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From The Garden State: The Otteau Report: May 2006

[This monthly market report is provided by Jeffrey Otteau of the Otteau Appraisal Group [1] who also authors a series of widely followed quarterly market reports [2] on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.]

I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis. -Jonathan Miller


MAY SALES TREND HIGHER, BUT STILL LAG LAST YEAR

Following a disappointing April, residential contract-sales activity in New Jersey trended higher in May providing some balance to the housing market. However, while buying activity in May increased 7% from April, it still ran 18% below May 2005 providing further evidence of a structural market change. Some encouragement can be taken in the slowing rise of unsold-inventory which held steady in May at a 7-month-supply of available homes. When segregated by home price, the market is now holding a 6 month supply below $600,000, 10-months between $600,000-$1 million, and 13-months above $1 million.

While there are very real reasons for the current deceleration in the residential market, the extent of that change goes beyond what can be explained by underlying fundamentals alone. Certainly the record high home prices achieved in 2005 when coupled with lagging salary increases, rising interest rates and slower population growth are solid reasons for a market slowdown. More positive indicators are also in play however such as a state economy at virtual full-employment, new home building activity at constrained levels, and mortgage rates which remain low by historical standards. Clearly, the sweeping change that has enveloped the residential market over the past 10 months extends beyond market metrics and is at least partly attributable to fears of a housing price collapse. Apparently the chorus of voices predicting this collapse and the attention they received from the media, have played a role in bringing the market to it’s current state……as always perception becomes reality!

As we look forward to what’s ahead, expect the current situation of fewer sales and higher inventory to continue for the next several years. As a result, some of the increases in home prices which occurred over the past several years will likely be reversed as motivated Sellers trade-off lower prices for quicker sales. Ironically, this is not necessarily good news for home buyers as rising mortgage rates will likely offset any savings derived from lower home prices. In fact, some home buyers will actually lose purchasing power despite a downward drift in home prices. Thus, buyers should consider whether the current combination of affordable mortgage rates, higher inventory levels and negotiable-sellers are reason to buy now rather than wait.

Here are 2005 annual stats.