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Wpease, Both Buyer and Seller in New Jersey

There are statistics from Yale (schiller) that show long term housing appreciation is less than 1 %; and the

Asked by Wpease, New Jersey Wed Mar 12, 2008

WSJ ran an article on baby boomer retirement and housing selloff impacting future house prices way downwards--these 2 reasons were cited to me as reasons that some would-be buyers might choose to rent instead, going into the future 7 years or so, even if the relative prices compared to the irrational exuberance of 04-06 look like they might come down. Is the NJ area (morris to monmouth) along the work routes suscpetible to the projected boomer-induced housing glut? thanks, W.

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Jerry - You said: "Let's use $300,000 as an example. So a homebuyer puts 20% of THEIR own money down on this $300,000 house, so that's $60,000. Based on the national average their home will appreciate at 6.8% or gain $20,400 in value. So the homeowner actually had a return on THEIR money of 34%." Forgive me but debt doesn't come free. You are not adding the cost of capital, interest + closing cost, to the $270,000. Furthermore, you can't calculate a return on equity until you net out operating expense. Your 34% ROE is misleading and incorrect. The estimated interest payment on that 260k would be $9,000 per year over 30 years (approximately). Now, you get a deduction for interest so your net interest cost is somewhere around $6,500 per year, on average. Then, add property tax (est. $10,000 / yr), add maintenance (est. $5,000 / yr) and you get what? a carrying cost of over 7% per year. In other words, the true return on equity is not that great. People buy homes because they want to own their piece of the world and as a means to long term forced savings. Point is once someone has to put down more than 10% as a downpayment, the economics get less compelling, fast. As a side note, if you are looking to purchase in a declining market, your equity would be wiped out if prices pulled back as little as 5% to 10% in a year, because the time it takes for housing prices to recover is much longer than marketable securities. Buy because you love the house and don't care about the return on investment as much but there are much better financial investments than housing today. One potential hedge would be to put the same money into housing stocks for 6 months and see what happens to home prices. If in fact the market believes that housing is nearing a bottom, that will be reflected first in housing stocks and you will have actually made money versus watching prices decline for another year before the correction is over.
2 votes Thank Flag Link Fri Mar 21, 2008
Thank you all for your answers.
The wsj link is here:…

The yale publication is by Prof Shiller--(i misspelt the name, sorry) and is titled Long-Term Perspectives on the Current Boom in Home Prices by Robert J Shiller
I can't attach it here but I think it can be got by a web search--there are repositories you can transfer the file from.
A summary of this paper is here:
2 votes Thank Flag Link Wed Mar 12, 2008
Excellent question! Intuitively I think you might be right. Where will baby boomers move? Check for predictions of future trends. Many baby boomers will keep their residences or go smaller in northern areas and buy a 2nd home somewhere else. Resort orented and highly amenitized communities are targeted for growth.
2 votes Thank Flag Link Wed Mar 12, 2008
John - Way to pounce! Did you see the WSJ article last week re: condos in Miami and other markets? This is less applicable to Manhattan but certainly to Brooklyn and Jersey City - once developers complete their condo projects, lenders will step in fast to monetize (read: drop asking prices or wholesale auction the bldgs). Housing data yesterday confirms that prices are coming down as volume spiked. Bulls will call a bottom everytime for the next 20% down. Real estate being local, what I do wonder is how overbuilt Hoboken really is? My gut says rents are probably 30% high if Manhattan is off 10% already - at least for the pre-war stock. I think Class A's are holding up OK but weak. FYI, homebuilder stocks did rally substantially this week. Watch that action, since they will def lead any housing recovery. When I can buy a condo in the best bldg in Hoboken for $500 PSF cash, we will be in range of a bottom. Think about it: there is no debt financing today, so my purchase is financing the building; I should get a return on that investment equivalent to or greater than a lender's risk adjusted return requirement.
1 vote Thank Flag Link Tue Mar 25, 2008
I could write a novel here in response to some of this Realtorâ„¢ idiocy.

The best thing about this thread: Realtorsâ„¢ don't even know what the Case-Shiller Home Price Index is. Priceless.

Jerry – During the 13-year period from 1987 until 1999, real home prices stayed roughly within the range of $125,000 to $150,000 – national average. That’s a long time to go outside of your fantasy 6.8% rate of return. Why buy into that kind of market when I could park my equity into a high yielding CD or municipal bond? Sure, your response will counter with “long term means 30 years” or whatever. But, what’s your opportunity cost for those 13 years in this example?

Marian said, “I agree completely with Jerry. Purchasing real estate instead of renting is always better. Renting is the worst thing you can do unless it's a short term issue.”

If this is true, how could there ever be such a thing as an unoccupied or abandoned house? Please think critically about this point before responding.

Your argument is based on a faulty premise. That being that real estate always goes up. Right now, “home owners” are experiencing negative returns on their [quickly evaporating to non-existent to negative] equity. And, it’s far from over. Who’s going to try catching this falling knife?
1 vote Thank Flag Link Sat Mar 22, 2008
Wpease, I'd too am curious to see read the Yale report; so please post or forward a link.

I do agree that housing and just about every other aspect of American life will be impacted as the massive boomer generation begins phasing out. However, I'm dubious about those suggesting that boomer retirements in NJ and elsewhere will forever doom the housing market.

For one, boomers have to live somewhere--and as we've already started to see some boomers reconsidering traditional retirements meccas of Florida, Arizona, etc. Believe or not, we may actually see more retirees staying put or moving down the road to retirement villas.

Secondly, where exactly will the US's projected population of 450MM by 2050 live? As suggested above, they won't all want to--or be able to afford--to live in a more crowded--and expensive--sunbelt.

Third, Morris to Monmouth were integrated into the sprawling NYC economic zone. The fortunes of that zone are IMHO are tied to global commerce of all shapes and size. It is a leading engine for a rapidly expanding world economy. As such, the region is the recipient of some of the nation and world's smartest and hardest workers--people that are quickly replacing baby boomers and adding tremendous economic value. Their home purchases are one reasons, for example, where some of Long Island's moderate to pricey communities have held in the current housing slump.

Finally, owning property far outstrips renting in terms of near and long term financial benefits. The idea that renters are somehow inoculated from the travails of the real estate market is just plain silly. If anything, they're more exposed--receiving neither the tax benefits, equity accumulation or protection from annual price hikes.

1 vote Thank Flag Link Wed Mar 12, 2008
The media and college thinktank gurus are busy jumping on the bandwagon of the housing glut and downward prices and the other alarmist tactics. Was the bubble burst? Yes, of course, it happens every 10-12 years. Were we due? Of course, and the subprime mortgage marketplace was the chief contributor of that, along with a weaker US economy. Data can be interpreted in any one of a number of ways, and while the market is still somewhat soft, I can assure you that the minute the rates came back down again in January, my open houses had buyers coming out of the woodwork and offers on houses started coming in. Granted the offers weren't as close to asking price as they used to be, but the bottom line is, if the house is priced right and in good condition it will still sell. It is an EXCELLENT time to purchase a home, you have alot of inventory to pick from, and sellers are more flexible in discussion of both price and inspection issues within reason. (If I weren't busy paying for two kids in college and had some extra dollars, I would be snapping up a couple of properties myself right now!) If you are looking in northern NJ area, give me a call!
1 vote Thank Flag Link Wed Mar 12, 2008
As with any investment, there will always be good times and bad, but real estate has consistently shown to be one of the best investments you can make. Unless you are looking at short term gains (less than 5 years) I still believe that real estate is the way to go. If you think you will be living in a home less than 5 years, renting might not be a bad idea but keep in mind that home prices have declined so far already it is unlikely they will continue to decline for 2 or 3 more years (although anything is possible). The bottom line is that people have to live somewhere and as long as the community you are looking in has a favorable economic look for the next 10 years, buying a home is probably the best option.
1 vote Thank Flag Link Wed Mar 12, 2008

I'd love to receive a copy of the WSJ article. Could you send me this link:
I agree completely with Jerry. Purchasing real estate instead of renting is always better. Renting is the worst thing you can do unless it's a short term issue.
Marian Schaffer
The Schaffer Realty Group
1 vote Thank Flag Link Wed Mar 12, 2008
Hi Wpease,

I am not an expert on the NJ area, but I can tell you that over the past 40 years, on a national level, home prices have appreciated at 6.8%. Just like the stock market we must view the long term broad picture. Whenver we get into a bear market, whether it be the stock market or housing market, all the naysayers and doomsayers come out predicting it is the end of the world as we know it (sorry for stealing your line Michael Stipe.) But truth be told this downturn in the market will pass as well.

The 6.8% average rate of appreciation must also be viewed in the proper light. That figure is 6.8% of the value of the home. Most homeowners do not purchase their homes outright. If they did, then yes, they would be realizing a 6.8% return on their money. Most homeowners might put down 20% of the total purchase price. Let's use $300,000 as an example. So a homebuyer puts 20% of THEIR own money down on this $300,000 house, so that's $60,000. Based on the national average their home will appreciate at 6.8% or gain $20,400 in value. So the homeowner actually had a return on THEIR money of 34%. Factor in the tax benefits of homeownership and the return is even greater. That is why contrary to what some people may say, in the long run home ownership is always a good investment.
1 vote Thank Flag Link Wed Mar 12, 2008
Boomers who live in McMansions may choose to downsize. I expect the retirement induced sales to impact the McMansions which do not have other strengths to support the value. For example, properties close to water, or waterfront, or close to a town that has steadily held value for years, will continue to hold. Not all retiring boomers will be moving from McMansions to retirement communities. For those retiring boomers who live in median priced housing, it is reasonable to expect the buyers to absorb that inventory. It is the higher end inventory in locations that are second tier in demand factors that have greater cause for concern.

Fred....I don't understand the excitement and rush to congratulate John for "pouncing". I didn’t know this was a forum for tally counts of who can one-up another, or pounce upon one another. Frankly, I appreciate diversity in opinions and do learn from it. But, I don't appreciate disrespect, attacks, or side line rah-rahs as if one were attending a boxing match.

Good Luck,
Deborah Madey - Broker
Peninsula Realty Group
(732) 530-6350
0 votes Thank Flag Link Sun Apr 27, 2008
Deborah Madey, Real Estate Pro in ,
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