Despite the frenzy of homebuying activity over the last few months, NJ housing prices are still recovering from the depths of the 2008 financial crisis. In fact, according to a recent article on northjersey.com, “Home values are no higher than they were in 2004, both nationally and in the region.” As surprising, at the end of April, the S&P/Case-Shiller Home Price Index still pegged national housing valuations some 10% below the residential real estate peak levels of 2006. Will homebuyers push real estate prices back towards their pre-crisis highs?

With the NJ summer housing market around the corner, you may be wondering whether the housing market will continue to sizzle — or fizzle. Here are 3 reasons why the current rally in housing prices may be on shaky ground:

1. Wage Growth Not Keeping Pace with the Increase in Home Values

Housing prices have been rising faster than wages. According to David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, “Home prices continue to rise and outpace both inflation and wage gains.” A gap between earnings and home values makes home ownership difficult for Americans. It also means larger mortgages for potential homebuyers and an increased exposure to rising interest rates. With the prospect of an increasing interest rate environment ahead, homeowners could get stuck with sizeable mortgages and higher payments. As a result, they may put off homebuying decisions.

2. Rising Northern New Jersey Home Prices Outpace the Averages

Our area of northern New Jersey has beautiful, historic communities. Towns such as Short Hills, Summit, Millburn, South Orange and Maplewood attract families looking for highly-rated schools, a short commute to New York City, and family-oriented neighborhoods with a plethora of activities. As a result, the median selling price for homes in any one of these communities is higher than other NJ towns.

I did a quick exercise using the Zillow Home Value Index and looked at median home values, price increases for the last year and predicted price increases in the next year for 5 towns in our area: 

In the United States, the median home value is $178,400, having risen 3.9% in the last year with the Zillow Home Value Index predicting a 2.6% increase in the upcoming year. Therefore, with the exception of Summit, NJ, housing price increases in our area over the last year have far outpaced the national average. A check of some other towns with similar characteristics to these 5 northern New Jersey communities shows price increases below northern New Jersey levels as well. Here are a few examples: Greenwich, CT (4.5% increase last year and 4.6% increase predicted for next year); Stamford, CT (5% increase last year and 4% increase predicted for next year); and Manhasset, NY (6.4% increase last year and 3.3% increase predicted for next year).

It seems pretty clear that northern New Jersey housing prices have undergone a significant increase in the last year relative to comparable regional markets and the national average. Maintaining the same price trajectory over the next few months may be a challenge.

3. Interest Rates Are On The Rise

The volume of mortgage applications is falling as interest rates start to rise. For the week ending May 15, the Mortgage Bankers Association reported that weekly mortgage applications fell 1.5%. 30-year fixed rate mortgages recently reached 4.04% and have given homebuyers reason to pause.

Rising interest rates affect more than mortgage applications. In How Interest Rates Affect Property Values, Robert Stammers explains, “…interest rates also affect the availability of capital and the demand for investment. These capital flows influence the supply and demand for property and, as a result, they affect property prices.” So, the recent move in interest rates impacts both property values and the level of mortgage applications, a one-two punch.

So, what’s in store for the NJ summer housing market? As a real estate agent, I hope that housing prices will be strong and have lots of summer sizzle! But, my instinct and 20 years of experience tell me that prices just may start to fizzle. Whatever happens, buying a home is a long-term proposition, and one that will ultimately withstand the ups and downs of housing price fluctuations. And as investments go, a 5 to 6 percent increase over the next 12 months is certainly appealing compared to the alternatives.

If you are looking to make a move in or out of northern New Jersey and would like to work with a real estate agent that really understands the area, email victoria@victoriacarter.com or call (973) 220-3050. I would love to assist!