LONG LIVE THE MORTGAGE TAX DEDUCTION Gerard and Heather Reynolds feel they got a deal on their two-bedroom at Dixon Mills, a condo conversion in Jersey City.

New York Times
By ANTOINETTE MARTIN
Published: February 17, 2008

TO buy or not to buy, that is the question ? especially in a market where property values have been deflating, and may deflate still further.

In northern New Jersey in the past year, the median home value slid 5 percent, to $403,087, according to newly compiled statistics from the Otteau Valuation Group, which monitors property values statewide. In central New Jersey, the median value was down 7 percent, to $335,654.

At the same time, rental rates are rising. The median rose 5 percent in the northern part of the state over the past 12 months, and 4 percent in the center, which includes the coastal counties of Monmouth and Ocean.

Traditionally, of course, buying is the preferred option, at least for those who can afford a down payment on a mortgage. ?It?s pretty much common knowledge that renting is throwing money away,? said Ebro Darden, 33, who recently closed on an $850,000 three-bedroom condo at Mandalay on the Hudson in Jersey City.

But despite the conventional wisdom, the rental market has been showing strength. Since two high-end rental buildings opened within a block of each other in Jersey City in late September, for example, more than 750 of their apartments have been leased. The buildings, 50 Columbus and Grove Pointe, are next to a PATH train station, but well inland from the river; their rents start at $1,900 for a studio.

Such indications would seem to be bad news for the Peninsula at City Place in Edgewater, where developers converted a three-building rental complex to condominiums a year ago. And indeed, in the last quarter of the year, sales traffic slowed to a crawl, said Jamie Anthony of Savanna Partners, the owner. ?People kept coming in and asking for rentals,? Mr. Anthony said. ?But buyer traffic went from 30 people a week down to the teens, or even less.?

Yet since mid-January things have changed again; an average of 40 potential buyers show up per week, Mr. Anthony said. ?I think there is a perception that there is a floor in the market ? and we hit it, or have come very very close,? he said. ?With the recent compression of federal interest rates, and the trickle-down to mortgage rates, people are seeing ?cheap money,? and the desire to own is resilient.?

But one technique that may have encouraged that desire at Peninsula (a technique also applied at several other slow-selling condo projects) is a ?rent to buy? program that went into effect last month. It is drawing in buyers ?like honey,? Mr. Anthony said.

The complex has 160 units; 60 have sold so far. But prospective buyers now have a couple of extra possibilities to consider. One is to rent with an option for purchase after a year. If the option is exercised at that point, the 12 months already paid in rent serve as a down payment on a mortgage. The other possibility, called rent-to-own, involves signing a purchase agreement at the same time as a year?s lease, with the purchase price and maximum mortgage interest rate locked in.

Mr. Anthony said that the former option seems to be appealing to Manhattanites wary of the move across the river, who want to try out life in New Jersey before committing. The rent-to-own program, on the other hand, has already attracted several buyers who knew they wanted the Peninsula condos, but did not have the required down payment.

?There really is no catch, no negative, to programs like that,? said Shaun Osher of CORE Group Marketing, which does sales promotion for both condo and rental projects. ?It takes away the uncertainty for a buyer.?

Mr. Osher added that while renting is ?appealing,? he believes that ?ultimately, if one is planning to be in a property for more than two years, with interest rates being what they are, buying is still the way to go.?

The mortgage tax deduction on federal income taxes continues to be a tipping factor, he added.

At Dixon Mills, a condo conversion project in Jersey City that offers mostly one- and two-bedroom units, Jon Ha, the sales manager, detailed the scenario he typically presents to prospective buyers: A one-bedroom unit at the complex is priced at $329,000. With a 20 percent down payment, and a 30-year fixed-rate mortgage with 5.5 percent interest on the remaining $263,200, the monthly payment ? including property tax and common charges ? is $3,025. But when the tax savings on the mortgage deduction is figured in, the net payment is $1,869.

?This is less ? to own a one-bedroom ? than to rent a studio at 50 Columbus or Grove Pointe,? he said.

For those now contending with Manhattan prices, it?s a bargain either way, of course. Mr. Ha, who keeps track of visitors to open houses at Dixon Mills, said that for most of last year, the number of potential buyers looking to relocate from Manhattan hovered at about 30 percent ? but that in the last few months, it increased to 37 percent.

One new buyer at Dixon Mills, Gerard Reynolds, described his friends elsewhere in the country as aghast at the cost of housing in Manhattan, where he and his wife, Heather, both work. His friends in Manhattan, meanwhile, are incredulous at the ?deal? he got on his two-bedroom condo in New Jersey.

At a new development in Rahway adjacent to a transit center, 35 condos are priced from $315,000, and the developers are advertising a mortgage program that could make mortgage payments as low as $1,770. (The estimate, which is on a 30-year Wells Fargo Bank mortgage with a fixed interest rate of 5.987, requiring a 5 percent down payment, does not include property taxes.)

?Well, when you see the deals being offered,? Mr. Otteau said, ?it?s pretty clear developers really want to sell these condos and woo people away from rental.?

In the longer run, however, he is predicting that demand for rental housing will increase faster than for home purchases.

?New Jersey?s population density of 1,150 persons per square mile is the highest in the world, even greater than Japan, 850 persons, and India, 950,? he said. This intensifies demand for housing, which leads to higher cost; currently, housing in New Jersey costs 53 percent above the national average, he said.

An estimated 30,000 people per year cross the Hudson from Manhattan to find housing, he added. And if prices in New York remain where they are or go higher, that number is likely to increase. The net effect will be to force more people out of the home purchase market ? and into the rental market.