Real Estate: The New Reality

It’s a buyer’s market—for those who can get the financing.

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After one-and-a-half years of living in an apartment in the Ironbound district of Newark, Michael Gordon and his fiancée, Carolina Montesdeoca, decided the time had come to buy a house in a “nice, quiet suburb, with a yard,” Gordon says. So they set out to make it happen.

Both 27 and each with a secure job—he is a securities and financial services lawyer, she is a legal assistant—they began saving for a substantial down payment. They also worked on improving their credit scores. (Gordon says his is now in the low 700s, while his fiancée’s is in the mid to high 700s.) They signed on with a real-estate agent who sent them multiple listings, which they pored over every night after work, and visited by the dozen each weekend. After several weeks of searching, they decided on a 2,600-square-foot bi-level home in Roxbury Township, in western Morris County, which they bought for $397,500, $32,500 less than the asking price when the house first went on the market last fall. Gordon’s uncle, a mortgage broker, guided the couple through the mortgage process, a nightmare for many but a walk in the park for this young couple.

“As a lawyer, I tend to be organized,” says Gordon. “We had set a goal and knew we had to get everything in order so it would go as smoothly as possible, and, surprisingly, it did. I don’t know if we are the exception.”

Exception indeed. Buying a house today is not for the faint of heart, nor for those with less than stellar credit scores, those who currently own a house they need to sell, or anyone who has run into mortgage trouble in the past. 

Depending on who’s talking, the real estate market is either on a downward trajectory, or it’s finally starting to turn the corner. Charlie Oppler, CEO and managing partner of Prominent Properties Sotheby’s International Realty in Bergen County, represents the latter group, noting that the 105 houses in the $1 million-plus range sold by his office in the first six months of 2011 nearly doubled the number of high-end homes his team sold in the same period last year.

“This tells me that there are enough people who are saying, ‘There’s lots of good things out there to take advantage of. Let’s make our move,’” Oppler says.

James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, falls in the other camp. Having once predicted a full recovery of the real estate market by the middle of this decade, he has pushed his forecast back to 2020, predicting that we have not yet hit bottom.

“It’s been worse than most people expected,” says Hughes. “It looked like we were stabilizing, then we even had a little bounce with the home-buyer tax credits last year; then they expired, and the job market continued to be tepid, so the dip began again.”

The numbers also send a mixed message, something Jeffrey Otteau is quick to point out. His company, Otteau Valuation Group, monitors the state’s real estate and job markets and provides monthly reports to real estate executives throughout New Jersey. According to his latest reports, the number of New Jersey homes for sale is up (and will continue to grow), while the state’s job recovery—the key to a healthy housing market—is proceeding at a pace two-thirds slower than the national average. 

Foreclosure sales in the state are down, largely due to last December’s court-ordered moratorium preventing banks from rubber-stamping foreclosure claims. But the inventory of delinquent properties continues to grow. At the end of June, New Jersey had 121,258 homes in foreclosure, the sixth highest number in the country, according to real estate data firm LPS Applied Analytics, and another 54,812 homes for which owners are more than 90 days behind in their mortgage payments. Once the banks meet regulatory requirements, probably by the end of the year, these homes are expected to flood the market, further depressing prices of existing homes in the most affected neighborhoods.

Still, there are encouraging signs. One came in May, when the number of houses under contract rebounded 13 percent over the previous May, the first uptick since the home-buyer tax credits ended more than a year ago.

“It’s a real, honest-to-goodness increase in housing demand,” Otteau says. “One month doesn’t make a trend, but it’s a fairly substantial rise, and it starts to raise hopes.”

With record-low interest rates and bargain-basement prices, buyers are beginning to recognize opportunity. “We’re never going to see a market like this again in most of our lifetimes,” says Bryan Vurgason, an agent with Keller Williams Realty in Cherry Hill.

If you’re ready to take the plunge, here’s what you’re facing:

The Buyer: Investors and trade-up buyers who still have equity in their homes are driving the market, with investors taking advantage of fire-sale prices on loan-delinquent properties. The National Association of Realtors (NAR) reports that 29 percent of buyers this spring paid all cash. Further, 18 percent of transactions involved foreclosed properties, and 12 percent were short sales (a compromised price agreed upon by a lender to satisfy a seller’s mortgage balance to avoid foreclosure).

For first-time home buyers—unhampered by a property they have to sell—the current market offers a shot at the American Dream. First-time home buyers make up 31 percent of the market today, according to NAR. That’s down from the nearly 50 percent they once represented—but still a driving force.

On the other hand, a shaky job market and labyrinthine borrowing requirements have prompted a growing number of potential buyers to rent instead. There are  38 million rental households nationwide, according to NAR, 4.3 million more than in 2005.

A 2010 New Jersey Association of Realtors survey of  recent home buyers found that the average Garden State home buyer is 38 years old, has an income of $99,000, compared to $72,200 nationwide, searched on average for 16 weeks and looked at 15 houses before making a decision.

Retirees and empty-nesters, once considered an important demographic for developers, are no longer a significant factor, as more of the state’s 55-and-older residents are choosing (or being forced) to stay put in their current homes or to move out of state upon retirement in order to avoid New Jersey’s high taxes.

The Market: In May there were 73,000 homes for sale in New Jersey, according to Otteau, a level that matches the all-time high of 2008, which Otteau refers to as “the deepest, darkest days of the Great Depression.” This number reflects some but not all of the houses in various stages of the foreclosure process. Since then, unsold inventory has begun to decline modestly.

“There’s a tremendous amount of inventory out there, which really makes it a buyer’s market,” says Gary Large, president-elect of the New Jersey Association of Realtors. “The problem is that buyers are still a little hesitant about where the market might go, so they’re waiting.”

Prices continue to drop. Statewide, the median sale price on a single-family home fell from $347,000 in 2007 to $300,000 in 2010; it was down to $280,900 for the first quarter of 2011.

The healthiest markets today are in North Jersey, where there is a higher concentration of jobs, proximity to New York City and superior transportation services to job corridors. To measure the health of a market, Otteau determines the length of time it would take to sell all the houses being offered in a given area, based on the current pace of sales. A six-month supply is considered balanced; that condition is nonexistent in the state. But nine counties—Bergen, Morris, Passaic, Union, Essex, Hudson, Monmouth, Somerset, and Middlesex—have supplies of between 8 and 12 months. 

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The high end of the market was particularly strong in the first half of 2011, with the number of houses sold between $1 million and $2.5 million up 12 percent over the same period last year. Oppler says his office has been involved in bidding wars this year in desirable communities like Franklin Lakes and Montclair.

The weakest housing markets are in South Jersey and the northwest corner of the state, areas hardest hit by the economic downturn. Salem and Atlantic counties have a 23-month supply of houses on the market, Cumberland County has a 19.5-month supply, and Cape May County has a 21-month supply. In the northwest, Sussex has 15.5 months of supply and Warren has 13 months.

Weaker yet are towns most beset by foreclosures, which in New Jersey are concentrated in the most urban and most remote rural areas. With foreclosure proceedings at a virtual standstill for now, Herb Blecher, senior vice president of LPS Applied Analytics, says LPS data suggests it would take 54 years to clear the pipeline of New Jersey’s foreclosure inventory at the current pace of bank repossessions.

“It’s like having a gallon of water and letting it out drip by drip,” says Blecher. “Right now, the spigot is closed, and unless you open the spigot, it will be several years before getting back to normal.”

But buyers able to locate foreclosed properties and willing to withstand the rigors of the process, can reap a great bargain. That’s what Michael and Shanta Tucker did when they went searching for a weekend getaway home. They zeroed in on Asbury Park, where there were a number of foreclosed homes. This led them to a foreclosed five-bedroom house in neighboring Loch Arbour, just three blocks from the beach. Built in 1911, with 10-foot ceilings and original woodwork, the house—which faces Deal Lake—was originally listed at $1.5 million. After significant wrangling with the bank, the Tuckers got the house for $455,000. Buying a foreclosed house didn’t scare Michael Tucker, who says, “You’re fundamentally going through the same process.”

“Where the unknown comes in is what you’re getting with a house that hasn’t been lived in for years,” says Tucker, 33, an architect in Manhattan. “When we turned on the water, a sprinkler went off inside the wall.”

Bargains can also be had with traditional home sales in weak markets like Sussex County, where Mark and Julie Bush bought a newly constructed four-bedroom house on 3.2 acres in Vernon Township in January, paying $355,000 for a house originally listed at $499,900. “As our family started to grow, I thought maybe it was time to find our dream house,” says 30-year-old Mark Bush, who, living in a condo nearby, bided his time as he watched several contracts fall through and the price drop until it reached a point where he felt comfortable making an offer.

The Seller: “From the seller’s perspective, if you don’t have to sell, this is not the market to be in,” says Large. His recommendation for anyone who has to sell now: “Price aggressively and get out as quickly as you can.”

Large adds that sellers quickly become aware of the fickle market and have been willing to drop their asking price after two weeks rather than two months. 

Oppler agrees. “It may have taken a few years, but sellers are becoming more educated and pricing more realistically,” he says. “People want to compare everything to 2003, 2004 and 2005, but those were abnormal years.” Indeed, home values have fallen more than 30 percent nationwide since 2005.

The Builder: New construction has taken a particularly hard hit. As a result, building activity has slowed significantly throughout the state. At the height of the real estate market in 2005, 37,980 residential building permits were issued statewide. Through June 2011, just 6,503 permits were issued for New Jersey, according to the U.S. Census Bureau. 

In an effort to keep approved building projects alive, the New Jersey Legislature has passed two bills extending the life of existing permits. The current extension is due to expire at the end of next year, but legislation has been introduced to push back that deadline to December 2014.

Meanwhile, builders are responding to the new economic realities, says Dominick Paragano, president of the New Jersey Builders Association. For builders, that has meant converting condos to rental units, opening up 55-and-over communities to all ages and focusing on mixed-use projects in commuter towns.

“People are trending away from the mega-mansion,” Paragano says. “There’s a trend back into community-type housing. People want to live smaller and more efficiently.”

The Financing:
While interest rates are at an all-time low, the biggest challenge facing many home buyers is securing financing. Banks have tightened credit requirements, as has the government for those applying for FHA-backed loans.

“Banks are taking no risks,” says Joseph Heisler Jr., president of the New Jersey Association of Mortgage Brokers. “The quality of loan applicants is far better than we’ve seen in years. Why they’re being tortured is beyond me.”

Torturous is how Michael Tucker described his banking experience in buying his house in Loch Arbour. “We were dealing with ineptitude,” he says. “They waited until the last minute to ask for all sorts of documentation that they needed within four hours or we couldn’t close tomorrow.”

The debt-to-income ratio has become more restrictive, and conventional mortgage lenders now require minimum credit scores of 620, according to Heisler. Government-backed FHA loans, which require down payments of only 3.5 percent and are increasingly popular for first-time home buyers, require a minimum credit score of 580. The monthly mortgage insurance premium charged to FHA borrowers has also doubled in recent months, Heisler says.

The Future: The two biggest concerns of those in the industry are the imminent release of thousands of foreclosed houses into the market and the nation’s slow pace of job recovery.
“We went from hemorrhaging jobs in 2009, when the state lost 118,000 private-sector jobs, to modest growth in 2010, to adding 28,100 in 2011,” says Hughes. “We’re moving in the right direction. But the numbers are not big enough to contribute to housing-market support.”

For new homeowners like Michael Gordon and Michael Tucker, there’s a shifting attitude about their recent purchases, viewing them as places to live rather than as investments.

“We’re planning on staying here for a while,” Gordon says. “The other night, I was walking outside and I actually saw stars for the first time. I definitely didn’t see those in the Ironbound.”

Jill P. Capuzzo is a frequent contributor.

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