SHRIMP PRICES, MORTGAGE RATES & THE OUTLOOK FOR THE NJ HOUSING MARKET
With a Recession Looming in 2024, Now’s a Good Time to Sell, Analyst Says
By The Tamima Team
Our jaws dropped the other day when the price for a bag of large frozen shrimp at our local supermarket came to a heart-stopping $50. More than 2 bucks a shrimp? Robbery. Incensed, we put the frosty crustaceans back in the grocer’s freezer.
What does the price of shrimp have to do with New Jersey home prices?
Inflation.
Inflation, according to Jeffrey Otteau, president of The Otteau Group, and the U.S. Fed’s ongoing struggle to tamp down rising prices by ratcheting up interest rates will keep mortgage rates high near term.
And those lofty mortgage rates will continue to grind down purchasing power for new home buyers, millennials, up-sizers, and Baby Boomer alike, he said.
(If you recall, dear reader, we have said here many times that every one percentage point increase in mortgage interest rates reduces the price of a home a mortgage borrower can afford by 9 percent.)
Should the Fed manage to tame inflation next year – a likely scenario, according Otteau – the U.S. economy will slump into a short, shallow recession in 2024, sending overall NJ home values tumbling by 4 pct.
“We find ourselves in a place where interest rates have been trailing higher and higher, and the likelihood is that rates are going to go higher than they are today,” Otteau told a group of industry professionals last week.
If higher rates result in the Fed’s intended consequences, overall NJ home prices will decline by 4 pct in 2024, giving a “price haircut” to this year’s healthy 5 pct forecast rise in overall home prices, he said.
2023 is turning out to be a decent year for the NJ residential real estate market. Otteau expects municipalities with access to culture, transportation and the Big Apple will fare better than average, with values in Montclair, Bloomfield, Glen Ridge, South Orange, Maplewood and Cedar Grove rising 6 pct this year.
In fact, a recent listing in Montclair by yours truly went for 53 pct over the asking price.
But with a recession looming, low inventories, and a 4 pct decline in overall values expected in 2024, would-be sellers should move fast, Otteau said.
“Now would be better than later if you’re a seller because interest rates are going higher and the economy is heading into a recession,” he said.
The Fed has jacked up short-term interest rates from zero to 5.5 pct, propelling rates on the 30-year fixed mortgage from 2.7 pct a couple of years ago to close to 7.49 pct last month, Otteau noted.
While the inflation rate is slowly drifting down toward the Fed’s target rate of 2 pct, it still has a distance to go, he added.
As a result, mortgage rates could peak at 8-8.2 pct before falling back down toward 6 pct in the second half of 2024.
Inflation fell to 3.1 pct in June from 9 pct in 2022, but has since spiked to 3.7 pct in August.
“The Fed aims to raise interest rates so high that consumers can’t participate in the economy,“ including the housing market.
“The Fed is looking to choke off demand for home buying by pushing mortgage rates higher. We may be getting to the end of this higher interest rate cycle but we’re not there yet,” he said.
But take heart:
Once inflation is contained, mortgage interest rates should reverse course and fall back down. If mortgage rates decline to 5 or even 6 pct, that should be incentive enough for new and millennial buyers, downsizers, and up-sizers to return to the market in 2025.
“Once we get inflation to fall below the (Fed’s) 2 pct target, what will happen next is that interest rates will start to fall and pent-up demand for homes will rush into the market,” Otteau said.
In the meantime, housing inventory and market volumes have dried up in the years since the pandemic triggered a tidal wave of flight of homebuyers to the suburbs.
Otteau pointed out that since 2021, the dollar volume of home sales has fallen by $22 billion, and broker commissions by $1 billion.
Towns like Glen Ridge and West Caldwell report some of the lowest housing inventory in the state at 0.7 months each – another boon for would-be sellers.
“Home buying is at its lowest level in five years and is likely to go lower in the next few months because interest rates are not likely to come down,” he added.
Starting in 2025, Otteau sees the housing market return to more “normal” seasonality trends with prices raising by 5 pct, in line with the 50-year average of 4.8 pct.
“We will see a rebound effect by people who have not been able to afford (mortgages) by next late spring or summer when mortgage rates fall to the 6 the range. Empty-nesters will give up 3 pct mortgages for 5 or 6 pct mortgages because cause that’s not as painful.”
And the forecast for frozen shrimp?
That’s anyone’s guess.
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Curious how home prices in your town are likely to fare in 2023 and beyond, or considering a home purchase and want to understand the market better? Give me a call at 201.306.0267 or email me at Tamimafriedman@gmail.com.