by Anne Rand
© 12/99 Foreclosure News of NJ, Inc.

Re-sales of single family homes, townhouses and condos was up 14.4% in New Jersey for the third quarter ending September 30, 1999. While this does not equal the first quarter increase of 23%, it is illuminating when compared to other regions. Contrast New Jerseys increase with the 5.9% decline in the Northeast region and a respectable 6% increase for the United States as a whole and an impressive picture emerges.

Last year, New Jersey set an annual record for resales at 129,900 units. If resales continue at the same pace through the fourth quarter, then another record will be set at 140,000 units.

It appears the interest rate increases of two quarter point moves over the summer, have had little impact on the sales activity when placed against the supply and demand factors in the state. New home construction is very expensive. During the recession, new home permits were reduced and developable land in NJ is a scarcity. Sometimes, buyers who can afford the $400,000 price of a new home are not willing to wait for a year to have it built.

As a result, buyers are bidding against each other and the offer price is greater than the asking price.

The median price of homes in the northwest counties (Essex, Union, Morris, Sussex, and Warren) increased at 6.5% from $209,600 to $223,200 from the third quarter last year to the third quarter this year. Similarly, the median price in Monmouth and Ocean counties increased by 6% from $162,000 to $171,700. However, some counties did not fare as well as the national average of 4.1% increase in median price. The national median price is $136,000. These Counties, Middlesex, Somerset and Mercer experienced a 2.7% increase in median resale from $193,800 to $199,100.

The median is the point at which half the homes sold for more and half the homes sold for less. The median is the preferred statistical measure of central tendency where there are either extremely low values or extremely high values.

The recent real estate market is great for sellers who wish to sell, but, it is not too late for first time home buyers or trade up buyers. The increased activity and increases in median values only tell part of
the story of how to make money in real estate.

Alan Greenspan, Chairman of the Federal Reserve, said in a recent speech, "Over the past five years, the average capital gain on the sale of an existing home net of transaction costs was more than $25,000, almost a fifth of the average purchase price." "While home prices do on occasion decline, large declines are rare; the general experience of homeowner is a modest, but persistent, rise in home values that is perceived to be largely permanent. This experience contrasts markedly from volatile and often-ephemeral gains in stock market wealth."

Greenspan's statement deserves an example to illustrate the financial benefit of home ownership.

Assume the following:

¨ Home purchased in 1994 for $100,000
¨ Home can be sold in 1999 for $125,000
¨ Appreciation after 5 years $25,000.
¨ Home appreciated 4.56% annually.

The 4.56% increase is less than the 6% increase reported for some counties in New Jersey, but it does not tell the whole story. Since most buyers do not purchase homes for cash, they use OPM (other peoples money) - a mortgage to finance the majority of the purchase. Therefore, one must figure the return on the actual dollars invested.

The National Association of Realtors, reports the average first time buyer will make a down payment of 6.8% of the sale price and use 2.2% toward closing costs for a total outlay of funds at 9% of the sale price.

Add these facts to our prior assumption:

¨ Down payment is $6,800 ($100,000 x.068).
¨ Closing costs are $2,200.
¨ Total money out of pocket is $9,000.
¨ Original mortgage amount is $93,200.
¨ Mortgage interest rate 7.5%
¨ Monthly payment (mortgage and interest) is $651.67
¨ Mortgage balance after 5 years is $88,183.45.
¨ Increase in equity through mortgage paydown $5,016.55 over 5 years.

Therefore, after 5 years, the owner has increased their wealth by $5,016.55 by paying down the mortgage.

Next, add to the "real profits" the tax deductibility of mortgage interest and property taxes.

¨ Interest paid on the Mortgage after 5 years is $34,063.
¨ 15% Federal Tax Bracket
¨ $5,109 Federal Tax Savings due to mortgage interest deduction.

Total interest paid over 5 years $34,063. For a buyer in the 15% federal bracket, this is a $5,109 reduction in taxes which would have been paid if the homeowner did not purchase the home 5 years ago.

Assume property taxes are $2,000 per year. In New Jersey, more than likely, they will be more. After 5 years, $10,000 will be paid in property taxes with a $1,500 savings in Federal Taxes and some additional savings in NJ State Taxes (I am not an accountant, therefore, I will not try to calculate the tax savings and Homestead rebate effect for the NJ tax benefit).
¨ NJ State Property tax $2,000/yr. or $10,000 over 5 years.
¨ $1,500 Federal Tax Savings due to deductible property tax.

What are the total benefits for the $9,000 used to purchase this house?

¨ $25,000 in price appreciation
¨ $6,800 original down payment
¨ $5,017 from mortgage paydown.
¨ $5,109 reduction in Federal taxes for mortgage interest.
¨ $1,500 reduction in Federal taxes for local property tax.
¨ Total Increase in Wealth $43,426
¨ Annual Rate of Return 37%

The total benefit for our $9,000 is a whopping $43,426. This is almost 37% annual return over 5 years.

Check out your mutual funds and stock portfolios for the last 5 years. How many increased at 37% per year? In recent times, stock market performance has been stellar, but there will always be ups and downs, Likewise, the same can be said for the real estate market. But even if the real estate market suffers a slump, I am still sleeping in my bank. However, if my mutual funds take a dive, the quarterly statements do not make for a warm blanket.

The next time you read about median price increases at 4% to 6% range, remember the example above. The true benefits of home ownership translate a 4.5% increase in resale price to over 37% annual return (with a place to sleep).

The first example used very conservative figures. The home purchase, five years ago, was the current market value. If you take the same example, but purchase the home as a foreclosure for less than market value, then the true return is much higher and profits can be taken out of the home much earlier. Most professional foreclosure buyers and investors only do deals when there is 20% or more reduction to market value. However, even a lower discount to market value will increase your annual rate of return.

As an example, assume you purchased the home 5 years ago for $93,000 even though the market value was $100,000. This is only a 7% reduction. If all other factors are the same as the previous example, the annual return after five years would jump to over 41% and the increase in wealth is $50,434!

¨ Purchase price in 1994 $93,000
¨ Market value in 1994 $100,000
¨ Discount to market value 7%
¨ 41% Annual Rate Return
¨ $50,434 increase in wealth

If you purchase the property for $77,342 or 22% below market value then your annual rate of return will increase to 49% per year; keeping all the other factors from the first example the same. This increases the total benefit to $66,092.


¨ Purchase price in 1994 $77,342
¨ Market value in 1994 $100,000
¨ Discount to market value 22%
¨ 49% Annual Rate Return
¨ $66,092 increase in wealth

Another way to look at the above example, is this. Assume you are a Member of NJPForeclosures.com and invest 10 hours per month driving by and researching the properties. After 6 months, you close on the deal above and live in your bank for the next five years. The 60 hours you invested in buying foreclosures, earned you over $1,100 per hour or the equivalent of over 2.2 MILLION dollars per year.