NJ home buyers rejoice!
More homes are coming to market as interest rates fall, giving buyers more inventory to choose from, while the increase in homes on the market will eventually cap the precipitous rise in property prices seen in recent post-pandemic years.
The only potential fly in the ointment to this sunny scenario for buyers is turmoil in the Middle East, which, if escalated further, could cause oil prices to spike up, taking interest rates higher with them.
That’s the picture painted by NJ real estate maven Jeffrey Otteau, who spoke to a group of NJ realtors earlier this week.
“We will see inflation continue to cool, and with that mortgage rates should steadily decline, which will improve affordability for buyers and we will see see an increase in transaction volume,” Otteau predicted.
“As we move into a higher inventory market, we will see buyers expect to pay no more than asking price or even below the asking price. We are starting to shift away from a sellers’ market to more of a buyers’ market,” he said.
Indeed, inflation has fallen from 9 percent to under 3 percent, pulling rates on the 30-year fixed mortgage down from around 8 percent a year ago to closer to 6 percent today.
Core inflation is currently hovering at 2.7 percent.
“We think the inflation fever has broken and rates are going to continue coming down,” Otteau said.
That decline in rates is compelling many Baby Boomers, and others who’ve been loath to give up their existing low mortgage rates, to put their homes on the market, with the expectation that mortgage rates on their next purchase will be more affordable as rates come down.
“We have a lot of pent-up demand from people trading up, down and sideways. A lot of Baby Boomer downsizing has still not happened, with 40 percent still in big houses. The oldest Baby Boomers are 78 and we think there will be quite a bit of inventory (when they enter the market),” Otteau said.
At the same time, lower interest rates are making home-buying more affordable for Millennials and other first-time buyers.
As a rule of thumb, every 100-basis point drop in mortgage rates increases home affordability by 9 percent by reducing financing costs.
The pandemic saw a rush of buyers from New York flood the NJ real estate market, eventually causing sales transaction volume to fall by 45 percent as available homes were snatched up and inventory shriveled.
But that process is likely to be reversed as employers like Bank of America and IBM require their workers to return to their offices or live in close proximity to their jobs.
“Migration from New York City to the suburbs may reverse,” bringing more homes to market, he said.
With average mortgage rates expected to fall from 6.1 percent currently to 4.8 percent by the end of 2025, Otteau predicts annual NJ home sales volume will grow from 82,000 units this year, to 92,000 in 2025 and 101,500 in 2026.
And at the same time, he expects average NJ home prices, which soared a whopping 48 percent between 2020 and 2023, to rise at a more modest 4 percent this year, declining to a 2 percent increase in 2025, remaining flat in 2026, and possibly declining in 2027. Over the past 23 years, the average annual increase in NJ home values has been 5.2 percent per annum.
“As rates come down and inventory increases, we will come out of a sellers’ market to a more balanced market,” he reiterated.
For the remainder of 2024, however, inventory in many towns in Essex, Bergen, Passaic, and Morris counties, will still be under 3 months’ worth, meaning those towns will continue to have an undersupply of homes for sale, which will buoy prices for the time being, according to Otteau’s forecasts.
That’s good news for sellers in rail towns like Montclair and South Orange, where he predicts prices will rise by 7 percent in 2024.
Adding to this rosy outlook, Otteau said the chances of the U.S. economy falling into a recession have diminished significantly.
“We do not have another foreclosure wave coming,” he said, noting that the foreclosure rate in New Jersey is currently 1.1 percent compared with 6 percent in 2020.
“The wild card is the Middle East and what happens next, but at this point our projection is that interest rates will continue to decline.”
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