WHAT IS THE ECONOMIC/REAL ESTATE OUTLOOK FOR 2008?
If this week's poll results are anything to go by, there's not much optimism regarding the economic outlook for 2008. Most respondents (67%) replied that they were on the fence, 23% are expecting the worst and only 9% remained positive, expecting a great year. Dr. Joseph Seneca, a professor at Rutgers' Edward J. Bloustein School of Planning and Public Policy is not expecting great things from the year ahead. Here are his thoughts:
"The economic outlook is a giant question mark. It's clear the housing market has more unwinding to do. We've seen significant, steady declines in sales, new home starts and new home permits in many parts of the country; it's a downward trend with no bottom in sight.
"In New Jersey, residential building permits are down approximately 16-17% over last year. Contract sales from September 2006 to September 2007 went down 17%. The subprime lending debacle is affecting New Jersey; we've seen increases in foreclosures, which puts more inventory on the market, and even people who don't have subprime loans are having their adjustable mortgage rates reset. You have rising home payments and declining prices, so using your house as a piggybank is less prevalent and will continue to drop.
"Home equity prices falling in housing markets has an effect on consumer spending decisions, so it's a generally bleak picture for housing. Housing prices have to drop further, both in New Jersey and nationally before demand can start to pick up.
"Can the national economy endure this severe housing downturn without going into recession? That's the uncertain part of the outlook. The national economy will feed back into the housing market and determine the duration and severity of the decline.
"The key issue will be whether employment starts to decline, because that would signal a recession. When employment declines income declines, and then you have a downward reinforcing spiral, particularly for those who were caught up in the subprime lending problems and find themselves with higher adjustable-rate mortgages and other fees to pay.
"The commercial real estate market in New Jersey has been tepid this year. There's been very little net absorption of space, so there's a lot of excess capacity in the commercial real estate market. Absorption of existing and construction of new space depends on job growth. Job growth in New Jersey has been positive this year, but not very strong. Total growth for the year is likely to be below 25000. The types of jobs that typically occupy office space haven't been growing very rapidly.
"That's the pessimistic scenario of whether the housing market spiraling downward will take the national economy down. There are a number of factors that could reduce consumer spending: the high prices of gasoline and the decline in using your home as an equity vehicle. Lending standards are tightening up all over the country, so even if you're a qualified buyer it's harder to get a mortgage. All of that is reinforcing the decline in demand. Prices need to come down to restore some of that demand in the market.
"One factor does favor New Jersey: The strong commercial real estate market in Manhattan means there's a significant difference in rents between Manhattan and New Jersey. At some point, that price differential is going to benefit New Jersey as the state becomes the low-cost alternative to office space in Manhattan. That's been slow to occur and if the national economy slows further, the demand for office space in New Jersey might start to slow down too."
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