The NJBIZ Interview Â Jeffrey G. OtteauHousing analyst Jeffrey G. Otteau is widely seen as a sobering voice in a market frequently in the throes of a boom-or-bust mentality. Otteau, the president of Otteau Valuation Group Inc. in East Brunswick, acknowledges that delinquencies and foreclosures in subprime loans have worsened the current downturn by making mortgages harder to get and pushing some prospective homebuyers out of the market. However, he calls the foreclosure problem exaggerated and says the fear of a crisis could become a self-fulfilling prophecy. Otteau discussed the New Jersey housing market with NJBIZ Staff Writer Shankar P.
NJBIZ: How have home prices in New Jersey behaved in this slowdown?
Otteau: Home prices in the state declined in 2006 by 6 percent to 12 percent, depending on the location. They stabilized in the first quarter of 2007, which means they stopped declining. As to what will happen going forward, it hinges on whether the spring selling season has been delayedÂwhether the increase in sales is yet to occur or we will miss it altogether. It normally begins in March. In the past month-and-a-half, sales have been increasing, but are less than would be typical for a spring market. So we are seeing a weak spring market.
NJBIZ: Which are the strongest and weakest housing markets in the state?
Otteau: The markets where we expect to see some upward price movements are on the direct-rail corridors to Manhattan. The reason for that is the Manhattan housing market did not experience a correction this time, the weakening that the rest of the country did. It stayed strong and that is pushing demand out along the rail corridors for buyers who cannot afford Manhattan prices.
Where that is strongest is in the Gold Coast markets of Hoboken and Jersey City in Hudson County, where home sales this year are up year-to-date by 20 percent. We are also seeing that trend along the Midtown Direct line in Bergen County, in Essex County, in Montclair and along the Route 78 corridor from Millburn and Summit out into Madison, Chatham and New Providence.
NJBIZ: How is the crisis in the sub-prime lending market affecting New JerseyÂs real estate industry?
Otteau: At this point the impact is mostly psychological. It has introduced an additional layer of concern in the minds of homebuyers who are already worried about where housing prices are heading. So, in that sense, it has removed all sense of urgency to buy now, and is causing buyers to take a wait-and-see approach.
NJBIZ: Is this concern warranted?
Otteau: Some concern is warranted, but the level of concern is being exaggerated by the distortion of the facts. (Currently) in New Jersey, the inventory of homes for sale is equivalent to 7.3 months of supply, as compared with 5.6 months a year ago. Today we have 65,000 houses for sale in New Jersey. One year ago that was at 55,000 houses. The peak occurred in August last year when there were 68,000 homes for sale. Those numbers indicate that the market is weaker than it was a year ago because there is more unsold inventory. So that is real.
NJBIZ: You say in your latest newsletter that the magnitude of foreclosures is overstated. What is the correct picture?
Otteau: The accounting of foreclosures includes both homes in delinquency as well as actual foreclosures. And thatÂs generally not understood. Basically there are three stages of the foreclosure process. The first one is delinquency, when a borrower falls behind in mortgage payments, usually for about three [successive] months. At that point the home is counted as being in the foreclosure process, although it is probably more than a year away from foreclosure.
The second phase is when the bank issues a notice of foreclosure indicating its intention to foreclose if the payments are not brought current. The third step is the actual foreclosure, where the property goes through a sheriffÂs sale. In New Jersey, out of a total of about 5,000 homes per month that are currently counted in the foreclosure process, only 200 a month are actually being foreclosed on.
NJBIZ: If 200 homes each month are being foreclosed, are the other 4,800 homes emerging from delinquency?
Otteau: They are either emerging out of delinquency or are still in the foreclosure pipeline. We are approaching the record foreclosure levels from the recession of 1989-91, which averaged about 300 homes per month. WhatÂs alarming here is we are approaching recession-like foreclosures without a recession. The risk is if the economy were to go into recession in the next two years, we could expect the foreclosure rate to double. If companies start cutting jobs and laying off employees, it would be more than the housing market could bear.
NJBIZ: YouÂve said that fears of a housing slump could become a self-fulfilling prophecy. That sounds alarming.
Otteau: It is frightening. The rule in real estate is that if buyers believe it to be a bad market, it will become that. This is the first time in history that it is happening to the entire housing market, when we have record low interest rates and an economy that is still expanding and creating new jobs. At least we are not in the situation where we are losing jobs and people are losing employment.