What's Causing the Current Real Estate Market, and Will It Last?

Potential buyers and sellers have been curious lately about what will happen in the near term for real estate in Connecticut?  Is it too late to sell this year?  Will next spring be better?  Given that there are no crystal balls, there are still some relevant observations to make.

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.

Current Absorption Rates

Explanation of absorption rate: The rate at which available homes are sold in a specific real estate market during a given time period. If you look at the number for Branford you can say “If market conditions do not change and if no new listings come on the market it will take 3.5 months for the current inventory to sell at the current pace of the market. A balanced market’s absorption rate is typically between 5-7 months”.

What Do You Think About Houses On The Market For Months?

 We had an interesting discussion at a sales meeting today, about what people think when they see a home that has been for sale for a very long time?  Or one that has been reduced in price over and over again?  The consensus answer was that it depends, of course.  

If you are a sophisticated buyer, and you look at the property on Zillow, you can see the history of listings and sales.  People who discover price change after price change often assume that the property was very overpriced, or that there is something really wrong with it. Other homebuyers, especially those who are not as internet-dependent, may never see the history; however, those people may also forget about the house completely, unless it gets brought to their attention by way of advertising a price change.

Sometimes a tortured listing history does mean that is was overpriced.  Because the listing agent is not always known, it could be a reduction due to listing with a new firm.  Sometimes, there is something wrong with a property, although usually a real problem leads in the end to lowered price.  The point is that we don't actually know why the price kept changing, or why the property didn't sell quickly, but we all draw our own conclusions.

Sellers sometimes take properties off the market and relist them, so buyers can see them again at the new price.  That doesn't always work though, thanks to the aforementioned price history.  So what's the answer?  Don't overprice to begin with, because a quick sale is always better.  And the first few weeks are the best time to sell.  And the first offer is often the best.  Need we say more?

Don't Chase the Market Down, Home Sellers

Because of the strength of the current real estate market, largely due to lack of supply, there is still time this calendar year to sell a home.  Even now, buyers are out there.  One agent at our firm listed her home yesterday, and had multiple showings within an hour.  

What's the secret to selling your home quickly?  Don't overprice.  That's it. Many people want to try for more, so they overprice, hoping that a desperate buyer will bite.  That's the wrong way to do it.  The only real way to get more than your home is worth is to list it for at, or slightly below, what it should sell for--then buyers will bid, more than one offer might well come in, and, with luck, a bidding war will ensue.  

When, on the other hand, the seller starts high, s/he misses the best two weeks to sell a home--the first two.  And, since the best offer is often the first, it's important to get that offer in.  Overpricing leads to lowering the price, which in turn leads buyers to try for even less.

It's so simple, and so often violated.  Don't be greedy, and listen to your agent.  You'll be happy you did.

Why Do Real Estate Professionals Care About State and Local Debt?

It was recently announced that Connecticut has a debt load per taxpayer of $62,500, against an average across all states of $9300.  There are many ways to calculate debt, and to measure it versus average income, but this is a high number by any measure.  The reasons go back decades, most specifically to the 1980s, when Connecticut was flush with tax money, and many programs and benefits were instituted.  That, combined with the unusual strength of the public sectors unions in our state, left us with problems that still persist, and in some cases are getting worse.  The looming issue of State employee retirements, due to the benefit changes that begin in 2022, is leaving us, thanks to many exiting the workforce this year or next, with a much bigger roster of retired State employees, still entitled to the old package.

Why does this matter?  Ultimately, it affects property values.  The certainty of large future State expenses almost guarantees future tax increases.  Because we are not gaining population, as many other places are, the number we have to cover is not being spread over a larger group. This compounds itself as an issue, when those left to pay more decide to move out of state themselves.  For example, 37% of Connecticut's retired employees live outside of Connecticut.  So they don't pay taxes here, but get mailed checks every month.  So, to make up for that, we have put in very high estate taxes compared to other states, making older taxpayers move away even faster, since they don't want to die in Connecticut.  

This becomes a vicious cycle.  More people moving out means that taxpayers left owe more, which causes more people to move out.  You get the idea.  When fewer people stay or relocate into Connecticut, there are fewer buyers for property, making the market softer.  There are issues that go the other way, such as the fact that very little has been built over the past three decades, and that we have little land available for future construction.  COVID has actually helped us, given our open spaces and proximity to NYC and Boston.  That has caused shortages in housing and industrial real estate, for two examples, which is raising prices for those sectors.  

Within Connecticut, some cities and towns have their own debt loads that are high.  Hamden is a good example.  Taxes are higher on similar property than in surrounding towns, as Hamden struggles to reduce its debt.  Even though it is doing the right thing, there is pain for taxpayers in the solution.  It's easy to see how that scenario could play out on a statewide level.

What should you do?  Vote for fiscally responsible candidates.  Write to the ones already in office, and express your concern for added entitlements or givebacks.  Read the facts and take action as citizens.  And, above all, remember why you love living here, and work to preserve that, as well as promote Connecticut to others.