So is the sale of my home hopeless? (Morristown, Little Falls: condo, loan)

[JamesBoyer]

Originally Posted by elflord1973

How much of a correction do you expect ? In my area (Journal Square), it seems that there are some places on the market that are priced consistently with the rent I am paying. But that's in part because a large portion of places there are not owner occupied, so prices are constrained by rents.

In of the places where I'd seriously consider buying a house (e.g. Montclair and neighbors), someone earning the median income in those neighborhoods cannot buy there. Median household income in Montclair: 89k. Median house price: 525K (source trulia, Oct-Dec '08). For the median resident to live in the median house, prices would need to be under 300k (this would put them in line with pre-bubble valuations).

Now maybe Montclair is doomed to be unaffordable for ever, but all the surrounding towns as well ... ?What dooms places like Montclair, is that it is in Essex County, and so far nobody at the state level or county level has had the brains, backing, or financial ability to deal with Newark. Places like Montclair are doomed to pay Newarks bills for a good long time. I don't actually know Montclairs numbers but I do know Millburns numbers, here is an example of how bad Essex County and Newark are run. Millburn has less then 20K population, Newark has almost 300K population, yet Millburn pays as much or more in taxes to Essex County as Newark does. If the rest of Essex County could get away with it, they would be well served to build a wall around Newark, and secede from Essex county and form a new one. Likely would cut the property taxes in most towns by 1/3 or more. I'm hard pressed to find a valuation metric that doesn't say that the bubble is still due for plenty of deflating. See my comments below.

I am just curious, do you own a home now or are you renting? Have you owned before or always been a renter?

I asked that because it does make a difference over the long run in what you can afford. An example that stands out for me was a family I worked with who had 4 kids so family of 6. They had been renters their entire adult lives. Between the 2 of them they had about 150K in income and were paying something like $2700 a month in rent.

This family wanted to purchase a 4 bedroom or larger home, and wanted to get one that was similar to the homes that a few of their friends owned. OK, they got pre-approved and we started looking at homes in their price range in the towns where their friends owned, by the way these friends of theirs in both the cases I was aware of, made less money than my clients, one of them reported to one of my clients at work.

It turned out that in order to afford a home in any of the neighborhoods they wanted to be in, 2 of those neighborhoods were where their friends owned, they needed at least another 150K in buying power.

What was the difference??

The difference was, in the cases of both the friends, they had all owned homes before. I dare say, that virtually nobody in the neighborhoods my clients wanted to live in, had purchased those homes as first time home buyers. None of them would have been able to afford them. They all had had to get on the property ladder and climb their way up.

My little family is the same way. Their is no way we would have been able to afford our current home, let alone put 150K into renovations, had we not owned and lived in 3 other homes before it. You see, over time your home is the best investment you can have! as long as you are not using it as a ATM.

I am sure people will poo poo that but it has been true for at least 100 years and will continue to be true over time. The government has made sure through it's tax laws that over time compaired to renting you will always come out ahead vs renting the equivalent home.

As to price declines over the next 12 months, I really cannot predict as real estate performance is so local. For example 2006 is the accepted peak, and since them one of the towns I work in, Madison is down about 6% median price from the peak, and about 9% average price. Maplewood and Summit had similar numbers. Now people on this board are tying to say 25% from here. Perhaps I am just blind and dumb, but in my 40 years of living on this planet, I have noticed that very few of the extreme predictions ever come close to being true. There are always those who scream that this time is different, but very very rarely are those people right. I have a hard time believing them now, the numbers just do not support their assertions.

I might change my mind on the last paragraph, but the average foreclosure rate here in New Jersey would have to go up from the current 2% to something more like 25% to make me do that. I think a move like that is highly unlikely. No, I believe that the towns I work, which are not as dependent on wall street as places like Jersey City, & Hoboken, & ... will probably tread water to being somewhat down, depending on the price range of the homes you look at, for the first 6 months of 2009, then I think prices will be flat to slightly up. Keep in mind I am talking about sold prices, not talking about average list price, as I believe 80% of what is out their tends to be overpriced for the condition it is in, but that is not different from most times.

[theoakman]

"The difference was, in the cases of both the friends, they had all owned homes before. I dare say, that virtually nobody in the neighborhoods my clients wanted to live in, had purchased those homes as first time home buyers. None of them would have been able to afford them. They all had had to get on the property ladder and climb their way up.

My little family is the same way. Their is no way we would have been able to afford our current home, let alone put 150K into renovations, had we not owned and lived in 3 other homes before it."

Careful, what you are describing is a ponzi scheme. Unfortunately, in Ponzi schemes, last one in at the low end of the totem pole is the one who gets burned.

[JamesBoyer]

Originally Posted by theoakman

Careful, what you are describing is a ponzi scheme. Unfortunately, in Ponzi schemes, last one in at the low end of the totem pole is the one who gets burned.

If that is what you think perhaps some basic economics classes would be a good move for you.

What I described is life. You make the investments (Time, Money, Sweat), build up your own worth and you can afford more than the lazy who don't make the investments, those who spend their life renting, depending on others to provide their home to them, those who will not take a chance on life. Life is a risk, choose to avoid risk all together and are you really living a life worth while?

[theoakman]

Originally Posted by JamesBoyer

If that is what you think perhaps some basic economics classes would be a good move for you.

What I described is life. You make the investments (Time, Money, Sweat), build up your own worth and you can afford more than the lazy who don't make the investments, those who spend their life renting, depending on others to provide their home to them, those who will not take a chance on life. Life is a risk, choose to avoid risk all together and are you really living a life worth while?

or maybe you could just buy when things are affordable, like say in 1998...when prices were reflected in incomes. The idea that you cannot buy a big house unless you first buy a smaller house is beyond ridiculous. You don't have to take risks to accumulate wealth. The one way you cannot accumulate wealth is to buy an overpriced asset. That's how you lose wealth. No one here is advocating that you spend your life renting.

You didn't describe life. You described life during a housing bubble.

[JamesBoyer]

Originally Posted by theoakman

or maybe you could just buy when things are affordable, like say in 1998...when prices were reflected in incomes. The idea that you cannot buy a big house unless you first buy a smaller house is beyond ridiculous. You don't have to take risks to accumulate wealth. The one way you cannot accumulate wealth is to buy an overpriced asset. That's how you lose wealth. No one here is advocating that you spend your life renting.

You didn't describe life. You described life during a housing bubble.

No Oak, I describe how things worked for myself, how things worked for my parents, and how things worked for my grand parents. So are you trying to say there was a Real Estate bubble from 1945 - 2006?

If it was good enough for me and for two three generations of my family, and 10's of millions of other American families, why is it all of the sudden not good enough for people today??

Oh, by the way. My father was a rural mail carrier for the post office for 38 years, in Minnesota. Highest earning year he made about 35K. Retired for 10 years now, owns a home in Minnesota , 1 in Wisconsin, and 2 in Phoenix. Lives very comfortably and does not have any of those home financed. The Wisconsin home is 5 years old purchased about 2 years ago, the Minnesota home is 28 years old, he had it built, One of the Phoenix homes he has owned for 5 years and rents it out, the other he purchased for cash last winter I think about 250K. I know he owned 4 homes before the Minnesota home that he currently owns. I know my father to be set for life at this point. I would follow his example any-day as it works, and it is not that risky. The get rich slow approach.

This first time home buyer stuff where people think they should get a 600K house when they have not saved or invested enough is just Bull!! It is not a indicator that homes are over priced, it is a indicator that may peoples expectations are to high.

I personally think that you are all about provoking arguments, and many of the things you say contradict what someone who puts themselves out there as being financially savvy would say. So ether you constantly want to provoke or ...

[theoakman]

Originally Posted by JamesBoyer

No Oak, I describe how things worked for myself, how things worked for my parents, and how things worked for my grand parents. So are you trying to say there was a Real Estate bubble from 1945 - 2006?

If it was good enough for me and for two three generations of my family, and 10's of millions of other American families, why is it all of the sudden not good enough for people today??

I personally think that you are all about provoking arguments, and many of the things you say contradict what someone who puts themselves out there as being financially savvy would say. So ether you constantly want to provoke or ...

I'm not denying that real estate wasn't a bad investment for 50 years. I'm just saying it's been a bad one for the past 5 or 6 years because it got out of hand. We will return to the traditional valuations of real estate as soon as we get some price declines.

You never like to address the fact that incomes went up 20% while prices went up 100% here in NJ. That's never happened before in this country and it's the sole reason that prices are falling. I'm not provoking anybody. In fact, on that other thread, it seemed everyone agreed with my assessments.

My advice to potential buyers has been to wait out until the end of summer to see where things are. Oh the horror!

[JamesBoyer]

Originally Posted by theoakman

I'm not denying that real estate wasn't a bad investment for 50 years. I'm just saying it's been a bad one for the past 5 or 6 years because it got out of hand. We will return to the traditional valuations of real estate as soon as we get some price declines.

You never like to address the fact that incomes went up 20% while prices went up 100% here in NJ. That's never happened before in this country and it's the sole reason that prices are falling. I'm not provoking anybody. In fact, on that other thread, it seemed everyone agreed with my assessments.

My advice to potential buyers has been to wait out until the end of summer to see where things are. Oh the horror!

Sorry, in most towns, someone who purchased 5 or 6 years ago is still money ahead.

For most people real estate is not a short term investment, and it should not be.

You start answering questions directly and others may want to answer your questions. Up until now you just want to be difficult.

[theoakman]

Originally Posted by JamesBoyer

Sorry, in most towns, someone who purchased 5 or 6 years ago is still money ahead.

For most people real estate is not a short term investment, and it should not be.

You start answering questions directly and others may want to answer your questions. Up until now you just want to be difficult.

5 or 6 years ago, maybe...but we'll see if it stays that way. I never claimed their houses went below where they were 6 years ago. I'm claiming that there is a serious danger that they will in the future. By claiming the market price today to prove my prediction for the future wrong makes me wonder if you need to take a few economics courses yourself. You can't claim I'm wrong until I'm proven wrong by time. You can only claim that I will be wrong. Time will tell.

Real estate is never a short term investment. In fact, I've already referenced two studies that have shown that real estate never really returns more than the rate of inflation over the long term. If you buy real estate when it appreciated well above the rate of inflation, you run the risk of never actually getting a return on your money invested in it unless they magically are able to create a bubble bigger than the previous one, which I seriously doubt.

[theoakman]

I would also like to point out that if the government had not interfered by lowering interest rates, providing federal assistance to homeowners, bailing out Fannie/Freddie, bailing out banks, and bailing out Wall St., we would already be below 2003 levels.

Since our government is on a mission to interfere at all costs, I would wait it out because I do think there is a good possibility that they create some ridiculous incentives for potential home buyers because the ones they have in place now have not done a damn thing.

[PD517]

Originally Posted by JamesBoyer

The difference was, in the cases of both the friends, they had all owned homes before. I dare say, that virtually nobody in the neighborhoods my clients wanted to live in, had purchased those homes as first time home buyers. None of them would have been able to afford them. They all had had to get on the property ladder and climb their way up.

My little family is the same way. Their is no way we would have been able to afford our current home, let alone put 150K into renovations, had we not owned and lived in 3 other homes before it. You see, over time your home is the best investment you can have! as long as you are not using it as a ATM.

I am sure people will poo poo that but it has been true for at least 100 years and will continue to be true over time.

Ok let me address this, this is one of the things I kind of agree with you on even though a lot of your past posts make no sense at all of this market. Generally that is the way the real estate market has worked over time, but why this time is different.

The "Property Ladder" theory. Lets say 99% of first time homebuyers will start out with something small because that is what their income can afford. I would like to say a decent condo/townhouse, even a small cape style home, etc.. whatever is percieved as a "starter home". The example I will use are late 20 somethings, early 30's - a couple who just got married or whatever, dual incomes, could be white or blue collar. AVERAGE people.

Lets discuss some different time periods that have been spoken about and compared in some other real estate threads in this forum.

1998-2000
A couple brought real estate in the following areas and prices (these are real examples from people I know that were in that age range during that period):
A 2 bed condo in Little Falls, NJ for $150k.
A townhome in Morristown, NJ for $175k.
A small cape home (3 bed 2 baths) in Totowa, NJ for $200K.

Their combined incomes at the time ranged from $55k-100$k.

Getting a standard conventional 30yr fixed mortgage - 20% down and 2x-3x MAX income. Nice and affordable, the way it should be.


2005-2007
Irresponsible lending started. Mortgage companies were willing to give you a mortgage with 0%-5% down and 5x-7x (avg) income. Irresponsible people took those mortgage deals (mostly ARM's). They didn't care, all they heard were the cheerleaders in every step of the process saying real estate will always go up up up!!!. So even though their combined income may have risen a little from a few years before - lets now put it at $70K-$120k - they were able to offer much much more then what real estate historically appreciated at (3% a YEAR). A fair return, sometimes a little higher but again its the average.

So in the above examples those FIRST TIME BUYER homes now sold for the following:

A 2 bed condo in Little Falls, NJ that was $150k was now at $345k.
A townhome in Morristown, NJ that was $175k was now at $420K.
A small cape home (3 bed 2 baths) in Totowa, NJ for $200K was now at $480K.

If those original sellers were able to sell for that much and made a massive 125%-200%+ return on their money - HIP HIP HOORAY!! BUT... It's all relative - unless they moved somewhere else in the US with cheaper real estate they most likely worked their way up the "Property Ladder" in NJ and brought something larger. Maybe they had some kids in those 5-7 years and wanted a larger home now with a pretty backyard and a nice pool for John and Jane. Maybe Lassie needed a big place to run around.

They now are moving up the property ladder. But since real estate has risen so much in value their new McMansion, that was $400K back in 1999-2000, is now $850K to purchase. That's fine, they can do it based on the "new" way of doing mortgages. Even though their income rose only slightly, they can afford it since real estate always goes up up up!

2008-Present and the Future:
DOOM AND GLOOM HAS ARRIVED, ITS THE END OF THE WORLD - maybe not, but times sure are tough. Jobs are being lost left and right, we are in a recession, money has evaporated from stocks/401k's, everything is a mess and it's only getting worse, not matter what our president tries to do to "slow it down". You really get to know how bad it is when you can easily name off numerous people you personally know who have lost a job.

Banks learned from their mistakes. You are NOT getting a loan like you could have in the past few years. We are back to the way real estate has ALWAYS worked. You walk in that door and the only way to get approved to buy your first home is if you have your 20% and 2x-3x MAX income again.

But wait. I'm looking at listing prices and they smell fishy. It's my turn to now become a first time homebuyer. My wife/girlfriend/goumad, call her whatever and myself have the EXACT same jobs as those listed in the 1998-2000 example. Hey look at that, we make a little more then they did back then (incomes rise on AVERAGE 1%-3% a year - please dispute it if you think its wrong).

For those same jobs - they made in my original example $55k-100$k a year. We now make, and I'm being generous with the figures, $80k-$130k a year combined. Cool - I can afford my first home - let me take a look what I can buy. Hmm, not much is coming up unless I want to live in Newark or Orange and risk a bullet in my head. That's strange.

Now lets say those original home owners from 10 years ago missed the boat and waited until NOW to sell so they can get on the property ladder train. They are now "trying to get" the same prices or maybe their real estate agent told them, its kinda slow, drop it by 10% and you'll be the king. You still have to pay me 3%-6% though since I am a professional and did a 2 week course.

So with the advice of their professional real estate agent, they are listing these FIRST TIME BUYER type places - condos/townhomes/starter homes for the following:

A 2 bed condo in Little Falls, NJ that was $150k (1998-2000) that could have sold for $345k (2005-2007) is NOW at $310,000.
A townhome in Morristown, NJ that was $175k (1998-2000) that could have sold at $420K (2005-2007) is NOW at $378,000.
A small cape home (3 bed 2 baths) in Totowa, NJ for $200K that could have sold at $480K (2005-2007) is NOW at $432,000.

Guess what? No one can afford these freaking "first time buyer" places based on INCOME and STANDARD MORTGAGE UNDERWRITING PRACTICES. Do you really think the majority of these people today have 20% saved for the downpayment? Maybe someone got an inheritance but the majority do not have $60,000-$100,000 saved up. In fact the savings rate in this country is practially nothing. Add in the amount of credit card debt these types of buyers have, the risk that anyone's job could be gone tommorow if it hasn't already. Even if they still have one, their income never rose almost 100%+ in 10 years to support today's ASKING prices.

And don't forget about these $850k - multi-million $$$ McMansions for those moving on up, same rules apply.

Again, reality check for all involved in this process. The "property ladder" is currently stuck in place. A correction from this bubble is needed and will happen soon enough. We can delay it all we want and "get some stimulus" but it is inevitiable. Do some research. If you purchased within the last few years you are screwed IF you want to sell anytime soon. Long long term who knows, maybe it will get back up there. If you purchased 10 years ago and want to sell now - wake up and take the decent profit you can get before it gets lower and lower, dare I say close to breaking even or below.

I can't see how anyone can take seriously someone who stated in the thread "Northern NJ listed by Forbes as one of the 25 Weakest Housing Markets" (page 16 for reference) saying:
"I tend to agree with Cramer of CNBC and the Trump who are saying the downturn in the housing market will be all done by the end of the 2nd quarter. I would listen to them before Moody's any day of the week. The numbers for 2008 would have probably been a little better had it been possible to get a jumbo (non conforming) mortgage in the fall of 08. It is lots easier now, and credit will be considerably easier this year."

Yea - Cramer - enough said. Trump - hmm conflict of interest there? Credit will be easier? Please give me some of what you are smoking. And to boot, some of the comments about Peter Schiff??? Wow is all I have to say.

2009 and beyond should be interesting - foreclosures, short sales, MASSIVE ARM resets, layoffs, vanishing equities - oh my! I would love to revisit these threads down the road and compare a lot of the theories that have been put out there.

edit: For those who want the "bigger" picture of this BUBBLE, please go to the nj.com website and the section "by the numbers"
http://www.nj.com/news/bythenumbers/

Click where it says - "Home Sales" then choose "Sales In Your Town". Pick whatever town you want, it will show you a graph and sales data from 2000-2007. Almost every town I looked at showed a 110-200+% INCREASE.

Now tell me there was no bubble.