Buying in Connecticut May Be the Better Option Over Renting

 In many parts of the country, renting is cheaper than buying.  Connecticut, especially Greater New Haven, is not typical.  Thanks to years--decades--of languishing prices, we are no longer an expensive place to buy a house.  On the other hand, given our student population, and our arts/culture hub, we are one of the hottest rental markets across the United States.  In fact, the last survey we saw showed us as second!

What does that mean for buyers?  It still is affordable for many to purchase, especially given the interest rates.  Although there is a lot of competition, it is largely local, except for maybe the Shoreline.  The rental market, thanks to Yale, is international.  Listings are creeping up, and offers have been slightly slower to come in.  Competitively, then, it's a little easier to buy.

Will there still be appreciation?  It appears that millennials will be forming households at a rapid rate going forward.  Even though we have been told how different they are than their parents and grandparents, they seem to want many of the same things in a home, especially during the pandemic.  So the supply going forward should keep prices up for years to come.  There hasn't been much home construction for a long time, and that, right now at least, is backed up with regard to both supplies and labor.  

What should sellers do?  There is still a need for more product, so keep those listings coming.  Don't be greedy, and don't count your chickens before they hatch--a lot can happen before a closing takes place.  You will, however, be in a great position to buy when prices are lowest, at the end of the year, if you sell now.  

And Labor Day, the start of the fall market, is just around the corner for everyone!

Big Change in NYC Rental Law

New York City has always operated differently in the real estate world than almost anywhere else.  Long after the rest of us began to publish lists of every property on the market, they held on to the old system of each broker representing only his or her own listings.  When we started putting our Multiple Listing Service online, they kept to the scattered knowledge of listings that they'd always had.

Last week, a ruling came down from the New York State licensing agency, saying that renters no longer had to pay a broker's fee when renting an apartment, unless they represented a renter.  Issued as a "legal guidance", it changes the current practice, where brokers control access to most listings, and charge the renter up to 15% of the yearly rent, at the time that the lease is signed.  Brokers and real estate associations are fighting the ruling, although it isn't clear what will happen to any challenges.  Going forward, real estate brokers must either get paid by the landlords, or must have a representation agreement with the tenants.

Essentially, that's what happens in Connecticut.  We are required by law to offer representation to buyers and tenants, and they must sign an agreement for that to be in effect.  Landlords and owners most often do pay us, but we have a fiduciary relationship with buyers and tenants whom we represent.  We need another set of signatures in order to represent both the seller/landlord and the buyer/tenant, and that creates what is called dual agency.  Our duties are not related to how the commission gets paid; it's about what gets signed.

It's interesting that NYC is so late to the party, because the rights of tenants and buyers have been at the forefront of change around the country for a long time.  Because we have so many people coming to Connecticut from NYC, it often comes as a surprise to learn about our laws and requirements.  Now that they are going to have the same types of agreements, signing for representation may come to seem more routine.

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!

Rental Rates Reach the Sky in New Haven

A recent article announced that the penthouse apartment in the old Union Trust building has just rented for $6200 per month, a new record as far as we know.  There have also been very high reported numbers for smaller apartments in other buildings.  New Haven is becoming full of luxury apartments, and the parade doesn't look as though it's ending any time soon.  Several more projects have just come on the market, or are on the drawing board.

Despite the increase in supply, New Haven shows up on lists of places where buying is cheaper than renting, because rental rates have gone up at least 50% over the past ten years, while house purchase prices have declined over the same period.  If you include the effect of the current low interest rates, it's really a bargain to buy here.  We are at the top of rental market boom towns, and at the bottom of recent home price appreciation areas.

Of course, buying makes more sense if housing prices stop declining, and there are signs that that is happening.  The signs that Realtors see include lower listing inventories and multiple offers on newly-listed properties.  Over time, we are also beginnnig to see year over year appreciation in certain towns and categories, and problems with purchases "appraising out".  This is an industry term that means that accepted offers are coming in higher than appraisers think fair market value is (always an indicator that prices are rising, since appraisals, which compare recent sales to pending contracts, obviously lag the market when it is rising--if prices were declining, recent sales would be higher, and everything would appraise for more than the contracted price).

If you take these two factors together--rising rents and an improving market for sales--and you throw in mortgage rates as they are today, it seems that any rational person would choose to buy right now, unless they were only going to be here for a short time, unless they didn't have a down payment or a good credit score.  But the bargains will only last for so long, so act quickly!

Do the Math

There is a famous aphorism that says that there is no certainty in life, except for death and taxes.  Taxes turn  out to be a big factor in the purchase of property, although we don't really see the certainty involved.  Yes, taxes go up over time, but do they go up at the same rate in every city and town?  Are they phased in the same way everywhere?  Are the same services included?  Are the school systems comparable?

People buying property care a lot about what the taxes are, since what they are really basing affordability on is the amount of the monthly payment of mortgage, interest, insurance, and taxes.  While they may know the first two calculations, if they get a fixed-rate mortgage, they tend to overvalue the current information available, and overrate the problem of uncertainty going forward, about all kinds of things.  For instance, if you take money out of your savings to purchase a home, and those savings were in the stock market, what are you giving up as an alternative return?  You don't know what the stock market will do over the long haul, although you do know that, like real estate, it's generally cyclical.  If you buy rather than rent, will the price of your home increase over the period that you own it? Again, you don't know, although that is usually true, especially if you hold it for a long enough time, and if you buy when prices are not at a peak.  Will your housing needs remain stable for the foreseeable future?  "Foreseeable" would seem to imply that you know what they will be, but life has a way of throwing curve balls, be it a new job, an illness or injury, another child or children, an aging relative, or any number of other variables.  You can't know up front what the market will be like when you sell.  If you wait to buy, will prices and mortgage rates hold steady?  Although we can't know, it's not likely, especially if you wait for a long time. How quickly will rents rise, especially in New Haven, the country's tightest rental market?

I could go on and on, but I've made my point.  So, what's a person to do?  One of the best things I learned in business school was how to make a decision tree.  Since this column does not include a tutorial in econometrics, I'll simplify.  Make a list of the uncertainties, then put them each in either the "Buy Now" column, or the "Buy Later" column, depending upon which way they are each likely to lead you.  Try to quantify the general risk of each one in monetary terms (e.g., interest rates go up 1% vs. taxes go up 8%), and you will get an idea of what the math tells you.  You should, of course, factor in your own particular risk aversion factor (that is, how much uncertainty will bother you), but the numbers will tell you something.  If you find yourself arguing with the numbers, you will be telling yourself something that way, because you will be revealing your gut instinct.  Whatever you decide, it's time to go with that, and act.

Counting Down (or Up) to June 2006 Levels

Although the real estate market everywhere is on the mend, we in Connecticut are proceeding toward normal at a slower pace.  The high for prices in our region occurred in June 2006.  At last report, our median sales price was still 23% below that peak.  Since most of the country is within sight of their previous high, people in our area are among the lucky few who can continue to buy at lower prices.  Even if you are selling, those who are trading up would gain more from buying at those levels than they would lose from selling at current prices.  When you combine the present cost of mortgages with the sales figures, it remains a great time to buy.

And there's even one more factor in include, which improves even further the current climate, and that's the state of the Greater New Haven rental market.  We have the lowest vacancy rate in the country right now, and that tilts the equation even more toward the buying side.  Rental rates have gone up 50% in the period where sales prices have declined 23%, making us one of the clearest examples across the United States of a place where rent vs.buy decisions are so stark.  So don't kick yourself later.  Do it now--buy that property!

Why the Rental Market Matters

We have been reading lately about New Haven's stellar rental market--either the lowest or the second-lowest vacancy rate in the country, depending upon your source.  Why is this?  And how does it relate to other real estate data?

New Haven's extraordinary occupancy rate for apartments has several causes, some of which are unique to New Haven, and some of which apply across markets nationally.  New Haven's own reasons have to do, first of all, with the large number of students residing in the region.  Students are almost always renters, and graduate students rarely live in university housing.  The second driver in New Haven is the nightlife and culture prevalent here, so that young people (and empty nesters) who work in other places in Connecticut will disproportionately choose to rent in New Haven and commute to their jobs. 

Around the country, there are certain trends that are helping rental markets to stay strong.  Of course, high foreclosure rates will result in more renters, as the people displaced from their houses won't be able to buy right away.  Also, the uncertainty of all job security means that many more workers, executives included, leave their families behind and rent in the new city until they are confident that they will stay at the job.  That trend is exacerbated by the difficulty transferees are having in selling their homes in the locations they are leaving; until they do, many must rent.  Even those who sell are renting in many instances, since they worry that housing prices have not bottomed out, and that this may not be the best time to buy a new home.

All of these factors have combined in Greater New Haven to make rentals scarce and expensive.  It also offers an opportunity for investors to buy property and rent it out, and not just the typical apartment building or multi-family house.  Single family homes make good rentals also, particularly when you can buy one for a price that allows you to cover costs with rental income.  It can even be a good alternative for those who have houses on the market that are not selling.  Many people are looking for homes to lease, not just in the center city, and it's a good time to find tenants.  This is especially true if you allow pets!  As with all types of real estate markets, there are ways to make money in this one.