Is the real estate market REALLY that crazy???

There has been a lot of talk about how crazy the Northern NJ real estate market has been the last few years but, here’s a question: What SHOULD prices be when looked at through a longer term lens?

A few years ago, a speaker at a conference we attended, shared a concept that really struck a chord with all of us at Pollock Properties Group. But before we get to his chart, a quick economic primer is required.

The average percentage increase in U.S. home values over any 20-year period varies depending on economic conditions, inflation, and housing market cycles. However, based on historical data:

Since 1920, U.S. home prices have increased by an average of 3–5% per year, adjusting for inflation.
Over a 20-year period, this translates to an average total increase of approximately 80–170% in nominal terms, depending on the time frame chosen.

For example:

From 1980 to 2000, home prices increased by about 160% on average or 4.89% a year.
From 2000 to 2020, home prices increased by roughly 120–150% (4 to 4.69% annually), with major fluctuations due to the housing bubble and the 2008 financial crisis.

With the idea that one should expect about a 4% annual return on their real estate investment, the speaker shared this chart:

The chart shows a bar graph of Annual Average Home Price in the US from 1989 to the present and then shows a line that represents a 4% annual trend over that time. In other words, the US home buyer who purchased the average home in 1989 for $151,200 would expect that home to be worth $595,859 after 35 “normal” years of 4% annual growth. But as we know, these 35 years have been anything but normal!

The Savings and Loan Scandal, the Gulf War and its effect on oil prices, 9/11, the Housing Bubble, the Great Recession, and the Covid Boom made for a pretty tumultuous roller coaster ride. These events all conspired to make the actual annual home growth in this 35 year period closer to 3.5%. Now, this is not too far off the norm. But looking at everything from this “thirty-thousand foot view" gives buyers and sellers a perspective they may miss when concentrating on only the last few years of growth.

In short, here’s the answer to my original question of what prices SHOULD be when looked at through a longer term lens:

CURRENT PRICES ARE NOT CRAZY AND HAVE ACTUALLY NOT EVEN YET REACHED THEIR HISTORIC NORM!

Now all this is fine for the US in general but we are New Jersey…we’re…different…right?? I mean, who cares about what the US is doing? We invented gym/tan/laundry day! We don’t abide by normal standards. Well, actually…we don’t. We had a feeling an East Coast state like NJ would have a higher average annual growth and we were right.

From 1963 to the present, the average NJ home value has increased about 5.5% a year. For all the talk about how dynamic things have been here recently, if you bought an NJ property in 1963 and sold it in 1983, you would have made an annual appreciation of over 7%! For our purposes though, we decided to use a 4% trendline over the past 20 years in each of the many local towns we serve and here’s what we found.

We’ll share all the charts in the link below but a great example to start with is Maplewood.

What immediately jumps out at you is the (now obvious) fact that in the “Bubble Years” of 2002 to 2007, Average Sale Prices were a good deal over the trend line. We then see those home values crash down in 2007. While beginning a new, slow advance around 2012, we never quite get back to the return someone buying a home in 2004 would have expected. That is, until the Covid Boom.

Just like in the US Chart, the Covid Boom sent Maplewood home values closer to the 4% trendline but we have yet to reach the 4% benchmark. And this is using a more conservative 4% trend when the NJ average is usually closer to 5% or higher. Here are some other towns that show the same thing:

The gallows humor we’ve used on our team when trying to wrap our heads around the last few years has been…whelp, I guess $1.2M is the new $850K! The market just feels so out of control. But when you stand back and look at things from a more sober viewpoint, the market doesn’t look as inebriated as it seems.

The Millennial Buyers, forming new families at record pace, are still escaping high rents in Brooklyn. Inventory is still low as current owners hang on to their 3% mortgages and wait for their kids to graduate from high school before they make their move. Love it or hate it…the current real estate market in Northern NJ still has room to grow.

:

*All information gathered from the Garden State MLS and the Federal Reserve Bank of St Louis.

Article written by: