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Residential real estate improving, but still troubled

Housing expert points to problems with inventory, shifting demographics.CORRECTION APPENDED

New Jersey’s housing market is showing signs of recovery, an indication that the local economy may be starting to pull out of the recession. But the market could face troubles ahead as a result of changing demographics in the state, a residential real estate expert said Wednesday afternoon.

Uncertainty still clouds the employment picture in the Garden State, which gained more than 6,000 jobs between July and August, but then lost 12,000 jobs in September, said Jeff Otteau, president of Otteau Valuation Group, an East Brunswick-based appraisal and consulting services firm.

“We’re likely to see more months with job losses than there will be months with job gains,” until the second or third quarter of 2010, he said.

But “the housing market has already made its move toward recovery” — likely leading the job market by more than a year, Otteau said, speaking at the New Jersey Building Materials Dealers Association’s annual meeting at the Hilton East Brunswick. All three indicators of a housing recovery — more buyers purchasing homes, fewer homes on the market and housing prices starting to appreciate — “are in play here in New Jersey,” particularly in the northeastern and central parts of the state.

For the first time in five years, home sales rose consistently from January through June and then held steady, with sales in September at their highest in the last four years, he said. By contrast, in the preceding years, sales surged in the spring, then declined throughout the rest of the year.

The decline in the 30-year fixed mortgage rate has played a big part in improving the New Jersey housing market; the U.S. Treasury’s purchase of mortgage-backed securities has driven down the rate from 5.6 percent in June to below 5 percent, he said. With that program extended through March, interest rates will likely hover in the 5 percent range going into next spring, Otteau said.

Lower mortgage rates and the first-time homebuyer’s tax credit — extended until April 30 — will lead to “the first significant spring surge in home purchasing demand in many years,” he said.

But the market is still far from healthy, as “we still have a lot of inventory to sell off,” he said. The current supply of 60,000 homes on the market will need to fall to around 35,000 for prices to start seeing double-digit increases, he said.

Also, “there’s a lot of shadow inventory in the market that’s not reflected in the numbers yet,” he said. Would-be sellers who took themselves out of the market may put their homes up for sale as the market improves, he said, which will slow the decline in housing inventory and limit price increases. Over the next five years, Otteau said, prices will rise at an annual rate of 3 percent or 4 percent a year, compared to average annual increases of up to 15 percent between 2000 and 2005.

Otteau expects future housing demand in New Jersey to be more modest, in light of declining household income — baby boomers are expected to earn less over the next five years, while those in the 25-to-35 set are making 17 percent less than what their parents did at that age, and carry an average of $20,000 in unsecured debt.

Otteau said boomers’ declining earnings and insufficient retirement planning will create a “massive tradedown of people in large houses,” but young people won’t be able to afford or fill those large homes, or will want to live in urban areas. This could create a surplus of 22 million large-lot suburban homes nationwide by 2025, he said.

Correction: The first-time homebuyer’s tax credit has been extended to April 30. An earlier version of this story listed the wrong date.

E-mail Evelyn Lee at elee@njbiz.com

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