Home builders are still providing American dream

Marc J. Siegel

Guest Column

The home builders of New Jersey are still building and selling homes. The housing industry has and continues to drive the local and state economy. Despite alarming reports of a "doom and gloom" market, real estate remains a solid, historically proven investment.

Contrary to what you have read, buying a new home is not a risky business. Since the national savings and loan crisis in the late 1980s, when banks failed as a result of overextended construction lending, a number of safeguards between builders and lending institutions have been established. These stringent regulations require banks to have sufficient net assets to protect themselves in the event of losses.

Moreover, banks are exercising more fiscal caution and have established tighter credit guidelines. In the 1980s, financial institutions were much more lenient in providing funding for "spec" houses under construction, but not yet sold. Today, residential builders may only get financing for the homes that are already under a sales contract, and thus, do not put themselves in a position of overextending financially with unsold inventory.

The home-building industry has a cyclical nature. Throughout these cycles, prices fluctuate, but, as history has proven, real estate will increase in value, establishing it to be one of the best, if not the best, investment one will make in their lifetime.

In fact, over the past 12 years, we have experienced two "up" cycles - a quite unusual occurrence in real estate. Builders and homeowners have ridden the wave of record sales and fast appreciation driven by a tight supply and high demand. Now, in 2006, homeowners who purchased new homes in the past decade are experiencing a "down" cycle for the first time and may feel anxious about the state of the market.

However, take a look at what history has taught us: a condo in Hamilton Township, Mercer County, purchased in 1985 for $63,000 was resold by the early 1990s for $80,000. In 2005, the same condo was resold for over $200,000, which represents a 315 percent increase in price, or an average increase of 15 percent annually.

A single-family home in Freehold Township, Monmouth County, purchased new in 1992 for $274,000 was resold in 1999 for $370,000. This house was again resold in 2006 for $727,000, yielding a 264 percent increase; an average increase of approximately 11 percent.

There is no reason to panic. The economic condition that the media is calling a "bubble about to burst" is overexaggerated. What we are facing today is really more of a "slow fizz" - just a normal, descending phase in the cycle. As the rate of sales begins to slow, we must adjust to a softer market that works its way through an imbalance of inventory and price, which most national economic forecasts expect to be temporary.

The New Jersey economy remains fairly strong. According to the New Jersey Council of Economic Advisors, the outlook for 2006 and beyond is for continued growth in employment and income. Consider this fact as a testament to the strength of the new housing market: number of new residential permits in 2005 approached 39,000 - the highest annual total of the decade.

Not only can homebuyers remain confident about purchasing a newly constructed home, in fact, it's a buyer's market. Prices are lower, interest rates are favorable and holding, and builders are more competitive.

On the whole, today's building industry remains strong and resilient, accustomed to the fluctuations in the real estate market. The members of the Shore Builders Association of Central New Jersey provide the American Dream to those who seek it, and for all who want to call the Garden State "home."

Marc J. Siegel is president of the Shore Builders Association of Central New Jersey, Lakewood.