Tag Archives: Jeffrey Otteau

2015 Housing Market Outlook: Improving (Maybe)

BHHSNJ NJ301_H_Seal_cab_cmyk

by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

On March 24th I attended the Spring Housing Trends Workshop presented by Jeffrey Otteau, president of the Otteau Valuation Group, Inc.

Jeffrey Otteau

Jeffrey Otteau

I always enjoy attending Mr. Otteau’s workshops because his evaluations and predictions related to the northern New Jersey housing market are well thought out, well presented and always backed up by impressive research. This current workshop was no exception. I was keen to hear Mr. Otteau’s thoughts on our current New Jersey housing market to see if my perceptions of 2014 were correct and to hear his forecast for 2015. I am using a few of the graphics Mr. Otteau used in his presentation with his company’s permission. All materials are copyrighted by The Otteau Valuation Group, Inc. Click on the graphics to obtain a larger image.

Copyright 2015 The Otteau Valuation Group, Inc.

Copyright 2015
The Otteau Valuation Group, Inc.To

To gain perspective on what the last year has brought, let’s start with this graph which shows that New Jersey is not doing as well as the nation as a whole in job recovery since the recession (which, by the way, ended 6 years ago).  As you see, the US has recovered 132% of the jobs lost in the recession while New Jersey has currently recovered just 62%.  That’s the 3rd weakest in the nation.  This is an improvement, however, since October of 2014 when it was just 30%.  New Jersey has some other, ongoing, formidable challenges as well.  It’s rated worst state for retirement, highest in personal taxes, highest in out-migration (about 60,000 people leave the state every year – including young people – more on that later), it has the highest share of young adults living with their parents and has the least efficient road maintenance.  Bear in mind that these issues are for the state as a whole.  With 565 municipalities in 21 counties these situations may be different from place to place.  The point is, the overall housing market in New Jersey will be affected by these factors throughout the state.  The unemployment rate varies from region to region in New Jersey with the northern counties enjoying a lower unemployment rate (4.2% to 7%) than the southernmost counties (9.6% to 13%).   Companies are on the move out of New Jersey as well as evidenced by the high vacancy rates in office buildings.  This factor will also suppress job growth.

New York City, on the other hand, continues to enjoy major job gains and a robust economy.  This affects the housing markets in New Jersey with easy commuting to NYC.  Those towns with trains, especially, remain strong housing markets.

Mr. Otteau indicated that job creation in New Jersey is off to a strong start with 12,400 jobs added in January which would equate to a gain of 148,000 jobes over the course of a full year.  At the same time, new jobs in New Jersey mirror the rest of the country in that a significant portion of those new jobs are of lesser quality, especially in the service sector where wages tend to be lower.

Copyright 2015 the Otteau Valuation Group, Inc.

Copyright 2015
the Otteau Valuation Group, Inc.

A direct correlation exists, obviously, between wage growth and housing market growth.  The above graph illustrates how weak New Jersey remains in household income.  While the US has added 1.8% to household income in the last 12 months, New Jersey’s residents, on average, have seen their household income decline by 7.4%.  Home ownership, not surprisingly, is also down in NJ (down 9%) compared to the US (down 6%) post recession.  Median housing prices are down 21% in New Jersey since the peak prices in 2005, whereas the US as a whole is down 12% from the 2005 peak prices.  Home prices in New Jersey were, on average, flat (no improvement) at the end of 2014.

Copyright 2015 The Otteau Valuation Group, Inc.

Copyright 2015
The Otteau Valuation Group, Inc.

Here’s a fascinating New Jersey demographic change:  7 out of 10 households in New Jersey have no children under the age of 18. The highest average number of people in a NJ household is 1 to 2 people.  Enrollment in New Jersey’s school districts is down by more than 25,000 students.  These changing circumstances, coupled with New Jersey’s dubious distinction of having the highest out-migration in the nation raises questions of what the state has done with regard to its youth and the future of its housing.  Naturally, birth rates will be down in times of economic uncertainty and we’ve got plenty of that as illustrated in the first 2 graphs.  The question remains: why is the state not holding on to its Gen X, Ys and Millennials?  Mr. Otteau points out that New Jersey’s local governing boards have gone out of their way, down through the years, to create bland (read: boring), safe, predictable suburbs which children of the baby boomers are fleeing in great numbers.  Otteau also observes that the properties in many New Jersey municipalities have been zoned out of reach financially for young people with larger and larger plots that are unaffordable to any but the more affluent, established adult population.  Starter house prices on any size lot in many NJ towns are unaffordable to young people just starting out which leaves them with the choice of renting (that market is booming), living with their parents (which they are in NJ, in great numbers) or leaving the state, which they are also doing in great numbers.  The higher property and income taxes in New Jersey also weed out many young people from buying.  The effects of a “baby drought” and out-migration are legion, from the effect on school districts, to property taxes to the future population stability of New Jersey.  Smaller household sizes will also have the effect of stunting housing market growth and development.  All these factors will have an impact on the future of the housing market  in the state as we continue to recover from the recession.

Copyright 2015 The Otteau Valuation Group, Inc.

Copyright 2015
The Otteau Valuation Group, Inc.

And, recovering we are, even taking New Jersey’s challenges into account.  The above graph reflects what we call the “absorption rate” or the amount of time it takes (in months)  the market to “absorb”, or sell, the housing inventory available.  It’s very clear that there’s been improvement since the grim years going back to 2009, 10, 11.  What’s most interesting, also, is the slippage in the market between 2013 and 2014.  More parts of the state slipped into the longer absorption rates, confirming the impression that 2014 was not an improving year for housing.  2013 was a “great sigh of relief” year, in my opinion.  People were finally convinced that the economy was improving based on the media and their own perceptions which led to a surge of pent-up demand and a market improvement in home sales and prices.  2014 saw the engine of recovery sputter a bit as people did not see marked improvement going forward in wages or opportunity.  This, in my opinion, led to a cooling of the housing market in 2014 which is confirmed by this graph and the fact that home prices rose 4% in 2013 and only 1.4% in 2014.  The housing market sputtered in 2014 also from the fact that the price of homes outpaced the growth of  homebuyers’ income and underwriting standards by lenders continued to be tight.  It’s apparent that more of the state is in the lower absorption rate this year with predictions of improvement being confirmed.  Essex County where I work has the 2nd lowest absorption rate of the NJ counties at 4.6 months.  Unfortunately, the southern-most counties have had a terrible housing market for the last 5+ years and continue to have challenges.  As you can see, in the western-most counties the news is mixed with some counties improving and some slipping back.  Not surprisingly, the counties nearest the major markets of New York City and Philadelphia continue to improve with regard to housing.

Copyright 2015 The Otteau Valuation Group, inc

Copyright 2015
The Otteau Valuation Group, inc

This continues to be my favorite graphic from Mr. Otteau’s seminars.  It shows the gain in home prices during the “boom” years pre-recession, the percentage of value lost during the recession and tracks the recovery of housing prices going forward.   You’ll notice that a home that was worth $339,000 in 2005 will be worth that again in 2025 according to this table.  The timeline for price recovery has slipped a bit.  In October of 2014 the same graph showed that house recovering its value in 2022.  Again, these values are averages, taking the entire state into account, including its slowest, weakest markets.  The strongest markets in New Jersey will see recovery faster.  Mr. Otteau projects that housing prices will rise about 3.5%, on average, in 2015 and will continue to rise, slowly in years to come.  Bear in mind that real estate markets usually have a 5 to 6 year cycle and so we are due for a small correction soon.

So, what should we take from all this data?  The NJ housing market is continuing its conversion back to a “normal” market.  The market was an overheated anomaly in the years just prior to the recession and sunk as the recession’s correction took place.  I call the pre-recession market an anomaly because it varied tremendously from markets of the past 50 years and was a unique occurrence fueled by deregulation and the loosening (some say abandoning) of lending standards not seen since the Great Depression of 1929.

New Jersey’s “transit villages” continue to be strong markets, even as the state lingers at the bottom of many nationwide categories.  A buyer or seller should take all of the above factors into account when approaching the market today.  Sellers should not be overly ambitious in asking prices.  The market is still tied to many factors which exhibit weak recovery such as wages.  Sellers will be inclined to ask for more when they perceive housing in their area is selling quickly, and, being human, they may let their ambitions get the better of them.  Even during the boom years an arbitrarily, excessively overpriced home would not sell.  That is even truer today in a still weak and recovering market.

A buyer should not wait.  Prices will rise as the economy improves.  The strategy of waiting for a lower price on a property is no longer sound.  Prices will go up in stronger markets and stabilize in other markets and the deals are best made now before interest rates also rise with a strengthening economy.  For every 1% rise in interest rates a buyer will experience a 9% drop in purchasing power because of the increased cost of borrowing.  Mr. Otteau predicts rising interest rates and it’s only the weakness of the overall economy that has kept rates as low as they are today.  That will not last much longer.

As always, my advice is to enter the real estate market as a buyer or seller when it’s right for you and the circumstances in your life.  The important thing is to have realistic expectations of what kind of environment you’re embarking into and that’s where all these facts and figures have value.  My approach has always been to give clients all the facts to help them make wise choices rather than sweet talk buyers and sellers with rosy scenarios which may not be entirely real.  There’s nothing worse than approaching real estate (or anything else, for that matter) with unrealistic expectations.

Can’t get enough of my opinions?  Take heart. I have another (non-real estate) blog called “The World At Large by Jim Stefanile – Thoughts On Everything Else”.

This month’s post is “Who Are These People?” where I discuss the The Affordable Care Act,  I hope you can visit:  https://jimstefanilesotherblog.wordpress.com/2015/03/05/who-are-these-people/

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Housing: Recovery or Regression?

BHHSNJ NJ301_H_Seal_cab_cmykby James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

On October 21st I attended the Fall Housing Trends Workshop presented by Jeffrey Otteau, president of the Otteau Valuation Group, Inc.

Jeffrey Otteau

Jeffrey Otteau

I enjoy attending Mr. Otteau’s workshops because his evaluations and predictions related to the northern New Jersey housing market are well thought out, well presented and always backed up by impressive research. This current workshop was no exception.  I was keen to hear Mr. Otteau’s thoughts on our current New Jersey housing market since my perception was that our post-recession housing recovery had stalled, based on the monthly numbers I have been seeing.  Turns out I was right.

I am using a few of the graphics Mr. Otteau used in his presentation with his company’s permission.  All materials are copyrighted by The Otteau Valuation Group, Inc.  Click on the graphics to obtain a larger image.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

The workshop started with a long view of US economic growth since 1930.  The startling fact is that, overall, US growth has steadily declined since the 30’s.  The mightiest blows to traditional growth have been the rise of globalization and technology.  Over time, emerging counties have provided heightened competition to economic production in the United States.  Also, since the collapse of Communism there has been a rise in capitalist systems around the world as newly free societies adopted another economic model.  Jobs have migrated away from our shores as a result.  The second factor is technology, whose fundamental purpose is to replace people.  It’s no secret that some work that was done by 10 workers in the past can now be accomplished by 1 worker and a machine or computer or, even, no humans at all.

This was the general state of things regardless of the The Great Recession we’re recovering from in 2014.  Our current housing market in New Jersey is a result of a number of factors related to that recovery, not the least of which is that New Jersey’s post recession job recovery has lagged behind the overall US number.

New Jersey has, as of today, recovered 39% of the jobs lost in the recession, whereas the US, overall, has replaced 113% in the same time period.  Housing strength is always, and obviously, in proportion to employment.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

This graph shows the rate of increase in New Jersey residents income (the consistently rising brown line) as compared to the rise in housing prices (the meandering blue line).  You will notice that whenever the increase in housing prices outstrips the rise in income figures there is a correction to follow where housing prices collapse, most notably the decline which started in 2006 and continued into the Great Recession.

Add to this, New Jersey’s residents’ average income has declined by 7.4% in the last 12 months as opposed to the overall US income growth of 1.8% and you have an emerging picture of where housing is at the end of 2014.  New Jersey is a very expensive state from a consumer goods, taxes and regulation standpoint and housing prices have also risen, predictably, post recession.  Mortgage rates, while still at historic lows have ticked up ever so slightly over the last year which knocked some people out the housing market since even an 1/8th or 1/4 point increase in rates will decrease the price of a home someone can hope to afford.  Mortgage lenders are still over-compensating from the madness of the early 2000’s and this is also decreasing the amount of first time buyers in the market along with the absence of investors in income producing housing.

Mr. Otteau also points out that New Jersey has some work to do with regard to its overall attractiveness as a destination.  It’s ranked worst state for retirement, has the highest property taxes, the most restrictive land controls, and the highest domestic out-migration and share of young people living with their parents.  There were a few more negatives mentioned but, enough already.  You get the idea.

This all leads to a decrease in sales and an increase in inventories as New Jersey’s housing prices have stopped accelerating.  The next few graphics illustrate this trend.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

Here we see that New Jersey’s housing inventory is rising again, expressed in months of supply, broken down by housing price.  Please note that these are averages.  There are 565 municipalities in the state and many of these markets differ.  Glen Ridge, for example only has 2 months worth of inventory overall as opposed to New Jersey’s statewide 7.8% and Essex County’s 6%.  Months of supply is also known as the absorption rate – the amount of time it will take for a market to absorb (sell) the inventory available.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

Next we see that the median home price in New Jersey has stopped rising in the second quarter of 2014.  Again, some towns may be performing better than this.  I monitor the numbers in my local area and, even though some are stronger than the statewide averages, I have seen recent slippage in numbers of sales, pending contracts and a slow down in the rise of local prices.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

Sticking with the absorption rate model, this graphic shows the state’s months of housing supply, by region, over time since the recession.  Red areas have more than 12 months supply, blue areas have 8-12 months supply and green areas have less than 8 months supply.  The obvious improvement is shown since the period immediately following the crunch but the most interesting thing is the difference from 1 year ago.  In 2013 the absorption rate was, in most of the state, less than 8 months of supply.  In 2014 more of the state has fallen to between 8-12 months of supply.  This is the bedrock conclusion of Mr. Otteau’s research and my on-the-street perception.  Demand is cooling and we are not doing as well today as a year ago.  One indicator is that 2014’s year-to-date number of purchase contracts in New Jersey is down 6% from 2013.

The housing recovery will continue, according to the workshop’s conclusions, but slowly with slower increases in price, even with mortgage rates expected to remain low until the spring of 2015.  Next year Mr. Otteau predicts continued economic growth, continued, slow, housing price increases and mortgage rates approaching 5% by the end of 2015.  In 2016, a presidential election year, Otteau predicts mortgage financing will begin to loosen with prices and interest rates still on the rise.

Copyright 2014 The Otteau Valuation Group, Inc.

Copyright 2014 The Otteau Valuation Group, Inc.

Here’s my favorite graphic which Mr. Otteau provides in most of his workshops.  It shows the rise and fall and rise again of home prices in New Jersey for the period 2000 to 2022.  If a home was worth $339,000 at the brink of the housing crunch in 2005 it will be worth that same price again in 2022.  When I attended the fall seminar 1 year ago it was 2019 so, once again, we are backtracking.

So, what conclusions should a consumer take from all this?  Buyers should not wait.  Rates and prices will increase, supply will probably decrease and the sellers’ advantage will be stronger as a result.  Sellers should be practical and realistic in offering prices and acknowledge that buyers have some emerging advantage.  I won’t counsel sellers to wait until their advantage strengthens.  As the last graph illustrates it will be a long wait.  In the meantime we are experiencing a more normal market which is equally advantageous to both buyer and seller.

 

If you can’t get enough of my opinions, take heart. I have another (non-real estate) blog called “The World At Large by Jim Stefanile – Thoughts On Everything Else”.

This month’s post is “A Fateful Universe?” where I discuss the idea that “everything happens for a reason.” I hope you can visit: http://jimstefanilesotherblog.wordpress.com/2014/10/28/a-fateful-universe/

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A Once In A Generation Opportunity

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by James Stefanile, ABR, GRI, SRES, QSC, REALTOR/Salesperson, Prudential NJ Properties, Montclair, NJ

I recently attended the 2013 Spring Market Workshop hosted by Jeffrey Otteau, of the Otteau Valuation Group, Inc.  Mr. Otteau is generally considered the leading authority in the New Jersey real estate market.  His seminars are usually sold out to REALTORS and others in the business.  With an impressive track record in predicting where the New Jersey real estate market is going, his events are of great importance to me as I try to expand my knowledge for the benefit of my clients.

Jeffrey Otteau

Jeffrey Otteau

This seminar was a few hours of good news.  It’s generally perceived that the market has improved but Otteau attached facts, figures and charts to the perception, leading to a deeper understanding based on many facts, some of which I will share here. The dominant message was that this recovery is strong and will be long-lasting and is well underway, as the following chart shows.  Except for the US Census Bureau graph of housing market cycles, all graphics in this post are copyrighted by the Otteau Valuation Group, Inc. and  are used by permission.  If you click on any graphic you will be able to enlarge it for easy viewing.

Copyright 2013 Otteau Valuation Group, Inc.

Copyright 2013 Otteau Valuation Group, Inc.

This chart shows the amount of home buyer traffic nationwide for the last 5 years.  The graph starts in January of 2008, before the financial crisis but well into the market decline which actually started in 2006 and was not generally perceived until sometime in 2007.  You will notice that the volume of traffic today is the highest in the 5 year period by a large margin.  This chart shows that buyers are back and back with a vengeance.  Increased job security, consumer confidence, a sense of urgency and the gradual improvement in the US economy are all reflected in this graph.  Otteau pointed out that the economy is 2.4% higher today than it was at the beginning of the recent recession even though job creation is down by an equal amount.

Many of Otteau’s facts reveal the market cycle we have just experienced.  Most of the past history of the US real estate market has been cyclical in 5-7 year increments – 5 years up then 5 years down again and again except for the period from 1996 to 2006.  We were poised for a downward correction in 2001, but when September 11th happened, certain government policies and de-regulations were enacted which gave the housing market another 5 year upward trend.

Housing Market cycles since the '60's

Housing Market cycles since the ’60’s

This 10 year rise in the market was very much an anomaly and the correction which followed it was equally strong downward from 2006 with the recovery taking hold in 2012. What we are experiencing now is a strong housing market that has shaken off the “fiscal cliff”, “sequestration”, European economic crises and various outbreaks of foreign conflict.  Interest rates are at historic lows thanks to the continuing actions of the Federal Reserve and home prices started to rise in 2012, are continuing to rise in 2013, as the next graph shows, but are nowhere near where they were at their peak a few years ago.

US Prices still rising

Copyright 2013 Otteau Valuation Group, Inc.

The most fascinating fact learned at Otteau’s seminar is that interest rates and housing prices have never, ever, been low at the same time as they are now.  Otteau describes this as a once in a 50 year buying chance, in his words, a “once in a generation opportunity”.  My own parents bought their first house in 1951 for 3% and that rate has been replicated today, 62 years later.  The lesson of the above graph is, however, that prices continue to rise and interest rates will rise as the economy improves so this may be a fleeting opportunity.  For every 1% rise in interest rates, a buyer will have to reduce a hoped-for home price by 9% as the increased cost of borrowing erodes his buying power.

Copyright 2013 Otteau Valuation Group

Copyright 2013 Otteau Valuation Group

A good indicator of the upward pressure on prices is reflected above.  We are experiencing the same lack of  “inventory”, or homes for sale, that partly fueled the boom we had in housing at the beginning of the century.  As this lack of choice continues, combined with buyers returning in greater numbers, prices will have nowhere to go but up.  Otteau expects to see prices rise, on average, by 3% in 2013.  He says he won’t be surprised if they rise by 6% but he hopes not, since prices rising too high too fast will not help a sustainable recovery in housing.

A prime indicator of the strength of the housing market is what’s called the “absorption rate”, in other words, how long will it take the market to absorb (sell off) existing inventory.  During the boom, the rate was under 2 months for many parts of northern New Jersey.  That rate expanded to over 12 months during the recession, but, as the following graph shows, it’s dropping fast in most of the state.  The less time it takes the market to absorb inventory the less homes will be available for sale.

Copyright 2013 Otteau Valuation Group, Inc.

Copyright 2013 Otteau Valuation Group, Inc.

So, the natural conclusion to draw from all these conditions is we are in a brief but wonderful moment of opportunity.  These will be regarded as “the good old days” for buying a house as prices will not recover their previous peaks for a few more years.  As that happens, however, borrowing money will become more expensive and prices will continue to rise, possibly shutting out some people who could benefit by today’s conditions.  The chart below reflects Mr. Otteau’s projected home price forecast through 2019.

Copyright 2013 Otteau Valuation Group

Copyright 2013 Otteau Valuation Group

Notice that the increase in prices accelerates in the next couple of years as homes regain their value.  No buyer, in my opinion, should sit on the fence waiting for prices to fall further.  We’ve passed that part of the market correction and have embarked, as all the above information shows, on a new, upward cycle.   We are in a golden but brief period for buyers.  My conclusion is the New Jersey real estate market, going forward, will experience more buyer competition, rising prices, lower supply and higher demand.  There has never been a better time to act and it won’t last.

Please also visit my other blog “The World At Large By Jim Stefanile” where this month’s post is “Are We Alone? (And Should We Stay That Way?)”

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