For readers who might not have studied math in many years, it's important to remind people of the power of percentage increases on the cost of both the underlying real estate and its financing. Both commercial and residential real estate are deeply affected by the starting point for measuring costs. We have all been reading about the wild percentage increases in real estate prices around the country--for example, up 43% in one year in Austin. Connecticut comes in around the average, with about 16% year over year increases in sales prices for residential properties.
increases in costs
We should start the analysis with an examination of our location between New York and Boston, both of which have similar increases in costs (even higher in NYC, but off a lower pandemic base). To take a very simple example, suppose that the average home in Connecticut cost, on average, $100,000 one year, and rises by 50%, an amazing increase, to $150,000. If that same home in NY or Boston began by costing double, at $200,000, and also went up by 50%, it would now go for $300,000. Most people get mortgages, and usually they finance about 80% of the cost. Therefore, the Connecticut mortgage would go up from $80,000 to $120,000, while the Boston or NYC area mortgage would rise from $160,000 to $240,000. Since most people measure the affordability of housing by the monthly payment, it is easy to see in this example that the monthly cost in the places where prices were higher to begin with will go up by twice the dollar amount, and, while still 50% more than Connecticut, it will be double the monthly cost. Although these numbers are lower than the actual costs, the same principles would apply at any price point, as long as--and we believe this to be very true--the original cost in surrounding states began at a much higher amount. This is the silver lining of our anemic and protracted recovery from both major recessions of the past few decades.
Of course, this would also apply to commercial prices and commercial financing. For businesses that are selling outside Connecticut, that difference is going straight to the bottom line. For those whose customers are local, it would still be true, unless corporations in other states can charge twice as much to the end users in those locations. In addition, the cost of housing greatly impacts the performance of a business. Wages will not need to increase as quickly, if the cost of housing stays lower. Since we began with depressed real estate prices, it would be very surprising if that did not prove to be true in Connecticut. That will impact demand for people to move corporations here, or expand on current sites, and that will raise the rental rates and sales prices that commercial real estate landlords and owners can command.
As they say, the devil is in the details, and the details of the current percentage increases work in Connecticut's favor.