Housing Headaches
Defaults, other housing woes drag N.J.'s economy down
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One of the key sectors driving national growth has been the housing market. Housing starts are rising, sales are improving, and prices are increasing solidly.
Unfortunately, one of the biggest restraints on growth in New Jersey is its housing market. With the nation's highest rate of delinquencies, it's hard for the sector to pick up much steam. If New Jersey is to truly recover, it needs to face the music when it comes to home foreclosures.
Since the end of the recession, New Jersey has simply not kept up with the nation. From 2010 to 2014, economic growth averaged only 0.7 percent in New Jersey. In comparison, the United States grew at a 2 percent annual pace.
Even with the nation growing only moderately, it has recovered all the jobs it lost in the Great Recession by April 2014. Meanwhile, New Jersey still has about 100,000 fewer jobs than at the peak in January 2008. With jobs increasing sluggishly, New Jersey's unemployment rate remains elevated. As of July, the rate was 5.9 percent, while it was 5.3 percent in the U.S.
One reason for the difference in performance, but clearly not the only explanation, is New Jersey's disappointing housing market. Though housing starts are rising and could reach levels not seen in a decade, there still are issues with the single-family segment.
New Jersey's developers are shying away from building traditional homes. Over the last three years, only about 40 percent of the new-construction starts have been for single-family houses. That percentage had typically been between 60 percent and 75 percent. It is more than 70 percent for the nation as a whole.
Yes, the shift from single-family construction into multifamily housing is occurring nationally, as well. Millennials are not forming households rapidly, and that has changed housing preferences, at least temporarily. Thus, rental units are in demand.
But there is another reason the share that is single-family is depressed in New Jersey: Housing delinquencies remain in the stratosphere. According to CoreLogic, nationally about 1.2 percent of all homes with mortgages were in foreclosure in July. The number was 4.8 percent in New Jersey, the highest in the nation, by far. More than 8 percent of the homes were seriously delinquent, with owners more than 90 days late on payments. Nationally, the rate was 3.4 percent.
The huge overhang of delinquent and foreclosed homes is having a major impact on housing prices and construction. These homes tend to sell for less than similar houses. Because they also steadily come on the market at those lower costs, competing home prices are reduced. And because these homes are priced well below replacement costs, builders cannot compete, limiting housing starts.
New Jersey's home-price performance has been dismal. There are a variety of sources for home prices, and in just about all of them, New Jersey ranks in the bottom 10 of all states in annual price increases and for gains since the bottom of the recession.
Why is New Jersey so behind the curve in clearing out the supply of delinquent homes? The major reason is that it is a "judicial" state, where a foreclosure has to go through the court system to be approved. "Non-judicial" states don't have that requirement.
In a judicial state, the time it takes to complete a foreclosure is extended. In New Jersey, world records are being set. RealtyTrac estimates that it takes, on average, well over three years to complete a foreclosure in the state, the longest in the nation. And the longer these homes remain on the market, the longer they depress prices and home construction.
If New Jersey is to improve its economy, it will have to clear out the huge number of homes in foreclosure. Until that happens, the residential construction sector will not be able to reach its potential and neither will the state's economy.