OPINION

Real estate forecast: Partly sunny, with mix of clouds

AsburyPark
The outlook for real estate in New Jersey is mixed.

After nearly a decade of falling real estate prices in New Jersey, home values have been making a slow climb back. But in most communities, they still remain below their peaks in the mid-2000s. Now, it’s feared the recent federal tax reforms will put downward pressure on housing prices in New Jersey again. But the outlook for residential and commercial real estate isn’t all bad, says Monmouth University Professor Peter Reinhart, who provided a broad overview of the state of the real estate market in his responses to our Q&A.

What impact do you expect Congress’ tax reform plan to have on the housing market in New Jersey?

The potential impact on the housing market in New Jersey will come first from the new $10,000 cap on the deduction of state and local taxes (SALT). This is well below the $17,850 average paid by New Jerseyans in 2015. The other impact will come from the cap on the deduction of interest on new home mortgages of $750,000 of principal (down from $1,000,000), as well as the elimination of interest deduction for home equity mortgages. Interest on existing mortgages is still deductible.

I believe these changes will have a negative impact on the New Jersey housing market in several ways. First, existing homeowners who have a mortgage larger than $750,000 but below $1,000,000 may decide not to move if the new home would require a larger mortgage. If so, the already low inventory of homes for sale will remain low. Second, the ability of homebuyers to be able to afford a home without the tax benefits of interest and property tax deductions will be diminished. These potential buyers may elect to rent, rather than to buy. Or existing homebuyers who would normally look to move up to a larger home with a larger mortgage may not be able to afford to move. Therefore, the reduced number of new home buyers entering the market combined with the fewer homes for sale may result in fewer transactions overall. This would impact tax revenues from these sales, as well as the ancillary benefits from sales of furniture, home upgrades, painting and landscape contractors, and the like. I am sure that creative accountants and lawyers are trying to figure out a way to lessen the impact.

Peter Reinhart

What policies, if any, can lawmakers in New Jersey implement that would help offset any potentially negative effects?

The New Jersey legislature and governor could eliminate the current $10,000 cap on the deduction of local property taxes. This would provide some relief to property taxpayers who pay more than that. A more controversial approach would be to take a holistic look at the entire New Jersey tax structure to shift taxes away from property and income taxes to something like sales taxes or business taxes that are currently not deductible to individual homeowners anyway. The state of Pennsylvania is actively looking to ways to shift the tax burden away from homeowners. Other ideas like municipal consolidation, cost cutting, and cost-sharing need to be considered to reduce the amount needed to be raised by property taxes.

Are there any positives from the tax reforms related to housing?

The rental market should see even more demand from an already hot rental market. Landlords may decide to invest in upgrading and improving existing apartment communities to keep up with the demand. The lower tax rate for corporations and pass-through entities should result in greater profits that can be reinvested in housing. Companies that bought up single-family detached homes to use as rental properties following the recession may see increased demand as the benefits of owning the home are diminished.

Median home values, N.J. counties

How would you characterize the health of New Jersey’s residential housing market, from the perspective of homeowners and potential home buyers and sellers?

In a word, uncertain. The basic economic measures are reasonably good. The job market is growing, albeit slower than some would like, but growing. The lower inventory of homes for sale remains low. This should be good for sellers, but the uncertain impact of the new tax laws may give potential buyers pause and thus reduce demand. There is much noise currently about the negative impact of the new tax laws on housing prices that may lead buyers to offer lower prices to sellers. Sellers may be reluctant to lower their asking prices until there is more certainty on the tax law impact. I believe that strong market towns will continue to be strong as the community characteristics, school system reputation, proximity to transit and other features will offset the tax law impacts. On the other hand, towns that do not have those advantages may suffer greater reductions in home prices as there is little to offset the tax law impacts.

What kinds of housing are in greatest demand in New Jersey, and does that match what is being built?

The greatest demand is for higher-density townhomes, condominiums and rentals near mass transit. That housing is being built in those towns that have undergone a redevelopment analysis and revised their zoning to allow it. In those towns that have not undertaken to amend their master plans and zoning to attract the younger generations, that type of housing is not being built. The belief that higher-density housing is bad for a suburban town because it brings in too many schoolchildren persists despite a decline in pupil enrollment in many towns. There are a sizeable number of commercial and other non-residential structures that have outlived their usefulness but are in desirable locations and could be converted into residential uses. All towns should take a look at their inventory and take steps to allow the conversion of these buildings to residential.

Average home values in most municipalities in New Jersey remain well below what they were more than a decade ago. Do you see that changing any time soon?

Average is a dangerous term here. In those municipalities with the advantages of market-favored locations, good school system reputations, proximity to mass transit, home values have largely recovered or surpassed the pre-recession values. Other towns not fortunate to have those advantages will continue to struggle. The new tax laws will only make the home value recovery more difficult. The type of home also has a large impact on the value recovery analysis. Older homes that have not been upgraded will continue to decline in value. Location is still the major factor in value analysis. Look at the steep increase in home values in some older towns in close proximity to transit. During the latter part of the 20th century, most new development was in the outer suburbs. Now, the more desirable locations and most new housing is in the municipalities close to mass transit. We have also benefited from a low interest rate for many years. Interest rates are likely to rise in the next two years, which will likely not help values. And, by the way, those pre-recession home values were not sustainable and the frothiness was the result of speculators and horrible lending practices.

Median home value, selected NJ towns

What is the state of the commercial real estate market, from the vantage point of businesses and commercial developers? Where are the greatest opportunities?

The industrial market is absolutely on fire. New Jersey’s location as a major truck and rail thoroughfare and its ports make the demand for industrial warehouse space extremely high. Millions of square feet of new industrial and converted warehouses along every major New Jersey Turnpike and interstate highway intersection are being developed. Rents have increased just as dramatically. The need for the “last mile” locations for retail sellers may also increase the need for warehouse locations closer to residential areas in addition to the highway warehouse locations.

The retail market is in a state of flux. The traditional retail shopping centers are struggling as more purchases are made online. Around 50 percent of all holiday season retail purchases were made online this past season. Stores, shopping centers and downtowns all need to examine their particular situation and consider changes to attract more people. The popular slogan is now “experiential” rather than shopping. So entertainment, dining and housing are replacing department and satellite stores. The Monmouth Mall redevelopment will be an example if it gets built.

The office market is a mixed bag. Many owners of office buildings are making changes to the physical plant to make them more attractive to today’s corporate office users. Some developers are spending significant dollars to upgrade the infrastructure, technology, amenities and transportation options, as well as exterior appearances that today’s market users demand. Some office building owners are converting the building into residential uses, or even demolishing the building to build residential or other uses.

What influence, positive and negative, did the policies of the former Gov. Chris Christie administration have on residential and commercial development?

When Gov. Christie came into office, the recession was still ongoing. Having an agenda to promote job growth was beneficial since a strong job market is essential to a strong real estate market. His support for the Grow New Jersey incentive programs was a positive, particularly for the commercial real estate market. His opposition to affordable housing was a negative for that market. However, the New Jersey Supreme Court decisions overturned his actions and enabled the affordable housing progress to continue. His general approach to supporting pro-business tax and fiscal policies generally helped the overall business climate and thus the real estate market. His withdrawal of support for the ARC tunnel was and is a huge gamble. The failure of a Hudson River tunnel before a new one is in place would be a major disaster for the New Jersey economy and the real estate market. He was unable to make much of a dent in the very large fiscal deficit issues of the pension, health care and infrastructure needs. Those issues loom larger every day and threaten to impede any progress in other areas.

What kinds of policies would you like to see Gov. Phil Murphy implement that would benefit homebuyers and developers?

I think the allowance of full deduction of property taxes on state income tax returns would be of some help. In addition, a full review of the entire state tax structure should be undertaken. Taking a holistic view of all revenues and expenses at all levels of government has not been done since the 1980s. That is long overdue. A review of the overall land use process from the Municipal Land Use Law through the county and state administrative policies and regulations would also be helpful in finding ways to shorten the regulatory process and align with market needs without sacrificing environmental safeguards. A comprehensive plan to better coordinate the needs of businesses and residents is needed. New Jersey is in competition with the rest of the country for jobs and talent and cannot afford to allow outdated laws and regulations at all levels of government to hurt us in that competition. The Murphy administration’s support for housing for all income levels will be very important in allowing the state to compete favorably. Nimble and flexible are not terms normally associated with government. But the state needs to be more nimble and flexible to compete.

Peter S. Reinhart is director of the Kislak Real Estate Institute at Monmouth University and the NJAR/Greenbaum/Ferguson Professor of Real Estate Policy.