The Future of Mortgages in New Jersey: Trends and Predictions

The Future of Mortgages in New Jersey: Trends and Predictions

There are several trends that we have observed in 2022 and 2023 that may help you decide whether to purchase a home this year, comparing renting to owning, and how much cash you should use towards down payment.

One of the key trends of 2022 and 2023 is increasing interest rates. The Federal Reserve was chartered through an act of Congress and is technically not part of the Federal Government. The Federal Reserve is tasked with regulating banks and financial institutions, and also maintaining a long term inflation goal of 2% per year. During and after the pandemic, inflation spiked to 8% - 12% (depending on the method of calculation utilized). As a result, the Federal Reserve increased the Federal Funds rate (the interest rate that banks use to borrow from each other), which ultimately determines the mortgage interest rate. The Federal Reserve meets eight times per year and reevaluates the economy at each meeting to determine if the funds rate should be increased or decreased. Beginning in February 2022, the Federal Reserve began increasing the funds rate from zero at each meeting. At each meeting (for the last 9 meetings), it chose to increase funds rate, which is now at 4.5% - 4.75%.

This trend of increasing federal funds rate (and increasing mortgage interest rates) is expected to continue through 2023. Most economists and experts believe that the funds rate and mortgage rates will decrease in 2024, but the timing and amount of that decrease is a highly debated topic.

The first trend to consider if you’re buying a home is certainly mortgage interest rates, as they have a direct impact on your monthly payment and your buying power (maximum purchase price). When and if rates decrease next year, it will increase demand for housing and will cause prices to rise in most areas, especially in New Jersey. This will lead to increased housing prices and more competition (more bidding wars, more best and final offer submissions, and more frustrated buyers). The best strategy is to purchase a home in 2023 despite the higher interest rates and acquire your property at a lower price and without tremendous competition. When and if rates drop next year, you can refinance your loan to reduce your payment OR sell your property and make a profit.

Another key trend to observe in 2022 and 2023 is the increase in market rents in New Jersey. According to NJ.com and Zillow, rents in 14 New Jersey counties have increased between 20% and 40% in the last 2 years. Although single-family monthly rental payments are presently still lower than single-family monthly mortgage payments in most areas, this may change if mortgage rates decrease next year.

Additionally, rents for primary single-family housing are expected to increase at 6% or greater in northern New Jersey, according to the bureau of labor statistics February 2023 Consumer Price Index (CPI). It is reasonable to predict that if rents continue to climb and mortgage payments begin decreasing (after interest rates drop in 2024), then it may become less expensive to own a single-family home than to rent a single-family home.

The last trend to observe is related to the average down payment percentage for home purchases in 2022 and 2023. According to the National Association of Realtors, the median down payment percentage in 2022 across the US was 13%.  In Bergen County (Northern New Jersey), the average home price is $577,194, which means that the average down payment needed to buy a home in this area would be $75,035. We (Brightwire) believe (based on the offers and purchases that we are closing) that the average down payment in Northern New Jersey is actually much higher than the national average (as a percentage and dollar amount). We estimate the average down payment to be at $125,000 and closer to 15% of the home’s purchase price. We also believe that 2023, and especially 2024, will have tremendous competition between buyers, and that 20% will be the minimum down payment that a buyer must have for sellers to consider them to be a creditworthy buyer (as most sellers have ten or more offers to review when selling their home).