Residential real estate tends to lead into a good economy, followed by commercial real estate, and also can begin declining before other sectors see a dip. The reason it precedes many other factors is that it is driven by consumer confidence to a large extent. That's an attitude, not necessarily a measurable reality, and reflects popular sentiment about the future, as much as the present. So, when the average person thinks things are improving, real estate goes up, as they act on those ideas by buying property.
Other parts of the economy, fueled by production of goods or job creation, take longer to ramp up, and often do so in light of what's happening in early bellwether fields, such as real estate. Increasing the supply of real estate takes the longest time, if we are talking about new construction, so, in the short run, prices will be driven up fastest, since the supply is constrained.
When the opposite is true, and people don't feel positive about the future, they then stop buying. Sometimes, given the tie between credit and real estate purchases, it may not be that they don't feel upbeat, but that they don't qualify for the size or risk levels of the loans they are seeking. That fact, throughout history, has been a predictor of trouble to come in the economy, but it is hard to measure loans not made, as opposed to purchases, unemployment, or savings rates.
Where does that leave us today? Connecticut in particular, since prices have been depressed for so long, and people have been leaving the State more than moving into it, is a relative bargain for buyers. However, because there has been little new construction, and because interest rates have remained so low, allowing buyers to keep monthly payments affordable despite paying more for a property, sellers are now in the driver's seat. There isn't the general overheating that we saw during the past year, fueled in large part by COVID, but there is demand for all kinds of life reasons, and not the supply to fulfill it. That, plus the ability to borrow, will keep the market strong for some time to come. Let's hope not too strong, so that we don't see an abrupt halt down the road, but strong enough to reach a balanced state in the months to come. There are already indications of that, and they include fewer bidding wars, and more houses going under contract and then coming back onto the market. We should be glad about that, since what flies up may fly back down. Slow and steady is the goal.
