Optimistic Thoughts for the Post-Pandemic Real Estate Market

Right now, it's hard to visualize what the world, and the real estate market, will look like after the pandemic is over.  The article below, sent by a friend in Northern New England, provides a rational basis for a booming market in the second half of the year:

With all of the volatility in the stock market and uncertainty about the COVID-19 coronavirus, some are concerned we may be headed for another housing crash like the one we experienced from 2006-2008. The feeling is understandable. There are many reasons, however, indicating this real estate market is nothing like 2008. Here are five visuals to show dramatic differences.

1. Mortgage standards are nothing like they were back then. During the housing bubble, it was difficult NOT to get a mortgage. Today, it is tough to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble

2. Prices are not soaring out of control. Below is a graph showing annual house appreciation over the past six years, compared to the six years leading up to the height of the housing bubble. Though price appreciation has been quite strong recently, it is nowhere near the rise in prices that preceded the crash. There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.

3. We don’t have a surplus of homes on the market. We have a shortage. The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.

4. Houses became too expensive to buy. The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%. That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:

5. When it comes to housing, people are equity rich, not tapped out. In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less than before:

During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today. Bottom Line If you’re concerned we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.

Deficit Forecasts, Economic Concerns Spark New Calls for Spending Reforms

Article is from CBIA, click here to read online

The OPM report says Connecticut's job growth since the recession ended in 2010 "has been skewed toward lower-wage industries, especially when compared to the jobs lost during the recession."

Connecticut lost 54,300 jobs in higher-wage industries-45% of all job losses-during the 2008-2010 economic downturn, recovering just 8,900 or 16% of those jobs through September of this year.

In comparison, Connecticut lost 39,400 jobs in lower­wage industries during the recession, recovering 49,300 (125%) of those positions.

"Average annual wages are growing at 1.9% per year in the post-recession period compared to 4.0%
per year before the recession," the OPM report says. "In FY 2019, employment grew 0.4 % while the average annual wage grew 2.8%."

The report also notes Connecticut trails the region and country in a number of key economic growth indicators, including jobs, population, home sales and prices, and gross domestic product.



Fixed Costs
Fixed costs-funding state employee pension and retirement benefits, teacher retirement and
health benefits, debt service, and Medicaid and other entitlements-continue to dominate any state budget discussion.

For instance, active and retired state employee wages and benefits represent 31.7% of fiscal 2020 spending, municipal aid (including teachers' retirement costs) accounts for 21.7%, and 11.6% of this year's expenditures are for debt service.

OPM projects the state's fixed costs will grow an average 4.8%-$2 billion-from fiscal 2020 through 2024 while revenues are forecast to increase an average 2.4%, a gap of $770 million.

While revenue growth is projected to exceed fixed cost growth in fiscal 2024, the state's long-term liabilities-now around $85 billion-continue to diminish Connecticut's ability to properly address essential state services such as education and transportation.

Mccaw told legislators that based on contribution changes made during the 2019 legislative session, the State Employees Retirement System should be fully funded by 2048, with the Teachers' Retirement System following two years later.

Debt service as a percentage of the state budget is also forecast to begin leveling out, growing from the current year 11.7% ($2.28 billion) to 12.7°/o ($2.83 billion) by fiscal 2024, based in part on the Lamont administration's self-imposed "debt diet."

Reserve Fund
The state's reserve fund now stands at a relatively robust $2.5 billion, although Mccaw cautioned that $1.3 billion of that was attributable to "one-time, non-repeatable factors," including the repatriation of deferred overseas hedge fund profits and the new pass-through entity tax.

The fund balance is expected to reach 15% of the annual state budget in fiscal 2021. Under state law, any reserves above that threshold are directed to the state employee and teacher retirement funds and paying down bonded debt.

Both Mccaw and OFA director Neil Ayers warned that the U.S. may be overdue for a recession, given the current economic expansion is now the longest since the end of World War II.
"We're not predicting a recession or predicting a lack of recession," Ayers said.

"We should continue to brace ourselves and be prepared," Mccaw said, adding that while the state
is relatively well-positioned to navigate a moderate economic downturn, it has "insufficient resources" to withstand a severe recession.

Connecticut has not escaped its endless cycle of deficits, as shown by the state's post-recession job and economic growth numbers, an indication lawmakers should put greater emphasis on cutting costs and promoting pro-growth tax policies in the 2020 legislative session and beyond.

From the Hartford Courant : These are the only 10 Connecticut towns where home prices have recovered from the recession

(Click here to read on the Hartford Courant's website)

By Kenneth R. Gosselin I Hartford Courant

Home sales in most Connecticut towns have yet to recover from the 2008 recession. An analysis by The Courant of single-family house sale price data from 2007 to 2018 shows sale prices in all of the state’s eight counties remain below the 2007 peak, with Hartford County making the most progress and Fairfield County in the deepest hole.

 

And of Connecticut’s 169 municipalities, just 10 towns and cities registered median sale prices that exceeded or matched their pre-recession values, according to data provided by The Warren Group, which tracks real estate trends in New England and publishes The Commercial Record.

 

Here’s a look at the 10 towns that have recovered: (to see how your town fared, please click here to view interactive map online)

 

West Hartford

Median home sale price in 2007: $305,000

Median home sale price in 2018: $310,000

Percentage change: 1.64%

 

Barkhamsted

Median home sale price in 2007: $239,000

Median home sale price in 2018: $254,250

Percentage change: 6.38%

 

Bridgewater

Median home sale price in 2007: $473,000

Median home sale price in 2018: $512,500

Percentage change: 8.35%

 

Darien

Median home sale price in 2007: $1,330,000

Median home sale price in 2018: $1,330,000

Percentage change: 0%

 

Union

Median home sale price in 2007: $236,000

Median home sale price in 2018: $236,000

Percentage change: 0%

 

Norfolk

Median home sale price in 2007: $303,500

Median home sale price in 2018: $355,000

Percentage change: 16.97%

 

Franklin

Median home sale price in 2007: $212,000

Median home sale price in 2018: $250,000

Percentage change: 17.92%

 

Eastford

Median home sale price in 2007: $232,500

Median home sale price in 2018: $235,000

Percentage change: 1.08%

 

Pomfret

Median home sale price in 2007: $277,000

Median home sale price in 2018: $287,450

Percentage change: 3.77%

 

Andover

Median home sale price in 2007: $247,450

Median home sale price in 2018: $247,500

Percentage change: .02%

Conflicting News

When people ask us how the market is, it's very tempting just to say that it's great.  However, it's more complicated than that.  I usually respond with some variation of an answer that includes the problems of Connecticut, which cause our market to lag behind the rest of the country, the bifurcated distribution of listings into those that get multiple offers and those that don't even get shown, the lack of price appreciation in most parts of our region, and the beginnings of demand outstripping supply.  It's actually hard just to figure out whether we are in a buyer's market or a seller's market.

So, as with many things, it depends.  Yes, you could be in a state that has greater fiscal health, but we are not.  Given where we are, are conditions better than a few years ago?  Certainly.  Since very little has been built, and many properties have sold over the past few years, is supply lower?  Of course.  Does that increase the likelihood that there will be more demand for the choices currently on the market?  For sure.  Are mortgage rates helping?  Without a doubt. 

And on the other hand?  Connecticut is one of the few places where the recession has never entirely ended.  We haven't gained back all of the jobs we lost, we are losing population, and we have many properties that are still worth less than they were when they were purchased, particularly if they were purchased before the big decline in 2008 and the years following.  Does this mean that pricing is still an issue, since sellers feel that they "need" to get more than buyers are often willing to pay?  I think that question answers itself.  Realism is still in short supply in some areas, especially since the rise in prices has been spotty, with some towns and neighborhoods far outstripping others. 

My advice?  Consult a Realtor before making a judgment about your property, if you are a seller.  If you are a buyer, get qualified and get educated, and then buy while the prices still seem low to most of us. 

Change in town grand list values over time

Many towns experienced an increase in their grand list between 2013 and 2014 but the vast majority are still below where they were in 2008, according to an analysis of recently released data from the Office of Policy and Management.

Only 15 towns, including Stamford and Bridgeport, have rebounded from the Great Recession and seen an increase in the aggregate valuation of taxable properties.

Click here for interactive map.

The most recent grand list data for municipalities is from 2014, but more recent data from a different study, which looks only at home values, shows that a downward trend in that category might be continuing statewide.

Home values in all other states increased between 1 and 10 percent from 2015 to 2016, but Connecticut’s decreased by half a percent, according to a recently released report from CoreLogic.

Connecticut was the only state in the country to show a valuation decline from 2015 to 2016.  Connecticut also was one of five states in the study furthest from peak home values – 20.1 percent below.

Article from Trend CT

Why New Haven is a Destination for Entrepreneurs and Startups

Article written by Matthew Storeygard / Senior Investment Associate / Connecticut Innovations

Please click here to view his article online

Four reasons for entrepreneurs to be excited about where the Elm City is headed

 

1. New Haven’s residents are educated

Companies are finding a strong base of talent across industries. The city demonstrated the 5^th highest growth rate in college degree attainment between 2000 and 2010. The talent pool includes many graduates from Yale University, as well as other colleges and universities in the region.

The high number of well-educated residents also means a stronger economy. Those with advanced degrees earn more money, on average, and can afford to spend more locally. New Haven has been seeing this trend for several years now.

2. New Haven has culture

New Haven offers more food, art, and culture that most cities of similar sizes, making it an attractive place to run a business. It has the best pizza in the country (I’m partial to Frank Pepe’s – try the bacon and clam), is home to the world’s first hamburger, the Yale Art Gallery, which is completely free to the public, and the Peabody Museum. Combine this with exciting nightlife and beautiful scenery, and you’ll understand why the city has been getting a lot of attention for its culture in recent years:

• “New Haven is Happening” – New York Daily News
• “Yale and Hearty” – New York Post

3. The region has a diverse industry base

Not dependent upon one large employer or industry, the region’s sectoral diversity has helped it weather economic and social changes. It was even named one of the country’s 20 recession-proof cities during the recent economic downturn. While education and medicine represent New Haven’s core strengths, the city also has a base of talent in finance, IT, manufacturing, and other industries.

4. New Haven’s relationship with Yale has improved dramatically

Perhaps most import of all, Yale and the City of New Haven are working together to move the city forward. The divide between town and gown was previously a wide chasm, with a baseline of antipathy that occasionally erupted into larger demonstrations of tension and differences. By the time I came to New Haven, the leaders of both New Haven and Yale had recognized the symbiotic relationship, and have fostered a much closer partnership. A good example is the New Haven Homebuyer Program in which Yale provides financial incentives to employees and faculty to purchase homes within designated areas of New Haven.

Weather or Not?

Spring was very late in coming this year, and it's been raining every morning this week when I went out to get my paper, so summer is late as well.  All around the country, real estate professionals were complaining about the effect weather was having on home sales.  We all expected that May and June would be crazy, and would make up for the lost winter, as happened last year after the blizzard in February. 

We're still waiting.  Yes, we're busy, but no more so than in the spring and early summer that follows a normal winter.  We are missing that catch-up phase, where buyers and sellers come out of the woodwork when the weather improves.  This part of the year has also been the same in many parts of the country, albeit the worst area has been the Northeast. 

In other places, it could be that anemic sales relate more to lack of supply than to lack of demand.  It could be that Connecticut, with its 50% recovery rate from the recession is lagging for economic reasons, while others tell a different tale.  We're not sure.  But we are waiting for more activity, and keeping our eyes and ears open for the cause of the delay. 

Action step for buyers and sellers:  Treat June as though it were April.  Make plans to list, which we see happening, and buy, which we're hoping will follow!

Recent Statistics

There have been new indications that shed some light on what we may expect for a spring market in residential real estate.  It's been a brutal winter, but the February job numbers, which just came out, were not as bad as they might have been, and put Connecticut at 50% of its jobs regained from the lowest recessionary level.  This, of course, compares with 92% of jobs regained nationwide, after awful weather everywhere, but we welcome any good news.

Other recent studies predict that the Northeast is the likeliest region to see multiple bids on property this spring, suggesting that demand has been postponed due to winter storms, and will "pop" when spring arrives (will it ever come??).  Rates are edging up, which is another indication that time is of the essence for buyers, since monthly payments matter more than total cost for most people.

Another report from Zillow suggests that the West Coast is best for sellers, and the East Coast for buyers.  That's not surprising, since prices in Connecticut are still 23% below their peak in June of 2006.  It is yet another indication that our region will see strong buyer demand.  Since the listing inventory is delayed, again by weather, supply may be tight.

In our office, we've been getting reports of greatly increased web traffic to our site, with strong demand for certain types of searches by buyers.  Again, that would seem to indicate pent-up demand.

My crystal ball is a little cloudy, but my outlook, based on all of the above, is positive!

Not the Usual Pattern

It's not just the weather that's unusual these days. The state of the real estate market is abnormal as well. Generally speaking, real estate leads into a recession and out of a recession, with commercial real estate following residential trends nine months to a year later.

This time, we did lead into the recession, with the peak of prices and demand coming in about 2005, and falling every year since then. The big dip in the financial markets didn't happen for another three years, and, while the banks look as though they've come roaring out of the doldrums, real estate has not recovered. In fact, many economists say that only real estate has not begun to recover.

Why was this cycle different? For one thing, it was in many ways the perfect storm. One thing after another conspired to keep real estate from improving. More importantly, the one thing the government did do--the homebuyer tax credit--didn't work enough, and sent things crashing back down. Think of a ball that rolls uphill, but not quite to the top, and the speed with which it then comes back down, and replace that image with real estate. The most important factor, in my opinion, is that the government did help everybody else with actual cash--the banks, the insurance companies, and the automakers--leaving us essentially to fend for ourselves. As a result, we suffered even more than we otherwise would have, since the pain was not spread evenly.

If I sound as though I think that it was all a little unfair, that's true. And I'm more than a little tired of this market, as are all of my coworkers and industry compatriots. Instead of leading the country out of recession, we're still lagging. It looks as though we're in for another year of glacially-paced improvement, and maybe a couple of more years of slow progress before we really see good, or at least normal, times. The spring buying season will tell us a lot more, and, this time, I hope I'm wrong about the pace of recovery!

Finally, an Upturn

I was looking at our financial results from last month recently, and I began by just checking our numbers, which didn't seem great. Then I compared them to the column from last year at this time, and I almost began dancing around the office. The numbers that I thought were mediocre (and they were) were 80% better than at this time last year!

This proves the old adage that everything is relative. If something is bad enough, anything else can be an improvement. While that may seem obvious, the effect may not be. If many people--especially buyers--start believing in this upturn, a little improvement can turn into a good market.

It did feel at the beginning of the year that there was a widespread feeling that this recession had gone on long enough. Everyone seemed to be ready to turn the page. Now we can add a little proof that this may indeed be so.

And just in time for spring!

Commercial Real Estate Update

It's worth a mention about what's happening in the commercial real estate arena these days. The answer is: nothing. The nation's banking woes, and the resulting credit crunch, have brought most real estate transactions to a screeching halt. Traditionally, there is a lag between the residential market performance and the commercial market performance of about nine to twelve months. I had an interesting discussion yesterday with an economist running buddy as to why this should be so, but it has been consistent over the past recessions as well. One might think that jobs and business profits would decline before housing sales, but it's usually the other way around. Residential sales can be predicted if you know personal income numbers, interest rates, and the consumer confidence index. Commercial real estate has more to do with credit, GNP, tax structure, and general business cycles, yet they do coincide and overlap this way.

Given the current state of the economy, pundits are not forecasting an improvement in commercial real estate this year. New Haven is lucky that so much of our space is occupied by Yale, but even mighty Yale has seen the effects of this market cycle, so we may not be as protected as we might otherwise have been. Our best protection is coming from a lack of new product, meaning that we don't have the see-through office buildings sitting empty, the way we did in the last recession. One of the worst problems is that there has been a fundamental shift in the way people work, causing companies with the same revenues to need less office space. That may not change back when the economy improves. Other new companies will have to spring up to take that space, and Connecticut's cost and tax structures have caused it to be at or near the bottom of new business creation. In our area, biotech has made our regional results somewhat better, but we should all do what we can to attract corporations and jobs to our region.