By The Tamima Team
Persistent inflation and high mortgage interest rates will continue to keep housing inventory low and home prices high in much of New Jersey this year. This is especially true for “luxury homes” priced over $1 million and homes in towns with good transportation links to New York City.
So says Jeffrey Otteau, president of The Otteau Group, who spoke to a group of industry professionals last week.
“High interest rates have been a disincentive for sellers to trade up or down. The majority of homeowners don’t want to leave behind 3-4 percent mortgages and go to 7 percent (mortgages),” Otteau said. “The largest portion of homes available to be purchased is from existing home buyers who want to trade up or down.”
As a result, NJ housing inventories continue to hover around a low 1.5 months state-wide, with some counties like Passaic, Union and Morris dipping to 1 month of unsold inventory. Towns like Glen Ridge, West Caldwell, and Montclair report even lower inventories at 0.6, 0.8 and 0.9 months respectively.
Dearth of supply has seen the number of home sales in NJ fall for 34 consecutive months, resulting in a decline of $22 billion in home sales volume between 2022 and 2023.
Rock-bottom inventories helped push average NJ home prices up 9 percent in 2022 and 11 percent in 2023, way outpacing the historical annual increase of 5 percent, he added. Otteau added that he expects prices to rise in 2024, but at a more moderate pace of 4 percent.
“We do not expect to see interest rates decline until sometime in the second half of this year,” he said.
It’s true that inflation is down significantly since the US Consumer Price index hit 8.9 percent in 2022.
Still, with CPI at 3.2 percent in 2023, inflation is hovering above the Fed’s target rate of 2 percent. That combined with record-low US unemployment and robust US GDP growth, mean mortgage rates, while off their recent high of near 8 percent, will remain firm in the coming months.
But Otteau was quick to add that the economy is showing some signs of a “gentle cooling,” as producer prices have fallen in 4 of the last 5 months and costs for new construction of homes has also declined.
In fact, tight housing inventories may already be loosening as the number of home sales in the first three months of March was down just 5 percent compared with 23 percent in March of 2023.
Inflation is close to seeing “the fever break” and interest rates should begin to trend lower by this summer, he said.
“We think as interest rates start to decline the number of (real estate) transactions will go higher and higher and higher,” leading to a more stable real estate market, with annual appreciation around 4-5 percent, he said.
He sees the real estate market returning to “a normal market” by 2025, with a better balance of supply and demand, and more moderate annual increases in home prices.
However, that doesn’t mean would-be buyers should stay sidelined. Home prices are expected to climb by 9 percent between now the end of 2025, and waiting to buy will only mean higher home prices down the road, he said.
As in the past, Otteau expects the most robust price increase this year will be in towns in Essex, Bergen, Hudson and other areas with transportation links to New York. And there could well be a “pent-up” surge in demand from millennials, those looking to trade up, and baby boomer downsizers once interest rates decline.
“We may have a rebound effect in home sales,” he said.
Meanwhile, “The luxury market continues to do extremely well. Affluent buyers are continuing to increase demand in that segment,” he added.
Contract sales for homes in NJ in the $1 million-$2.5 million range were up by 176 units so far in 2024, compared with a decline of 257 in 2023.
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Curious to know how your town’s home prices will fare in 2024? Give me a call at 201.306.0267 or email me at tamimafriedman@gmail.com