The latest real estate data indicates a big shift in the New Jersey housing market. While the median sale price of a New Jersey home was still up in the first quarter of 2023, the number of homes sold decreased by over 30%, according to data from Redfin. This is likely due to 20-year high mortgage rates scaring would-be buyers away from the market. Sellers are dropping their list prices as homes linger on slow markets to entice potential buyers. While this is giving NJ homebuyers more power in a market that has favored sellers for the last three years, many homeowners are worried about these price decreases and asking the age-old real estate question: when will the market crash?
Most real estate experts would agree that the housing market in New Jersey is currently forming a housing market bubble. A housing market bubble is a real estate term that describes a scenario in which housing prices drastically rise while there is an increasing demand for a limited supply of homes. The bubble expands until home prices reach precarious levels, making the purchase of a home unobtainable for the average buyer. Housing market bubbles can be caused by times of economic prosperity, low mortgage rates, and easier access to financing for homebuyers. When these factors work together, a bubble grows. When these factors begin to falter, the bubble can burst.
A housing market crash typically refers to the moment a housing market bubble bursts. Housing bubbles can burst when there is a sharp increase in interest rates, as we have seen over the last year. A crash can also occur during economic downturns and times of increased layoffs, income loss, and inflation—which we have also seen over the last year. Another contributing factor to a bubble burst is high credit standards. If mortgage lenders make it more challenging to secure financing, home affordability will become more difficult for the average buyer.
Because we have seen such a significant increase in interest rates and economic strife as inflation causes prices to rise, it is no wonder folks are asking when we can expect the real estate market to crash. However, many real estate experts expect the market to cool off but not crash anytime soon. So while prices will begin to fall a bit, homeowners should not expect the worth of their home to drop significantly.
Some of the factors buoying the market are:
1. Low Inventory
Despite recent high list prices, a limited number of homes are still on the market. This scarcity has forced homebuyers to compete over a limited supply, often bidding for higher than the list price on desirable properties. Over the last three years, low-balling a real estate offer has become unheard of. If buyers want to stay competitive against other buyers, they must continue to offer the list price or more. For this reason alone, folks should not expect home prices to crash anytime soon.
2. Few New Builds Available
The new construction market is slow right now. Supply chain issues and inflation have made it difficult for the average buyer to consider building new. When there is an influx of new builds, buyers have more home options and can be less generous with their offers. Less buyer competition often means home price decreases. And while new builds are trending upward again, putting new builds on the market takes time. A housing crash due to increased inventory via new builds is very unlikely in the near future.
3. New Buyers
Various demographics are entering their prime home-buying years. Millennials finally edged out Baby Boomers as the generation buying the most homes in 2022. With the youngest Millennials only in their mid-20s, this trend is expected to continue for years to come. According to statistics, 24% of younger Millennials moved directly from their childhood family home into a home they purchased.
The Latino population has also seen an uptick in homeownership across NJ. Some experts predict they will account for nearly 70% of homeownership growth over the next two decades. Much of this growth overlaps with Millennials, as educated second or third-generation Millennial Latinos look to become first-time homeowners.
These two big demographics are expected to keep bids for houses competitive as inventory remains low. Savvy real estate professionals will no doubt begin actively working towards attracting these demographics to the NJ housing market with the promise of jobs and proximity to big cities.
4. Stricter Lending Practices
Lenders learned a lot from the 2008 housing crash caused by borrowers defaulting on subprime mortgages, many of which were predatory in origin. Now, buyers must go through a stringent financial background check before getting approval for a mortgage. Buyers must have excellent credit, stable income, proof of down payment, and more to qualify for a mortgage. Getting the best rates on a mortgage loan is even more challenging. These prerequisites automatically disqualify many folks from homeownership due to their inability to secure financing.
With interest rates as elevated as they are now, many hopeful buyers spend much more time building a credit history, increasing their credit score, and saving funds for a larger down payment before beginning their home search. Because of this, fewer homeowners are defaulting on their mortgages.
5. Decrease in Foreclosures
While New Jersey still has one of the highest foreclosure rates in the country, we have seen a slight drop in foreclosure rates over the last fifteen years. This is likely because most NJ homeowners have significant equity in their homes. This makes their position as a homeowner stronger and more durable than in previous years. When financial troubles arise, and the economy takes a downturn, these homeowners are more equipped to weather the storm without resorting to foreclosure. The more financially robust NJ homeowners are, the less likely there will be a housing market crash anytime soon.
The NJ housing market is constantly changing. Many factors contribute to the stabilization of the housing market, and a shift in any of those factors can drastically change the reality of real estate in the Garden State. But current trends do not suggest that a housing market crash is imminent. The difficult lessons many learned in the 2008 housing market crash still haunt the minds of those worried about it today. But for that exact reason, a crash likely won't happen anytime soon. Many real estate professionals learned big lessons then that are informing better choices today.
Veitengruber Law is a New Jersey real estate law firm that can help you achieve your goals. Regardless of the market, we can help you protect your interests as you make what is probably the most significant investment of your life.