newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

The residential real estate market may not revive for a long, long time.

One reason: Young couples, who once could be counted upon to keep the housing market rolling, are — because of the miserable job market – now moving in with their parents.

A powerful clue that the market will revive: The job market improves.

Those are the observations of James Hughes, one of the nation's foremost real-estate authorities and dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University in New Brunswick.

His advice for sellers: Put a realistic price on your house. Advice for buyers: If you wait for prices to come down even further, mortgage rates may have shot up.

NJNR: What are the major signs that a residential real-estate recovery is coming about? A reduction in the inventory of unsold homes?

Hughes: The indicators this week suggest that recovery is far away. The unsold inventory nationally jumped from 8 months to 12 months, and we had record low sales of new ones since data were collected. This was for July. Basically, we're finding out that the housing market only stabilized because it was on Federal life support [in part because of tax credits] – though part of it is still available because the Fed is buying most of the mortgages on the secondary market. But then the homebuyers' credit is gone. Given the fact that the labor market is still extraordinarily weak I would expect prices to probably decline another 5 or 10 percent over the next year or so.

NJNR: If the job market improved, that would be a powerfully good sign?

Hughes: That would be a pre-condition before the housing market improved.

NJNR: And a reduction in the inventory – even if people just took their houses off the market?

Hughes: Yes, but inventory is moving in the wrong way. It's going up!

NJNR: Right. The situation has been caused, I gather, by the fact that too many unqualified buyers got mortgages and bought houses – so there's a lot of foreclosures, and a lot of people trying to get out of their houses because their mortgages exceed the value of their houses. Are those the main problems?

Hughes: Again, I think it's related to that. Homeownership during the housing bubble years expanded far beyond what it should have been. People who became homeowners shouldn't have become homeowners and are becoming non-homeowners again. So the homeownership rate roughly was 64 percent on average before 1970-2000, then it jumped up to 69 percent, and now it's dropping back to 66 or 67 percent. So it still has a way to go.

But that's only one part of the problem. Another is, young households who would be entering the housing market have been moving back with their parents rather than establishing separate households. Part of that is due to the labor market. So I think a big driver of demand will be those 20-somethings who are now living with their parents having the financial security to establish a household on their own.

NJNR: From what you've said, it seems that buyers should wait a while for houses to drop another 5 or 10 percent of their value?

Hughes: The only hesitancy to that – it seems like a slam-dunk strategy – is that we may have a limited window when you can get a 30-year fixed-rate mortgage for 4.4 percent. But the Federal Reserve has indicated that it's trying to keep interest rates low because they're afraid of deflation. So those cheap mortgages may still be available a year from now.

NJNR: If I were a buyer, I would tell a seller, look, prices are going down by another 5 or 10 percent, so lower your price by 5 or 10 percent. It's a good time to bargain, I think.

Hughes: Yeah, it is. The market is still also sticky because a number of potential sellers have not accepted the full reality of what the new pricing structure is, so they're holding back, refusing to appropriately price their houses. So they may be sitting on the market.

NJNR: As for sellers, you've given them good advice, to put a realistic price on their house and not think about what they paid for the house or all their improvements. What about any inducements they can offer, like taking back a mortgage? Or varying the move-in date?

Hughes: I think, given all the foreclosures and the like, I'd be very uncomfortable with that as a seller. The private market is steering clear of mortgages. That's a pretty clear signal that you should stay away from taking a mortgage. If none of the investor money is going into mortgages, why should a homeowner risk giving a mortgage? Also, given the fact that interest rates are so low, it's not like when mortgage rates were double digits and a seller's mortgage could be much lower.

NJNR: Any other comments?

Hughes: It's going to take a long, long time to get back. Also, there's a new mentality. We viewed houses as a super piggy bank during the bubble years, and it was a wealth creator. It's now going back to being a shelter from the elements.

NJNR: A few years ago, you said to me, someone shouldn't buy a house now unless that person is planning to live there a long time.

Hughes: More so now than ever.

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