 p.m. at the conference center at Raritan Valley Community College. (Contact Jeff Sommers at jsommers@fulbrightweb.org.)

Hudson predicts that many homeowners will soon be trapped in homes they cannot sell for the amount of their mortgages. He believes that the housing bubble of the past few years was not entirely a random event, but rather was engineered by lenders and by the government.

His article on the subject, “The New Road to Serfdom,” appeared in Harper’s Magazine last May.

“Never before have so many Americans gone so deeply into debt so willingly,” writes Hudson, who teaches at the University of Missouri at Kansas City. “Housing prices have swollen to the point that we’ve taken to calling a mortgage — by far the largest debt most of us will ever incur — an ‘investment.’ Sure, the thinking goes, $100,000 borrowed today will cost more than $200,000 to pay back over the next 30 years, but land, which they are not making any more of, will appreciate even faster. In the odd logic of the real estate bubble, debt has come to equal wealth.

“And not only wealth but freedom — and even stranger paradox. After all, debt throughout history has been little more than a slight variation on slavery. Debtors were medieval peons or Indians bonded to Spanish plantations or the sharecropping children of slaves in the postbellum South. Few Americans today would volunteer for such an arrangement, and therefore would-be lords and barons have been forced to develop more sophisticated enticements.”

Hudson calls the lure that led to the just-burst housing bubble “brilliant.” He writes that home ownership may be a wise choice for many people, but that “this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage, a lifetime spent working to pay off debt on asset of rapidly dwindling value.

“Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.

“Free markets are based on choice. But more and more homeowners are discovering that what they got for their money is fewer and fewer choices. A real estate boom that began with the promise of economic freedom almost certainly will end with a growing number of workers locked into a lifetime of debt service that absorbs every spare penny. Indeed, a study by the Conference Board found that the proportion of households with any discretionary income whatsoever had already declined between 1997 and 2002, from 53 percent to 52 percent. Rising interest rates, rising fuel costs, and declining wages will only tighten the squeeze on debtors.”

While Hudson may or may not be right about the bubble that ended a little over one year ago, it is instructive to remember that between the years of 1983 and 1993, or thereabouts, real estate prices in Princeton were absolutely flat, while prices in surrounding towns dropped as much as 33 percent. Many other experts, including James Hughes, who is quoted above, do not see anything like that scenario happening this time. Time will tell.

— Kathleen McGinn Spring

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