Connecticut's Rise in Residential Home Prices

Although we all feel locally that prices are going through the roof, we are not out of line with the rest of the country.  Residential home prices are rising all over, and we are right in line.  So, despite the fact that it has been theorized that our increases are due in large part to a demand from people seeking to leave NYC, it seems to be a broader trend.

The evidence has suggested, even before the pandemic, millennials have been moving toward lifestyles very close to what their parents wanted.  There have been some changes--among them the desire for walkability and smaller lots with smaller homes--the general trend has been for buying homes, often in suburban areas, with outdoor space and good schools.  This was true before the pandemic, and has only increased with remote working and family bubbles during COVID.  Generations before this age group have largely done the same thing, but now the people buying span a bigger age range.  Student debt, poor job prospects after 2007, and protracted adolescences have caused first-time buyers to wait longer.

That cohort is now a broader spectrum, from the 20s to early 40s, and it is colliding with baby boomers who are looking to downsize.  Given the differences brought about by changing tastes, it is putting mid-size homes in walkable neighborhoods at an incredible premium.  This means that the rapid rise in prices would be driven primarily by a lack of supply, fueled by a postponement of sales for a decade prior.  Americans are staying in their homes longer than was customary, and the backing up of the supply chain is causing shortages now, just as it has with paper towels and outdoor equipment.

What will happen next?  Well, it doesn't seem that Connecticut is in a bubble by itself, which is good news.  And the death of cities may not occur, although the trend toward smaller ones may continue, especially with the likely permanent increase in telecommuting, at least for part of the time.  So prices will stay high for the intermediate future, as long as mortgage rates cooperate, and our region will go on doing well.  It won't be about the pandemic, but about lifestyle, normal life cycle changes, and job opportunities.  

If you are a buyer, you will be paying more, but at an affordable monthly cost that is comparable to what has been paid in years past, with higher interest rates.  If you are a seller, now is your chance!

 

Move Up and On

Recently, we sent out a chart to our agents of interest rates by the decade.  Rounding off, they are now about half of what they were in the 70s and 90s, and a third of what was common in the 80s.  Given another chart, showing how long people have stayed in their homes before moving, it's worth pointing out again how much of a difference in the true cost of a home the mortgage rate can make.

Many boomers I know are chagrined to find that, even if their downsized home is actually smaller than the home they left (and you would be surprised to find how often it is not!), they almost always spend just as much buying the new home.  However, rates are still so low that we should think of it as buying "up" at a great cost, in much the same way that we might spring for Premium Economy or Business Class on a plane, if the differential is very reasonable.

While spending more on finishes and extras is a luxury, it will eventually increase the resale value if you make a home modern in the way that buyers down the road will expect.  That won't work if it's too personalized, but many currently trending add ons are well worth the price, and, at these interest rates, may not cost as much as they would have cost in a different decade.

So, the message?  Move up and move on.  Buy what you can afford, and don't forget what you are saving in interest costs, as well as common savings on landscaping, gas (being closer in toward a town center saves money and time), and utilities (modern appliances save energy).  Think of it as Business Class at a Premium Economy fare rate, and go for it!

Five Months and Twenty Nine Days

In my last blog post, I wrote about houses under two million on the Shoreline that were flying off the market.  I speculated that it had to do with the low prices versus perceived value, the stock market recovery, and the length of time since the last hurricane.  All of those things are true, I believe, but I also think that the baby boomer migration may also be a factor.

Baby boomers are turning 65 at an incredible clip, and many of them are retiring.  We know that the taxes, especially the estate tax, in Connecticut, means that many of them here are changing residency to other states.  Although that entails buying property in other states, it doesn't preclude them from buying here also.  When they sell the big McMansions, who's to say that they aren't buying waterfront property for the summers, where their extended families can gather and spend quality shoreline time?  It makes sense.  They want places where their children and grandchildren will want to visit on vacations and weekends, and the prices are attractive enough to be compelling.  They just have to spend six months and a day somewhere else.  And winter is a great time to do that, so it all works out well.

What will happen in the future?  Some of those families will keep those houses for generations, as long as taxes don't make that improbable.  Let's hope that we at least keep people spending their incomes in Connecticut for the warmer months, if they continue to go south in the winters.

A Different Market

All real estate markets are variable, as are all cycles.  What applies to one property may not apply to another.  Yet there are usually certain truisms that stand out at any given time.  So what are we seeing now?

First of all, inventories have tightened in almost every segment.  There just isn't as much on the market.  Good properties can get snapped up almost instantly, sometimes with multiple offers.  This is particularly true on the lower end of the price continuum.

Secondly, rates have been rising, meaning that time is of the essence.  If you are able to afford a home now, don't wait.  It will cost you more every month in the future, if rates go up further, and inflation is a real fear in this economy.  Even if you are downsizing, money is cheaper to borrow currently.

Thirdly, sellers (who tend to be older than buyers) value different things than do buyers (who tend to be younger).  There is often renegotiation that takes place after the inspections, not because the home is falling apart, but because the buyer intends to do work that the seller might not think is necessary, and which, indeed, may not be.  A seller shouldn't be surprised if a buyer is looking to change the floor pattern, bathrooms, security system, or appliances.  As a seller, you don't have to participate in those choices, unless you want to sell your home to that buyer.  There is an exception here--multiple offers reduce the cost of renegotiation, by changing the power dynamics.

Multiple offers still tend to come on properties that are very well priced, and also on those that are in move-in condition.  Prepping the house well for sale helps with that, as does making your offering price so attractive that more than one party will bid, often above asking.  Not only does that drive up the final sales price, but it cuts down on give backs, since buyers know they are competing.

If you are trading up to a larger and/or more expensive home, you may be better off than those trading down.  Not only is supply more plentiful, but carrying costs are a real concern for many people, and bigger homes can sell at discounts that smaller homes would not have to face.  This provides a real opportunity for those who are willing and able to purchase a large home, and those buyers can end up with a lot for their money.  In addition, they will start with more money, since the smaller home that they are selling is probably increasing faster than the larger one they are seeking to buy.  Every market has pockets of opportunity, and this is one--go over $1,000,000 for the best value.

Finally, don't expect this market to change rapidly.  Every other part of the country has already seen declining and tight inventory, and therefore rising prices.  If it is starting to happen here, remember that it is just starting.  And adjust your expectations--then make your move!

Rentals Rule

With the recent news that three of New Haven's newest and fanciest apartment complexes have changed hands at eye-popping prices, it's clear that New Haven has a presence on the national scene for investment potential.  Investors from other places, mainly those priced out of the NY market, have entered our arena with enthusiasm.  Most are institutional investors, who are in it for the long haul, and that shows a confidence in our market that should help us all.

New Haven has, for several years, been at or near the bottom of national lists of rental vacancies, getting as low at one point as 1.5%.  The current situation is not all that different--less than 2% overall, with slightly over 3% vacancy rates at the upper end. Almost every high-end unit that has come onto the market in the past few years is occupied, something that many people doubted would happen.

The really interesting aspect, however, is that the units existing before are still full, and in demand.  In addition, the traditional graduate student housing on Orange Street and environs was expected to fall off in value, as more attractive options lured away those with money, but we haven't seen that occur.  There is still very strong demand for multifamily units in the East Rock neighborhood, as well as in other parts of the city.  Finally, despite all the rental interest, there are not enough condo units to satisfy the demand.  Part of that is because lenders are shying away from financing condominium projects, and that decreases new supply, but, whatever the reason, certain complexes are still in constant demand.

What all of this means is that the number of renters continues to grow.  Some are coming from increasing population, although New Haven is still far from its 1940s peak population.  Student demand is also growing, even as Yale continues to add to its own supply of housing.  We do have a large immigrant influx, and they may be pushing former renters into new areas and developments.  It also appears that New Haven may be achieving its goal of attracting young workers from around the State, who live here for the nightlife and cultural aspects, then commute by train or car to other environs for work.

There is also a heavy influence of baby boomer renters, those who previously owned large homes in the suburbs here or elsewhere, and are downsizing to rentals with amenities.  The traditional stigma against renting, when you could afford to buy, seems to be rapidly disappearing, and the convenience and portability of lifestyle is more important than the tax deduction to many.  We could easily see more of this group if their McMansions in the suburbs would sell more quickly, allowing them to move into the urban core.  While most experts believe that those with young children will eventually choose suburban venues, it does appear that walkability scores may continue to keep those families in cities longer.

What to tell investors?  It's a seller's market for multifamilies and developments, as well as for shovel-ready projects, although there are still opportunities for local people to guess the paths of gentrification, and use them to advantage.  But what about what usually follows?  We haven't yet seen the office and retail that so often accompanies housing, or even precedes it.  While office is years from recovery, and may never reach the pre-telecommuting heights, retail should still be in the wings as a growth opportunity.

And all of this is cause for New Haveners, and those in the region it supports, to rejoice!

Should We Let the Market Fall?

There's a very interesting article on the front of today's NYT business section about the differing predictions as to future real estate prices, and what to do about the flailing state of demand. Some experts think that real estate has been overvalued for the past couple of decades at least, and that the medium-term future upside will be limited to minor price increases. Those people often believe that we are at the beginning of the dreaded "double dip", and that real property prices will drop again.

Other experts feel that real estate is a luxury good, and that people will spend more on housing if they can. As my most recent prior blog would indicate, I'm in that camp. Especially when you consider the age of the baby boomers, I believe that they will "nest" over the next number of years, spending as much as they can on houses where they feel that they could live in retirement, and where their children will visit them. That would argue for higher values, at least for premium properties. As people spend less on food, they are going to spend their excess income on something, and I'm betting on housing over travel (not as easy as it used to be), cars (not politically correct), and clothing (ditto). Housing is where you can express your individuality without looking like a conspicuous consumer.

If you believe this scenario, then housing will improve as soon as consumer confidence rises and remains higher. For more on governmental intervention, I have an idea about that, too, so tune in next time.

Last Call

The Wall Street Journal had an article about buying a house for your child for Christmas. I guess it's appropriate that such an article would be in the WSJ, but it's an interesting idea and deserves some thought!

However, for the average person, it's time to think about buying a property as a holiday gift for yourself. If you hurry, and really move on the mortgage and the inspections, you might even get in for the New Year's celebration. We bought our current house that way. We signed the contract around Thanksgiving, and moved in the weekend before New Year's Day. We even thought of the purchase as a present to ourselves, since, at the time, it was our second home. Many people now do that--buying a vacation home now, with the idea that you might retire to it, is increasingly common with baby boomers. After all, how many socks and sweaters do you need? Putting all the gift money together, and doing something big with it, is likely to be the present that you remember--and enjoy--longest of all.