Tag Archives: Otteau Valuation Group

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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Are We There Yet?

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

Is the housing recovery here?  Is it good news?  Well, it depends on who you are and where you are.

If you’re a REALTOR you’ll raise your right hand and swear we’re on an upward path.  If you’re a consumer you may be more cautious.  If you’re a mortgage lender you may have missed the memo.  If you live in New Jersey the news will be different (and better) from those of you who live in other parts of the country.  The news will be also different from town to town within New Jersey as well.

Robert J. Shiller, who helped devise the S.&P./Case-Shiller 20-City Index contends that in our society both consumers and lenders have become less speculative toward housing and have become more wary and regulated.*  This trend would mitigate against another spectacular run up in prices like we saw before the correction in the market.  Indeed, no one is predicting another boom in prices or volume going forward.  After all, the 10 year upswing we experienced from 1996 to 2006 is generally regarded as an anomaly, both in duration and prices.

While consumer confidence is growing, unemployment is only falling by tiny increments.  The economy is not generating the 200,000 jobs per quarter needed to fuel an all-out recovery and the decreased jobless rate also reflects people who have stopped looking for work.  The economy is growing but, in fact, did contract in the last quarter of 2012 due to a sharp reduction in government spending.  The politicians and reactionary elements calling for deep government spending cuts should take note.  The Federal Reserve has its foot on the gas, trying to stimulate the economy, mainly through “asset acquisition” – the buying of government bonds.  This is the main instrument the Fed has in guiding the economy – the infusion or retraction of credit.  The net result of the Fed’s current policies is the suppression of interest rates in mortgages, etc.  So, if you’re a consumer that’s great news with 30 year fixed rates in the 3-4% range.  But you’d better be a model citizen and be prepared to jump through a gauntlet of hoops to get your mortgage. since underwriting standards have become more strict.

I’m not trying to discourage anyone.  I think it’s a great time to buy, and, if positive trends continue, it may be a less great time in the future.  The point is, signs are mixed as far as the overall market is concerned and overall trends are even harder to predict given the many different markets we have nationwide.

The raw numbers of sold and under contract units, prices, and housing starts all point to improvement and most pundits are counting on these trends continuing and accelerating in the future.  The problem with the future is it’s not here yet and usually defies our meager efforts to predict or control it.  The future is also subject to so many forces – inflation (currently under control), energy hiccups, seasonal trends, weather related disasters, government actions (including Federal Reserve policy), possible government defaults, deficit increases and efforts to reduce it, foreign financial crises, and, of course, the main driver of any market: the psychology of the buyer based on perceptions, real and imagined.

In my market area in Essex County, NJ, prices are flat year over year in the last two years with some small improvements and some small losses.  Statewide New Jersey trends are equally hard to get a handle on since the state has over 500 municipalities, all of which are different markets.  I track the trends in the towns of my market area month by month and graph them at the end of the year.  In 2012 the graphs reflect the predictions for that year – improvement.  Improvement, however, does not imply the end of what we’re improving from.  2012 was, by all accounts a transitional year where free-fall ceased and small improvement began.  There are, however, many flat lines on the graphs in number of units and prices which shows an end to the bad news replaced by a holding pattern in anticipation of some future good news.  You’ll see from the graph below that, seasonal fluctuations in price notwithstanding, where prices ended in 2012 was not that far from where they began at the beginning of the year.  Bloomfield’s graph is particularly striking, showing a flat line for prices.

residential sales 2012 graph

While the Otteau Valuation Group** reports continued bullish news, signs of sustained improvement in the New Jersey market are mixed with falling inventory trends and larger numbers of contracts competing with pretty flat prices.  The following stats show how Essex County performed in 2012 vs. 2011.

So what’s the overall conclusion to be reached?  Again, it depends on where you are in the market – buyer, seller, REALTOR.  Are the grim times over? Probably, but that’s most relevant for those of us who work in the industry and depend on its health.  For everyone else the quality of the news is dependent on what you want from the housing market.  Shiller recommends you not worry about home prices and encourages you to act if you have reason to be in the real estate market.  Good advice.

* Housing Boom? Don’t Count On It  by Robert J. Shiller, The New York Times, January 26, 2013

** MarketNEWS by Otteau.com, The Otteau Report by Jeffrey Otteau, January 2013

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