Tuesday, November 09, 2004

In Short Hills, a realty boom or bubble?

In Short Hills, a realty boom or bubble?

Where $800,000 homes are 'tear-downs'
Monday, November 08, 2004
BY GEORGE E. JORDAN
Star-Ledger Staff

The Short Hills section of Millburn is a place where you can buy a $10 martini or a $1,500 Jimmy Choo handbag in the hallowed corridors of The Mall at Short Hills.

Within that same 07078 zip code, you also can find early signs of a housing bubble that some real estate experts say could end badly for the builders and buyers of multimillion-dollar homes.

All the omens are in place, mortgage brokers, builders and economists say: Speculation and builders are rampant, the number of homes for sale is rising, prices seem out of touch with reality and there already have been big discounts on some high-end, multimillion-dollar houses.

Doug Duncan, senior vice president and chief economist at the Mortgage Bankers Association of America in Washington, D.C., calls it "speculative excess" and said the hot market is "a warning to be careful" for people who bought hoping to cash out later with a hefty increase in price.

During the past four years, the race to build bigger, better and more expensive homes across Millburn has seen developers level 92 existing homes and replace them with super McMansions (think seven bedrooms and five bathrooms) priced from $2.5 million to $5.5 million. That rush to build is the first sign of a bubble and has transformed Millburn, and especially Short Hills, into a playing field for speculators chasing quick profits.

"A house that sells for $800,000 is probably a tear-down in this community," says Phil Kehoe, Millburn's chief zoning officer, whose staff of three full-time and four part-time inspectors has been overwhelmed this year.

Jacelyn Botti, a senior vice president at Weichert Realtors, said Short Hills is a magnet for Wall Street executives and wealthy transplants from California who want trophy homes.

She also scoffs at the notion of a bubble.

"There is nothing wrong with the Short Hills market," Botti says.

The average 100 days it takes to sell houses valued at $2.9 million was "exceeding reasonable," she said. Only a sharp retreat in the regional job market or a spike in mortgage rates would hurt sales "and neither is going to happen," she said.

REALTORS ARE BUSY

Millburn is a township of about 20,000, tucked in the southwest corner of Essex County, between the Watchung and South Mountain reservations. A third of the households have income greater than $200,000.

Trendy shops and restaurants dot a town center around an NJ Transit station with commuter rail service to Manhattan. It is the type of place where well-heeled commuters pay for their morning coffee and bagel with credit cards.

It is also a place that has seen an eye-popping 220 homes change hands since April and an additional 49 go to contract.

At the same time, 29 other houses have been built or are under construction in Short Hills. That extra supply might account for price cuts, which are becoming more common among homes priced $3 million and above, according to an analysis of recent sales.

For instance, a home this summer on Madison Terrace sold for $4.9 million after a $550,000 price reduction, and another Kenilworth Drive sold for $4 million after a $375,000 price drop.

Homeowners a notch below in the $2 million range have another problem: Their properties are too expensive for builders to tear down, but not modern enough to compete with the big kitchens and family rooms in the new McMansions down the street.

For many, the choice is letting their listing languish or reducing the asking prices below appraised values. It's not a set of options any was willing to discuss.

HOME VALUE DELUSIONS

Karen Eastman Bigos, a sales agent at Burgdoff Realtors, says price cuts are just around the corner and that too many homeowners have an "inflated idea of what their house is worth because they know someone who sold fast and high."

The seeds for Short Hills' logic-defying building pricing were planted by SAJ Associates, a Morristown-based builder. In 1997, SAJ was among the first to build McMansions in Short Hills, later expanding into Morris and Union counties.

Now there are as many as 10 construction companies and joint ventures operating in Short Hills, some who got their start flipping modestly priced homes.

The heated competition has sent the "ante" -- jargon for the amount builders must pay for half acre lots -- over $1 million, says Guglielmo Durso, a principal of SAJ.

"The $2 million seller of an existing home has a real problem," he says. "When you're at $2 million, at these interest rates, the buyer can afford $2.3 million and can get a new house with all the modern amenities."

Joel Naroff, president of Naroff Economic Advisors and chief economist at Commerce Bank in Cherry Hill, likens the Short Hills housing market to the dot.com economy in which investors assumed prices and values would always go up.

Both builders and buyers, he said, could find themselves on the wrong side of a bad deal if interest rates rise.

"When an area moves to where housing becomes an investment, that people are trying to flip things, speculation drives prices above sustainable levels," he says. "The question is when do things pop?"

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