The initial section of this Market Report reported on “What” is happening.
This section will focus on “Why” it is happening
New Jersey’s Economic Drivers:
New Jersey Home Sales:
Home purchase demand for in the first two months of 2018 in New Jersey reached a record and representing a 2% increase over the prior year
The effect of the new Tax and Jobs Act is still being digested and may slow things down while this takes place.
Activity concentrates in the <$400,000 market where Millennial buyers transition into home ownership. During the same period, all housing sales showed increases across all price points showing confidence in the new administration’s plans on taxes and deregulation. There has also been an improvement at the very high end in towns where rail service to Manhattan is available.
At the same time, the number of homes offered for sale in New Jersey remained low and had recently decreased. The supply decreased by ~ 4,500 homes, compared to a year ago. Currently, ~37,000 fewer homes are on the market compared to the 2011 peak.
Current unsold inventory in New Jersey sits at just under 4.1 months vs. 4.7 months from a year ago.
We have an acute shortage of inventory in both Hunterdon and Somerset county in our more popular price points and locations.
Hunterdon and Somerset County has ~12% less inventory than a year ago. And, both counties have about 24% less inventory than two years ago.
The fear of increasing interest rates based on future increases and the Fed’s slightly loosening lending standards are driving the current market activity.
Interest Rates:
The economy is strengthening, and Interest rates at the end of March rose slightly to just over 4.4%% for a 30-year conventional mortgage (highest since 2014). A fifteen-year conventional mortgage rests at just under the 3.9% range. Five-year arms are just under the 3.7% range.
Consumer fears of steadily rising rates and slowly rising home prices impact the current market. The Fed already instituted initial increases in rates and are talking about additional ones. Industry analysts forecast to be nearly 5% by the end of 2018, and 5.5% by the end of 2019. If the rate increases from 4% to 5%, buyers will lose 9% of their buying power and have already lost .6% with rate increases over the past few months.
Combine this with the steadily increasing prices and consumer confidence, and you have what is driving our current market activity
National Job Front:
US unemployment rate remains at 4.1%, the lowest it has been in over eighteen years and new claims are the lowest in 44 years! This trend is expected to continue as a result of the recent tax reform.
On the national level the US added 550,000+ jobs in January and February of 2018 and is trending towards 2.6 million added jobs by year-end.
And the GDP has grown by 41% over the last four quarters.
Consumer confidence is the highest since 2004. Great news for the housing industry!
New Jersey Job Front:
NJ unemployment rate decreased to 4.6%, bolstering consumer confidence remains high in NJ as well.
And, 31,000+ jobs were added in NJ in the first two months of 2018 which was a significant improvement over 2017
The level of jobs created was at a much higher level than in the past several years (a silver lining?).
It also should be noted that these jobs are concentrated in the northern half of the state.
Rental Market Trends:
We still have an extremely tight rental market!
Prior restrictive mortgage standards nudged Millennials to postpone home ownership in life later than previously seen. These potential buyers live with parents or share rentals. We are starting to see them now re-enter the rental and first-time buyer markets. The average age of our first-time buyer changed from 29 to 37 years over the past five years. Older Americans impacted by underfunded retirement plans due to the economic downturn rent houses too.
Rental prices in New Jersey rose ~ 4% in 2017, averaging over $1,500 per unit. Current vacancy rates in central New Jersey rest at 2.5% with the nation at 4.5%.
The drop in New Jersey’s homeownership contributes to rental demand. A 12+ year trend shows a decrease from 71% to 64%. This 7% decrease compared to an 8% national decrease contributes to the slower recovery of home prices in the state and adds over 200,000 additional renters in our state. Households with no children stands at 65%, reflected in our school population.
New Jersey Foreclosures:
New Jersey continues to face high foreclosure rate filings. Other states have begun to, or already have recovered. In tight real estate market, these foreclosures sell at a small discount.
Note: Figures vary by local market, especially those walloped by Hurricane Sandy three years ago and rural and urban areas. We rank #2 in the country at 3.5%, led by only FL with 5.1% (mostly hurricane-related) and followed by NY, LA, MS, ME, TX, DE, MD, and PA. The national baseline number sits at ~ 1.7%.
2017 foreclosure filings decreased slightly to 70,150+ or -5%, putting pressure on home prices in concentrated areas. Base on the first two months of results 2018 could fall another 8% to around 64,000 filings.
Tax cuts and Jobs Act effect:
Three specific areas are evident:
- State and Local Taxes (SALT) are now limited to a $10,000 deduction going forward.
- Mortgage and Interest Deductions (MID) are now limited to a maximum principal balance of $750,000.
- Home Equity Line of Credit (HELOC) Loan interest deductions is for the most part eliminated
Although it is too early to tell how these areas will impact real estate values in New Jersey, they are sure to have some impact. New Jersey is one of the highest taxed states in the union, and our home values are also some of the highest. How this affects each of us on an individual basis needs to be better understood as there is some trade-off such as higher deductions and overall lower income brackets.
Obviously, the higher income luxury market is probably most at risk. But how it affects the overall incentive to own a home is still unfolding.
There were several proposals on the new tax code, and most consumers are not up to date on what actually passed. It will take time for this information to be digested.
It also is evident that the out-migration from New Jersey to other more affordable states has continued.
In a nutshell too early to tell, but there will be some very high-end people affected, and that will, in turn, affect the market…
This effect might slow the price growth in NJ and even turn into a deficit in some more affluent areas.
Real Estate Market Recap
Economic conditions:
- 2017 was the seventh straight year of 2 million + job gains.
- Although improving in 2018, the NJ job situation had been declining for the past two years.
- At % unemployment, NJ is almost 20% above the national average which is currently 4.1%.
- The best paying and most attractive jobs are in NYC.
- Interest rates have already risen .5% in recent months are forecasted to rise another .5% by year’s end, taking almost 10% away from buyers buying power.
- And, house prices are rising 3+ % in the popular housing price points further exasperating the situation.
- Baby boomers are choosing to “stay put’ rather than “move up.”
- And there is no entry level construction going on in the area.
- Foreclosures are on the decline and help to offset fewer listings.
- Also, there is confidence that the new tax and jobs act will further stimulate the economy with more jobs
- The new tax rules appear only to affect the higher upper-end buyers.
Changes in lifestyle:
- Average age at marriage is now in the late 30’s (up 7 years from just a decade ago).
- Families are usually having only one to two children.
- 65% of all NJ homes have no children of school age.
- 50% do not have more than 1 person in them.
- Demand for larger houses has diminished.
- As a result of the job situation, buyers are gravitating to areas within 15 miles of NYC with good mass transportation systems.
- 80% of consumers still perceive homeownership as part of the American Dream.
- It is just what they want to buy (or rent) that has changed.
- Builders have been thinking 4 BR center hall colonials on 1+ acre in the country.
- Buyers are thinking luxury hi-rise close to mass transportation and work.
Market conditions:
- Consumer confidence remains extremely high nation-wide based on the job and stock market increases.
- This confidence is reflected in buyer traffic being up at open houses
- Millennials make up 24% of our current homeowners with more room for expansion at the lower end of the market when adequate inventory supply materializes.
- Central New Jersey’s trend for 2016 and early 2017 showed a surge in home sales but price increases only in houses clustered in < $500,000 market where the first-time buyers and Millennials are focused.
- The >$600K market holds steady to diminishing slightly, depending on location and price. Often when a >$600K property goes on the market, it’s competing with a >$700K that needs to sell quickly (etc.). The extreme high-end market has seen some appreciation in 2018 so far.
- Minimal new construction and lack of entry-level new housing add additional value to the current inventory.
- Analysts five-year forecast indicates slow and steady price growth at an annual 3 to 4%.
- There is an acute shortage of inventory in both Hunterdon and Somerset county (both sitting with 26% less inventory than just two years ago and 12% less than last year). In our more popular price points and locations, this holds back sales. In general, we have only about 50% of the inventory that we had in 2011.
- In 2017 prices rose ~ averaging just over 3.5% and depending on price points and locations. 2018 promises to be almost as strong (without factoring in any tax impact).
- Mortgage delinquency is normalizing.
Forecast:
- The economy will continue to prosper with no recession in sight.
- Interest rates will Climb to about 5% by year-end further decreasing buying power.
- Home prices will rise by an average of another 3+% during that same period (this will depend on your price point and location).
- Supply will remain tight in residential real estate.
- Many new jobs will result from the Tax and Jobs act.
- Some decrease in home ownership could result in the raising of the standard deduction.
- Some high-end fall-out will result in residential real estate from the SALT and mortgage interest changes in the Tax and Jobs act.
- The commercial real estate market will flourish as a result.
- Mid-term elections effect is a total unknown at this point.
- People in their home > 10 years have very positive home equity built up, and a more significant portion of payments applies to principle. Increases in selling prices should eventually motivate people to make changes in their lifestyle or even start a new business with the extra equity cash.
Call me at 908-238-0118 to discuss your situation, and I’ll put my expertise and access to big data to work for you.
Note: Presented as a public service by Joe Peters of Coldwell Banker Residential Brokerage. I took reasonable precautions presenting this information. Please consult with a professional sales agent and take no actions based on my opinions, gathered trends, and statistics. I assume no liability.
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