What Areas Will Crack First?

I think that by the Summer, we will have plenty of evidence that the housing market is not going to make the soft landing that Fed Chairman Bernanke is looking for, or, on the other extreme, the flaming crash landing that former Fed Chairman Paul Volker is looking for. The landing, in my opinion, will be hard enough to seriously injure a few people but probably soft enough not to kill anyone.

At the national level, the housing bubble experts have pointed out that some cities lead the way in appreciating prices and that these cities are leading the way on the downside. San Diego is usually mentioned as the most likely city to collapse first, along with Miami, Las Vegas, and sometimes Boston.

At the Jersey Shore, I think that there are a few areas that will fall earlier, and probably harder, than other areas and therefore will be an early indicator for the rest of the Shore. In addition, aside from specific geographic regions, I think some market segments in the Shore might show signs of weakening before certain other areas do.

The towns along Long Beach Island will probably be some of the first, if they haven’t already, to experience falling prices. Not too many people live on LBI year round, so I think that when people are feeling nervous, they will look to sell the second home in Beach Haven before they sell the primary residence in Basking Ridge. Also, I would not be surprised if many of the homes there are un-rentable at prices that would be sufficient to cover the mortgage, especially if the house was bought sometime over the past four years. Finally, if you read the Asbury Park Press occasionally like I do, you’ll notice that there is a big fight as to whether property owners on LBI will allow a sand replenishment project. If the sand is not pumped on to the beach (at taxpayer expense) I’m not sure I would be a buyer of LBI property at even 25% of current prices.

The condos and town houses along Ocean Avenue in Long Branch that were built on property seized by the city look like good candidates for a correction. A few weeks ago I did a rough count of the number properties for sale at the The Bluffs and came up with about 17 out of I think 130 units for sale, not including FSBO. It is my understanding that many of these condos and townhouses were bought by real estate agents in the area in the hopes of making a quick buck from a quick flip. Given that the flip trade has been over since at least the summer of 2005, I would expect some of these units to start to trade below the original purchase prices. In addition, I bet many of these condos were sold as second homes for people and that second homes are the last thing anyone needs in a collapsing real estate market.

Speculative mansions probably seemed like a good idea in the summer of 2004. Rumson seems to have a pretty decent inventory of mansions built on spec. for sale. Along Rumson road, and along some of the side streets, old large houses were torn down and new bigger ones were put in there place. In many cases, these tear downs and build ups were done with a specific buyer in mind, like Queen Latifah (she owns one of these on Rumson Road.) However, I think in a few cases, the mansions were built without a particular buyer in mind. (The MLS says there are 35 houses in Rumson with an asking price above $3 million.)

I think that spec mansion builders will start to cut prices in order to unload what they have built because they can’t carry a $3 million house for very long. These mansion spec builders are mostly smaller private contractors rather than large publicly traded homebuilders (Toll, Hovnanian), and probably do not have the financial resources to hold onto a $3 million mansion too long, waiting for the right buyer, the way Toll Brothers can carry entire developments waiting for the right buyers. Therefore, while spec properties built and carried by national homebuilders might eventually fall in price, spec mansions built by Monmouth County general contractors might fall in price sooner.