Laurence Harbor: A Case Study in Real Estate Valuation

The Typical Real Estate Scenario

Here is how a typical real estate transaction works. You get an agent. You lay out what you have to spend and the agent chooses the communities with “good schools” and “good neighborhoods” with homes in the n-bedroom range. After your agent suggests that you need to spend 25 percent more than you wanted to, your agent prints a huge wad of listings and you proceed to be carted around to dozens of houses that aren’t quite right for you. Certain neighborhoods are ignored because the agent has blacklisted them for any number of reasons, some legitimate like true crime rates, some not like fear of people not like themselves or turf deals. Paying your share of the six percent real estate commission, you buy a boring house in a boring neighborhood with nothing to set it apart from any other neighborhood anywhere.

Except…..you can’t afford these typical places anymore, or even where you grew up. The typical way of doing things doesn’t work for many average folks anymore. Four hundred thousand dollars for a house that needs tons of work is not your idea of a good idea.

There may be another way. This paper is not an advertisement for Laurence Harbor, although it may serve as such. This document is an argument for thinking about real estate differently, outside the existing rules of buying (and selling) homes in which Laurence Harbor is the example.

Yes, yes, location does matter. But location is to real estate as comedy is to sitcom; in one era Friends is funny, in another the Golden Girls is. Same with real estate; what one group appreciates, another might not and new times brings new desirables in property.

How should one value real estate in Laurence Harbor? Isn’t getting comparables from your agent enough to tell you for how much to sell or buy a house? As is the case in industries undergoing change or kids becoming teenagers, what worked in the past might not work so well in the future. This is especially true of Laurence Harbor as it is in a transitional phase.

A Short History of the Raritan Bayshores and Laurence Harbor

Laurence Harbor had been considered, along with much of the Raritan bayshores, a less desirable place to live until recently. Decades of neglect and decline left behind much of the Route 35 and Route 36 corridor, creating an unusual value inversion. Waterfront property was worth much less than inland property, even though in many cases the schools associated with the properties were the same.

The history of changes occurring in the corridor over the past century is the history of the bayshores. For example, in the early 20th century, Laurence Harbor used to be a golf course, with proximity to dance halls and boardwalks along the Raritan bayshores. In the 1920’s, the course was converted into vacation bungalows, like many towns along the bay. Over the next 50 years, Laurence Harbor converted to full time residents from vacationers. The houses were affordable to those of limited means since the original bungalows were small. Laurence Harbor and many communities resulting from bungalow conversion were strong communities but with little extra means for improvement and expansion.

With few exceptions, the bay shore communities have remained working class communities for most of last quarter or half century. However, the recent real estate market in the New York Metropolitan Region is changing that.

The Laurence Harbor Difference

As New York and the metropolitan ring around it has experienced a resurgence, demand for housing has grown outward from the city; extending north, east and west into New York State; south and west into Pennsylvania and west and south into New Jersey.

This expansion of commuter housing has extended far beyond where people had believed it would. The distances traveled to get to New York City regional jobs can be surprising, with significant numbers of trips being generated from places as far away as Burlington County in New Jersey and Pennsylvania resort towns in the Poconos. According to a Census ‘Journey to Work’ study released in March 2005, the "extreme commute" of 90 minutes or more is among the fastest growing segment of commuters in the nation.

(See “Think your commute is tough?”, by Debbie Howlett and Paul Overberg, USA TODAY, http://www.usatoday.com/news/nation/2004-11-29-commute_x.htm for more info)

Longer distance commutes are one sign that housing costs are convincing people further outward to find housing suitable to them.

Although more house and amenities can often be purchased in eastern Pennsylvania than in northeast New Jersey for the same money, the cost in terms of time lost can be significant. With millions in the region traveling over an hour a day and a few hundred thousand at three hours a day, Laurence Harbor and many other previously ignored Central Jersey towns might be the solution.

Laurence Harbor offers so much besides a shorter commute. Among the amenities offered by Laurence Harbor are:

You can find out more details about what Laurence Harbor offers at http://www.laurenceharbor.org/whylh.htm.

Housing Bubble?

“Why should I buy a house at all right now, you might ask. After all, prices have gone up all over the place and prices have to come down soon. Everyone is saying we are in a housing bubble so it must be the wrong time to buy.”

Its no wonder you might feel this way. The press and media have oversimplified housing cost issues so much that “housing bubble” reports are almost meaningless.

“Is there a housing bubble?” is the wrong question. Are there regions where a housing bubble exists? Absolutely. San Francisco, Los Angeles, Washington D.C. and a few Texas cities are all potential bubbles since housing values cannot increase for 20 percent a year forever because family incomes do not increase at that rate forever.

Robert Shiller, writer of the book “Irrational Exuberance”, has been conducting surveys in the field of real estate to identify potential bubbles. One of his survey questions is "On average over the next ten years, how much do you expect the value of your home to change each year?" When comparing the responses of two cities, Los Angeles and Milwaukee, he found that respondents in Los Angeles said 22.5% on average, while those in Milwaukee said 13.4%. L.A.s higher expected percent suggests it might be more prone to a bubble and the subsequent bursting.

However, part of the story not told in attitude surveys is, what about supply and demand? A boring question with a useful answer. For example, in places like Texas and Wisconsin where land is plentiful and cheap, supply will keep up with demand for a long time. Bubbles, if they form in places like these, can easily burst with dramatic price drops. However, in places where housing supply is limited by tight land supply, high construction fees and costs, and long commutes, any bubbles are less likely and any post bubble corrections from housing bubbles that do form can be expected to be less severe.

Has a real estate bubble formed in the New York Metropolitan region? Even the New York Metropolitan region may be too large an area for a definite yes or no, but most of the region has simply experienced a recovery from the previous recession.

A Long, Great Explanation of New Jersey’s Residential Situation

An extraordinary telling of the story of the northeast’s and New Jersey’s last bubble, and the story of our current situation is told by James Hughes, Dean of the Edward J. Bloustein School in “Housing Bubble or Shelter-Safe Haven?” at http://policy.rutgers.edu/rrr23.pdf.

Although the entire report is a must read primer on real estate bubbles anywhere, excerpted here is the core description of the previous New Jersey bubble and the recent recovery from that bubble:

“The standard for a housing bubble is probably the 1980s home-price boom in New Jersey. Extraordinary price gains far in excess of inflation, combined with vast differentials between the rates of house appreciation in the state versus the nation, led to unsustainable excesses.

New Jersey house prices rose by 109.5 percent between 1983 and 1988, with 1988 standing as the market peak, as measured by the House Price Index of the Office of Federal Housing Enterprise Oversight. For five consecutive years, prices of New Jersey homes grew by almost 16 percent per year on a compound annual basis.

In contrast, over this same time house prices nationally rose by only 37.4 percent, or by a compound annual growth rate of 6.6 percent. Thus, New Jersey’s house price gains on both measures were nearly two and a half times that of the nation. This type of sustained relative performance—or excess—certainly qualified as a “boom” and, as events would ultimately show, a bubble….

But these rates of increase did not prove to be sustainable. New Jersey house prices peaked in 1988 and then declined through 1991, with a total price decline of 7.8 percent, or –2.7 percent on a compound annual basis.

Since housing markets are “sticky” on the way down, at least compared to equity markets, this decline may not have fully revealed the scale of correction. In contrast, home prices for the country as a whole continued to rise, although slowly.

During this period, national prices increased by 8.7 percent, or 2.8 percent on a compound annual basis….The punch bowl was definitely removed from the [northeastern] regional housing party.

House values began to recover very slowly as the national and regional economies emerged from the early 1990s recession. But housing in the region faced a long road back. It actually took until 1998 for New Jersey to return fully to its nominal price peak of 1988. Thus, the recuperation period constituted a full decade.

This recuperation was in nominal dollars. After adjusting for inflation, 1998 home prices in New Jersey were still considerably below those of 1988 since inflation increased by 32.6 percent between 1988 and 1998. In constant dollar terms, the real house price in New Jersey in 1998 was still 32.6 percent less than in 1988—or nearly one-third lower!

However, by 1998, a number of factors were building in the Tri-State Region and in the nation that would contribute significantly to the next surge in house values. New Jersey’s home prices jumped by 51.7 percent between 1998 and 2003, or by 8.7 percent per year.

This was nearly four times faster than the annual increase in the CPI (2.4 percent). This was also considerably above the comparable national rates of house price increase (38.0 percent and 6.7 percent, respectively).

It took the first four years of this recent period of rapid home price appreciation—between 1998 and 2002—for the inflation-adjusted price index to finally top the peak of 1988. Thus, in real terms, it took a full 14 years, to 2002, for complete price recovery. In this context, the notion of a housing bubble tends to lose credibility, since the post-1998 price surge enabled us only to recover the price declines of 1988–1991 and to compensate for 14 years of inflation.

So it difficult to designate this recent price surge in New Jersey as a bubble. Another important piece of evidence arguing against a bubble is that the 8.7 percent annual compound rate of growth for New Jersey in the five-year period between 1998 and 2003 is barely half of the 15.9 percent annual growth rate of the 1983 to 1988 boom.

Moreover, in the earlier period (1983–1988), the annual rate of price increase in New Jersey was more than double the national rate. Currently (1998–2003), it is not even one-third higher. Thus, if the 1980s experience sets the threshold for a bubble—in terms of high general rates of increase and high rates of increase relative to inflation and the nation—then we conclude that the current experience is not a bubble. [ed. bold]

In the long run, housing price increases cannot consistently outstrip growth in housing buying power. Surrounding the 1980s housing boom was a period of strong relative income growth, with incomes in New Jersey growing far faster than the nation’s. But even this growth ultimately could not sustain the boom years’ price gains.

With housing prices having recently advanced far faster than income growth during our current home price boom, some apprehension again appears to be warranted. However, declining interest rates have transformed the unexceptional recent income gains into much larger increments of housing buying power, justifying part of the home-price surge.

But interest rate declines to levels not seen in more than 40 years are now themselves history. Thus, all of the gains in housing purchasing power as a result of interest rate reductions in the current market probably have been made. Future income growth from this point forward will be the major determinant of housing-buying power gains. How much this will reduce the rate of increase in prices, or even cause them to sag, remains to be seen because so many other elements are also present.”

The above report was finished in early 2003. As we know, the housing market, in New Jersey and the nation, has continued to astound even the most optimistic of housing prognosticators.

Some reasons for the continued performance of the residential housing market are mentioned earlier in this article and include eliminating the extreme commute and improving access to jobs and other amenities. Reasons for paying more for a home, if the price is right, can be entirely rational.

Housing Future

What information or data nationally or locally might tell us where the housing market will go next?

Areas with population growth will continue to see strong markets, though not necessarily rising housing prices. In the last Census, New Jersey surprised demographers the world round by gaining enough population to keep all of its House of Representative seats.

It is important to differentiate between areas with growing populations. Population growth in areas with plenty of housing supply cannot sustain continuous large price increases. New Jersey will probably be the first state to use up the majority of its land, also known as “build-out”. With land supply rapidly diminishing in the populated and high density northeastern portion of the state, this land supply constraint will certainly raise the value of housing beyond what it would be in other similar regions where build-out is much further off.

Add to this the rising cost to build housing and New Jersey is in the top ten in terms of the aggregate costs to build homes. These costs can include labor costs, fees, land prices, materials, infrastructure cost share, and codes and rule adherence.

Furthermore, income growth has put New Jersey into the top position as the state with the highest per capita income in the nation according to the last Census. Over the past decade and a half, salaries not only recovered from the late 1980’s early 1990’s recession but have been powered forward by very strong growth in the pharmaceutical, financial and information technology industry.

Increasingly common as well is the cash-out mortgage, home equity loan, and the home equity line of credit, where homeowners take some, all or more of the equity (value of the home above the remaining mortgage amount) out of their home for home improvements, investments, vehicles or some other purpose. This equity growth has assisted in powering income growth beyond that of simple wage increases.

Equity growth in homes has also allowed the potential homebuyers to buy homes that might have been previously out of reach without large amount of equity from their existing homes.

Although as James Hughes suggests, interest rates had risen from their lowest in forty years since the report was written, they stabilized not too far above their lowest levels, and have stayed there for two and a half years and counting!! Currently, the 30-year mortgage rate is around 5.75 percent depending on the fee structure and type of lending institution you are borrowing from, up only a percent from the forty year lows mentioned earlier. This continued low interest rate environment means that all else being equal, a given home buyer will be able to buy more house for the same amount of money.

For example, a homebuyer who wants to buy a $225,000 house with 10 percent down ($22,500) makes the loan $202,500. A 30-year mortgage at 5.75 percent, with a $3,000 property tax and $300 property insurance on that house, would cost $1,527 a month. At one percent more on the mortgage, 6.75 percent, the monthly payment goes up to $1,659 or $132 more a month. Low interest rates mean more house for the buck. To do more of these calculations, you can use the Monthly Payment tool at http://partners.leadfusion.com/tools/leadfusion_tools/home02/tool.fcs

So Why do Home Prices Vary so Much?

While the above data may argue for a housing market which in aggregate will continue to be strong, what determines the relative valuation differences between states and even regions? Why is a two bedroom house in rural Alabama $35,000 and a similar house on western Long Island, New York $550,000?

The reason is that an aggregation of the above factors (income, supply & demand, etc.) and others like school quality, combine to result in a valuation of a home. Long Island is much closer to a million six and seven figure jobs in the world’s leading businesses. A homeowner living in rural Alabama would be hard pressed to find many jobs cracking the $25,000 dollar mark.

A homeowner on eastern Long Island, if so inclined, could drive or commute to work in under an hour. The person in Alabama would be hard pressed to find jobs close to home, and would need to drive greater distances for better pay.

Access to New York City, with one of the world’s greatest concentrations of cultural amenities, is valued by the market much more highly than rural Alabama. This is NOT to say that Alabama is not a wonderful place to live, only that there are many more people with more money vying for houses in the New York metropolitan area than rural Alabama. In fact, many rural areas across the United States, Florida, and even Belize are popular places to retire because the cost of living is lower and there are many amenities desired by retirees, particularly natural ones.

Bubble or Undervalued?

Until recently, there is absolutely no doubt that Laurence Harbor was significantly undervalued. A recent article in the newspaper - LIVING IN/Laurence Harbor, N.J.; An Old Haunt Re-emerges on Raritan Bay - http://www.nytimes.com/2004/12/26/realestate/26livi.html, quotes a local marina manager; ''A few years ago, it was a million-dollar view that nobody wanted,'' Mr. Johnson said. ''You couldn't give houses away for $70,000. Now, they are sold to relatives or friends before brokers hear about them.'' (If the above link doesn’t work, try visiting this page, http://www.nytimes.com/top/classifieds/realestate/locations/newjersey/, and click on the link for “And Old Haunt…”) Even waterfront homes regularly went for under a $100,000 until recently.

Although you can’t buy a home for $70,000 anymore, prices are still well below the median price for the region. But the price increases for homes in the area are not all due to the rising real estate market or the “discovery” of Laurence Harbor as a water front mecca. Laurence Harbor’s value is also increasing due to a renaissance which has begun to show off a much-improved community.

Large numbers of home renovations are going on around the harbor. New 2nd floors, dormers and entirely new homes are being added. At times it seems that half the homes in Laurence Harbor had new siding put on in the past couple years, albeit all tan.

A new waterfront park was completed recently, and another phase is being added as this report is being written. Road improvement projects such as lane additions, on and off ramp improvements, and toll removals are being carried out on most major highways in the area, making for better commutes all around.

So although one might pay twice what one might have paid ten years ago, homes can still be considered very reasonably priced. Where in central and northern New Jersey can you get a home for $200,000?

Finally, none of the newly rebuilt waterfront homes has been put onto the market yet, so values for waterfront homes is only estimation by appraisal. This is important, because the appraised values of mid-$300,000 range is still extremely favorable when compared to the many very expensive new homes available in South Amboy City just northwest up the Raritan shore line. The least expensive new homes in South Amboy are town homes going for $500,000 for condominiums near the water and many of the choicest single-family homes are topping a million dollars.

These homes have an affect on the values of the other houses in the area and will continue to exert upward pressure on the rest of the homes in Laurence Harbor.

Hyped Homes & Hidden Treasures -- Laurence Harbor Real Estate Listings

As Laurence Harbor is rediscovered, listing challenges are being discovered as well. Although the challenge was even more widespread previously, even now, rooms are left out of descriptions while at the same time, houses smaller than a single wide trailer are divided up into five by five foot rooms so they can be hinted at being “five bedroom palaces”. As with many former vacation homes that have been added on to over the years, many front and back porches are unheated but fully enclosed and insulated. A bedroom may be a fully divided room, with doors and closets or it might be a large room with different carpet dividing the room in two. Do not limit yourself to viewing two bedroom homes because that is what your agent says. Look at large single bedroom homes or ones with lots of rooms as well as less expensive three bedroom homes that could be converted back to two bedrooms.

This leads to a reminder in your real estate ventures: do not rely too strongly on “comparables” in Laurence Harbor. Comparables are the home sales of houses in your price range, size, lot configuration and neighborhood used to help price out homes you are considering buying or selling. Although comparables work fairly well in large tracts of similar homes, where home size, shape, configurations are very similar; it works very poorly where these factors vary greatly. Where lots can be as small as 25’x50’ or as large as 200’x150’ and everywhere in between, extra land might be valued at a higher premium than in other more traditional neighborhoods. Also, where most homes do not have a basement, a basement might add a premium to a home. Although on street parking is plentiful, a driveway could be a useful bonus when buying a house, especially if one had plans to expand the homes foot print.

The Hunt for Undervalued Real Estate

Laurence Harbor is a gem in the rough, and there are many more communities to be discovered which are also undervalued gems. To find these communities, you should look for:

- Large price differentials between nearby communities
- Access to amenities which have not been priced into the market price
- Traits and characteristics not accounted for by the market price and the limited databases that make up the Multiple Listing Service tapestry (MLS)

Be careful that you stay realistic in your expectations for price appreciation, income, and amount of work in being a “real estate mogul”. But if you are logical and realistic, your efforts can be rewarded handsomely, either in finding a home for yourself or buying investment properties. A little extra time spent examining communities and homes, and not just listings can net you a better property for your efforts.