This report is provided by Jeffrey Otteau of the Otteau Appraisal Group who also authors a series of widely followed quarterly market reports on the New Jersey real estate market. This information is collected from various sources including Boards of Realtors and Multiple Listing Systems in New Jersey.
I have known Jeff for many years and consider him one of the leaders in the real estate appraisal profession. He has taught me a lot about quantitative real estate market analysis.
WEAK SALES PACE CONTINUES IN FEBRUARY
February home sales turned in another weak performance erasing hopes of a housing market recovery any time soon. Following a disappointing January when contract-sales were off by 30%, February home sales were down by 21% compared to the same month last year. This leaves year-to-date contract-sales activity 25% below last year at this time, making it the worst start for home sales since the housing recession began in 2005.
Further evidence of market weakness can be found in Unsold Inventory levels which rose for the 2nd consecutive month to 65,000 standing homes on the market, excluding the pipeline of new construction homes not yet completed. All of this provides compelling evidence that falling home prices will continue for the time being. As a reference point there were fewer than 32,000 homes for sale back in 2005 when home prices were last appreciating, suggesting that unsold inventory will need to decline significantly before home prices start rising again. Our current projection is that home prices will not recover to 2005 peak levels until 2015 at the earliest.
Therefore, the advice to home sellers is to Right! Price before home prices decline further. This is because overpricing extends marketing time, leading to a lower selling price down the road.
Despite the ongoing market decline however, some brighter spots exist in the housing market. Housing demand continues to outperform the overall market in downtown redevelopment areas as well as in communities offering transit rail access. Look for this trend to intensify as transit rich communities offer tangible solutions to New Jersey’s housing affordability constraints, particularly as younger Generation-Y home buyers transition from renting to home ownership over the next 5 years.
Switching to the buyer’s perspective, the current housing market presents a unique opportunity by way of falling home prices AND low mortgage interest rates. Because the decline in home prices typically slows later in a correction cycle, the greater risk in timing the market is the potential for higher mortgage rates ahead. Thus 2008 will provide home buyers with the double bonus of lower mortgage rates and lower home prices. Also noteworthy are the increased Jumbo mortgage thresholds for loans in excess of $417,000, which are scheduled to expire at the end of this year. This, together with tax refunds later this year increase the likelihood of higher interest rates and borrowing costs in 2009. Therefore, we’re likely to look back 5 years from now and conclude that 2008 was the ‘sweet spot’ for home buying.