Expect Adjustments in the 2023 Housing Market

BY MICHELE LERNER

Gloom and doom about prospects for the U.S. economy and the housing market have been rampant for months, but industry insiders have varied opinions about local markets.

“The national housing market is different than what we’re seeing in New Jersey,” said Jordan Moskowitz, managing director of single-family business for the New Jersey Housing and Mortgage Finance Agency. “Nationally, home prices increased a lot higher than in New Jersey these last few years, mostly because prices are already high here. As a result, we’re not likely to see the same correction that the rest of the country will see.”

Still, the pace of sales in New Jersey noticeably declined in recent months, according to Michael Borodinsky, branch manager of Caliber Home Loans in Edison.

“There are pockets of areas getting activity and even some residual bidding wars,” said Borodinsky. “Mortgage rates are up, and mortgage payments are up, but home prices haven’t adjusted yet, which is a bad combination.”

Nationally, recession fears, inflation, and higher mortgage rates are taking a toll on the housing market.

“Talking about the possibility of a recession so much becomes a selffulfilling prophecy,” said Selma Hepp, interim lead of the office of the chief economist for Corelogic, a financial services and data analytics company based in Irvine, California. “Employers start not hiring more workers and consumers slow their spending.”

Hepp believes the U.S. economy will see a lower level of growth in 2023 because of the aggressive pace of tightening economic policies by the Federal Reserve. “I expect 2023 will be a challenging year for the housing market, but 2024 should return to more normal conditions,” said Hepp.

Housing markets that didn’t experience rapid growth during the pandemic, such as New Jersey, will continue to see slower but steady appreciation in the coming year, said Hepp. “It’s good to be in New Jersey right now, where there’s steady demand.” said Hepp.

Why This Isn’t 2008

Some media reports warn of an impending housing crisis similar to 2008, but there are multiple differences in today’s market.

“Mortgage loans are underwritten to much better standards today than they were in the leadup to the housing crisis,” said Borodinsky. “Housing prices dropped fast then because so many borrowers couldn’t afford their payments and they didn’t have any cushion of equity from a down payment.”

Borodinsky points out an abundance of inventory from overbuilding contributed to the precipitous drop in prices. Now, the U.S. continues to face a severe housing shortage that will prop up the market, said Borodinsky.

“Even if a more severe recession hit and unemployment became more widespread, we’re not likely to see rampant foreclosures because homeowners have a lot of equity in their

properties and are more likely to sell,” said Hepp.

Home prices in New Jersey are not anticipated to drop steeply in 2023, said Aaron Galileo, a mortgage banker with NJ Lenders Corp. in Edison. “I think we’ll see a little more rationality in the market and maybe a slowdown in bidding wars, but that’s it,” said Galileo. “New Jersey was a tight market before the pandemic and people weren’t selling because they couldn’t buy anything.”

Mortgage Rates May Level Off in Early Spring

Mortgage rates aren’t expected to stay at 6% or higher forever, but when they come down and by how much is difficult to predict.

“Rates will definitely come down later in 2023, but don’t expect them to dip down to 3% again,” said Galileo. “That was related to the pandemic recession, so unless there’s some other unforeseen event they’ll level off at a more normal rate.”

Hepp also anticipates mortgage rates to come down during the second part of 2023. “If we see a more severe recession, one of the tools the Fed will use is to purchase mortgage-backed securities again, which could bring rates down close to 5%,” said Hepp.

Borodinsky anticipates rates coming down sooner than some other experts. “Mortgage rates are forward-looking, so I think they will peak over the next few months and back down in early 2023,” said Borodinsky.

Supply, Demand and the Housing Market

Mortgage rates impact both demand and supply dynamics in the housing market.

“If rates go down, we’ll see buyers come back into the market quickly as we did when they dipped a little in August,” said Hepp. “But sellers are locked into such favorable rates that they have no incentive to put their home on the market.”

Hepp is more concerned about the ongoing lack of inventory than demand.

“The biggest problem is that first-time buyers are squeezed out of the market by the combination of higher rates and higher prices,” said Borodinsky. “You need first-time buyers in the market because it’s a chain reaction that allows for move-up buyers.”

Creativity to Keep Market Moving

Down payment assistance programs through the NJHMFA are a growing incentive for first-time buyers, said Moskowitz. “We’ve helped more than 1,900 buyers with down payment funds from January through October of 2022, compared to 1,650 in all of 2021,” said Moskowitz. “We’ve also seen a 15% increase in the number of lenders offering our programs.”

In addition, the maximum down payment assistance of $10,000 has been increased to $15,000 in 12 counties with higher home prices.

“We also offer competitive mortgage rates for all our loan programs and don’t upcharge for borrowers who use down payment assistance,” said Lakesha White, manager of business development, single-family division, for NJHMFA.

Another option for buyers to consider in a changing market is a renovation loan that wraps purchase and remodeling costs into one loan, which Borodinsky said is an underutilized option.

Seller offers to pay closing costs are beginning to make a comeback in some markets too, said Borosinsky. “Sellers are offering to buy down their buyers’ mortgage rate for the first couple of years because that’s less expensive than reducing the price,” said Borodinsky. “We’re also seeing buyers choosing ARMs that are fixed for five to seven years with a plan to refinance before they adjust.”

While most experts agree the U.S. economy is in for a bumpy year, the New Jersey housing market is likely to continue to thrive.