Last Updated: July 28, 2022

Pressures on Real Estate Prices in Connecticut

Written By: Barbara L. Pearce
New Haven, CT Downtown and The Green 2

upward pressure on price

Although the number of multiple offers on residential properties has abated in the past few weeks, there is still upward pressure on prices. Greater New Haven is one of the 20 hottest markets in the country right now, and even the cooling of the market is happening more gradually in Connecticut than in other areas. To understand what's behind this, we need to look at the two main reasons that prices go up.

The simplest is supply: Prices rise for goods when the demand exceeds the supply. This is true for groceries, real estate, and all consumer goods. Suppose that you are buying avocados, and the crop in California is damaged by drought. With fewer avocados available to sell, prices will rise.

In real estate, location makes a difference.

You can't transport a house from one side of the country to the other, so the supply is local, often even hyperlocal. One neighborhood could have a shortage of properties, while there can be several on the market within a mile or so. Connecticut, with its small size and lack of vast amounts of empty and usable land, can't raise its supply of housing in the same way that big western states can. In addition, we have more environmental issues, since our cities and towns are older, meaning that more of the land has already been used for other purposes, sometimes meaning that it cannot be used for housing. Condominiums take less land, but they are often the second choice for young families, and millennials are driving much of the demand these days. Even if more homes could be produced, the pipeline is much slower than for most products--years, not months. Connecticut has been a haven for pandemic buyers, because of its location close to New York. That further reduces the supply that is left for residents to purchase. Finally, Connecticut now has the fourth-highest birth rate in the country, where it once lagged at or near the bottom. We all know that babies cause people to buy houses!

Inflation

The second reason that prices go up is because costs are rising. Inflation affects everything, including real estate. To go back to the avocado example, they are rising in price now because everything that goes into getting them to your home--transportation, harvesting, packing, and selling--is costing more. Oil prices can be blamed on the Ukraine, at least in part, and labor on COVID, to a decent extent, but that doesn't change the fact that all goods and services are more expensive due to the cost of production. Real estate construction, whether remodeling or new, is heavily influenced by supply chain and labor issues.

Existing homes have the same inflationary pressure on prices, but it's usually one step removed. Inflation from the preceding factors causes inflation, which is causing the Fed to raise the cost of funds rapidly. That is making interest rates go up, which means that mortgages are more expensive. People who could afford to buy at 3% interest may not be able to do so at 5%. For wealthier buyers, that also cuts the other way. When part of the buying public drops out due to rising interest rates, it cuts down the competition for those who are left in the pool. Eventually, that will lessen price increases, although that takes longer. Supply and demand have to be in rough proximity, and that leads back to the first cause above.

This is a lengthy explanation of why buyers are frustrated these days. However, their wages are mostly rising as well, and their savings from COVID-imposed restrictions on activity are helping with down payments and even purchase prices--cash sales are at a historically high rate lately. We do see signs that an equilibrium is approaching, and, when it arrives, we have our fingers crossed that Connecticut can stay in that sweet spot for a good long time.

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