The truth about the real estate market is that the sky is not falling. We’ve discussed the reasons why in earlier articles I’ve written. Current events have played a part too. No one expected Russia’s invasion of Ukraine.
I’d like to start with the media. They almost always get it wrong and are usually 6-9 months late. Here’s an example – the market shift. I was projecting this more than 1 year ago and it started happening last fall. As a result, people who listened to what I was telling them took full advantage of the market. Those who didn’t got hurt badly as in the case of buyers. Sellers who are listening have positioned themselves well.
The J Curve
Did you ever hear of the J Curve? Most folks haven’t but it illustrates my point. The J Curve is AFTER something’s actually happened because people look back and see it. So they’re at the end of the J looking back to see something that actually occurred before. That’s the media.
You’ve been reading all sorts of reports about how bad things are in the world of real estate since March while the change actually started to happen last fall. What were mortgage rates in January 2021? Around 3.25%. Since this was not sustainable, the Fed has announced rate hikes beginning in March to fight inflation. It was more than obvious that mortgage rates would go up.
I told all my buyers last year to get a house because low rates are not going to last. By that fall rates were up nearly 1% and inflation was becoming very apparent. The Fed finally admitted inflation wasn’t “transitory” and that they would start fighting it by raising rates in 2022.
The truth about the real estate market is that the transition began early fall last year when rates began to rise. While they came back for a short while (we began January at 3.25%), I knew this wasn’t going to last and so did Jim Weichert. Jim Weichert last fall predicted that the technical top of the market would be the 1st quarter of 2022. As always, he’s right.
Where We Are Now
Let’s begin by saying that the 40 year average for mortgage rates (since 1971) is 7.77% or, rounded off, 7.8%. Right now rates are around 5.5-5.625%. for the average home buyer. The 10 year bond is around 3% +/- a tiny amount. It’s easy to see that mortgage rates are often just under double the Fed Fund rate. This just went up 3/4% and it looks like another 3/4% Fed Funds rise is coming soon. So my projection of rates at 7-8% next year looks likely since the Fed should keep raising but at smaller increments.
We have lost renters who were turned into home buyers at the unsustainable 2.5-3.5% rates of the past few years. A lot of these buyers are at the entry level in my experience. Others were move up buyers who’ve now decided to stay and improve their current home. Many use a home equity loan which they’ll pay off over the next few years. There are others who have simply decided to stay in their rental because the higher rates reduced their buying power. As a result they can no longer afford that house they either passed on or didn’t bid a bit more for last year.
Inventory remains very thin which fuels the market. As long as the demand is stronger than the supply, the market will be fine but at a less robust level. This is a slow down and not a crash UNLESS the fools in DC create a recession.
Right now there are 1,367 single family homes on the market for sale. I believe still that 10% have accepted offers. Nothing much has changed with the inventory this year. Inventory is higher than it was a few years ago when we bouncing between 1,000 and 1,100 units but this isn’t a big jump up.
Let’s look at the foreclosure rate now too. The National Association of Realtors has said that nationally only 3% of all homes are in foreclosure. New Jersey MLS tax data today shows that Bergen County has 252,323 residential properties; only 6,554 have a lis pendens for a 2.6% rate. When I looked at this at the height of the Great Recession, it was 18%.
The Truth About The Real Estate Market
The truth about the real estate market in Bergen County is that while we are slowing down, this will be a very soft landing indeed. People will always need to move and the inventory shortage is going to take a good while to balance out. Baby Boomers remain a big demographic and a whole lot still own homes. Because they are aging much slower than previous generations, they’re able to stay in their homes. This is, I feel, a big reason for the inventory shortage.
4 million Boomer houses are not on the market now. They’ll be coming up for sale over the next several years which means time. This is going to be gradual. Also a good number of them are downsizing to another but smaller house which only adds to the number of buyers. Real estate is very much, as I’ve said before, a function of supply and demand.
Right now the absorption rates have increased but not greatly. We were at a 0-1 month absorption rate 6 months ago; today it’s 2 moths. Still a very fast paced seller favored market. Next year I believe we’ll be much more balanced but still in a low inventory driven market. Appreciation will be slowed to a crawl but rates will be higher. As a result, the true cost of a home will increase.
What does this mean for you? If you’re buying, it’s the cost of a mortgage that matters more than the cost of a home. Over the long run, homes appreciate even though there are up and down years. If you’re selling, your window of opportunity is closing. Yes, you can sell your home in any year, in any market. However you won’t have the leverage or buyer concessions next year you do now. Pricing will soften in the future but there will be no jumping off a cliff.
This is what I believe based on the data and what I am seeing in the market. Don’t kid yourself. The media doesn’t “get it” yet. I put a home on the market this past weekend in Closter, had 29 people at the open house and 5 offers. It’s 30 Rose Court. Check it out and tell me if things here in Bergen County are as bad as all those news reports would make you believe. And by the way, if you don’t think marketing counts, almost everyone at the open house said that they came because of the 3D Matterport Tour I did for the house.
