Is the sky falling? or has the sky fallen on the Real Estate Market?…

Following a disappointing April, residential contract-sales activity in New Jersey trended higher in May providing some balance to the housing market.
However, while buying activity in May increased 7% from April, it still ran 18% below May 2005 providing further proof of a market change.
Some encouragement can be taken in the slowing rise of UNSOLD inventory which held steady in May at a 7-month-supply of available homes.

Current Market conditions:

below $600,000, market is now holding a 6 month supply
$600,000 – $1 million, 10-months supply
above $1 million 13-months supply

While there are very real reasons for the current deceleration in the residential market, the extent of that change goes beyond what can be explained by underlying fundamentals alone.

Certainly the record high home prices achieved in 2005 when coupled with lagging salary increases, rising interest rates and slower population growth are solid reasons for a market slow down.

More positive indicators are also in play, such as a state economy at virtual full-employment, new home building activity at constrained levels, and mortgage rates which remain low by historical standards.

Clearly, the sweeping change that has enveloped the residential market over the past 10 months extends beyond market metrics and is at least partly attributable to fears of a housing price collapse.

Apparently the chorus of voices predicting this collapse and the attention they received from the media, have played a role in bringing the market to it’s current state……as always perception becomes reality!

As we look forward to what’s ahead, expect the current situation of fewer sales and higher inventory to continue for the next several years.

As a result, some of the increases in home prices which occurred over the past several years will likely be reversed as motivated Sellers trade-off lower prices for quicker sales.

Ironically, this is not necessarily good news for home buyers as rising mortgage rates will likely offset any savings derived from lower home prices.

Consider for every 1 percent the mortgage rate goes up the buyer loses 8% purchase power. We are currently 1% higher in mortgage rates this year than last year.

Thus, buyers should consider whether the current combination of affordable mortgage rates, higher inventory levels and negotiable-sellers are reason to buy now rather than wait.