What’s next for the real estate market? | Features
When the pandemic began, questions about the virus and public health prevailed. As time went on, people asked, “Where were you when the world shut down?”
For people who entered the real estate market in the latter part of 2020 and last year, the question became: “Where did you want to be?”
Last year several forces collided, resulting in a real estate market that smashed through previous records. Houses sold in mere days, prices skyrocketed and inventory sank to historic lows. “Where the demand is coming from is the importance of being happy in the home that you’re living in,” says Richard Ferrari, president and chief executive officer of Douglas Elliman’s New York and Northeast division. “It moved up a lot of the calendar for a lot of Americans who now don’t want to wait another three to five years for a change in life.”
Demand accelerated as people sought more space amid continued work-from-home arrangements, and city dwellers from New York and Boston migrated here or sought second homes. Average prices for single-family homes increased nearly 13percent, year-over-year, to $315,000.
Demand is likely to remain high in the next few months, as supply has dropped even further, real estate agents say. At the start of 2022, statewide inventory sat at less than a two-month supply, more than four months less than the typical market.
“The pandemic has changed the world going forward, in my opinion,” says Paul Breunich, president and chief executive officer of William Pitt and Julia B. Fee Sotheby’s International Realty. “I don’t think it’s a moment in time, I think it’s a shift.”
Here, we ask Connecticut real estate professionals key questions on the minds of buyers and sellers as a new spring home-buying season dawns.
How high can prices go?
Of course, prices are directly impacted by demand, which real estate experts say isn’t letting up anytime soon. But they aren’t rising as quickly as they had been, and Connecticut agents say they expect prices to level off or continue rising marginally this year.
From 2020 to 2021, median prices for single-family homes rose by nearly 13 percent — from $307,000 to $345,000. In 2019, they were at $268,000, according to data from SmartMLS Inc.
“Nobody has a crystal ball, but eventually prices will plateau,” Ferrari says. “They’re only going to go up so much with the demand that’s here.”
Some of that is likely to be due to rising interest rates, says Candace Adams, president and chief executive officer of Berkshire Hathaway HomeServices for New England, New York and the Hudson Valley. Interest rates, which have been at historic lows, are likely to rise a few times this year, which could slightly dampen demand.
But for the first few months of 2022, there probably won’t be much of a change in prices, says Jeffrey Cohen, a professor of finance at the University of Connecticut’s Center for Real Estate and Urban Economic Studies. “You might see some fluctuations, but I don’t see any dramatic increases or any dramatic decreases at least through the first half of this year,” Cohen says.
What was that about interest rates?
The Federal Reserve has said it plans to raise interest rates this year, which means mortgage rates will be higher, UConn’s Cohen says. The Federal Reserve sets interest rates for commercial banks’ borrowing, and increases to those rates trickle down to the consumer.
Cohen says interest rates will be the most important market indicator to watch in 2022. “Even though, in the short term, a small increase in rates may not have a tremendous effect due to the backlog in demand, I think in six to 12 months that could start to be a factor depending on how high rates go,” he says. Small increases aren’t likely to have a big effect, and interest rates typically have minimal effect on the luxury market. Even with the increases, rates are still low compared to historical rates, experts say.
Adams says that a possible drop in demand when rates rise is one of the reasons she’s telling homeowners this is a good time to sell. Still, that might take some time to play out. “They keep talking about interest rates going up, and they’ve ticked up a little bit but not enough to curb demand yet,”says Tammy Felenstein, president of the Connecticut Association of Realtors.
Will inventory pick up enough to meet demand?
That’s unclear, although in a typical year, more houses go on the market in the spring and fall, agents say. “We’re anticipating a robust sellers’ market in 2022. I don’t see that inventory will drop another 40 percent, but we are still seeing it as a sellers’ market at least for the first two or three quarters of 2022,” Ferrari says.
Agents say inventory will be the most important thing to watch in 2022. The Multiple Listing Service’s year-end report for 2021 showed the months supply of inventory down nearly 38 percent from 2020, to 1½ months statewide. Months supply describes the amount of time it would take to sell all the homes on the market, given current market conditions. Historically, moderate price appreciation comes with about six months’ supply, according to the National Association of Realtors.
“It is the biggest elephant in the room,” Felenstein says. “It’s a historic level of sustained, depleted inventory, more than we’ve ever seen. And it’s not just Connecticut, it’s nationally as well.”
It’s been an issue for months as eager buyers have purchased homes quickly, agents say. The problem is exacerbated by a self-perpetuating cycle of sorts, agents say. People who might want to sell are hesitant because they are worried they won’t be able to find a place to go. “If there was inventory coming on, it was just being scooped up very quickly,” says Ryan Raveis, co-president of William Raveis Inc.
To alleviate the issue, William Raveis has instituted a program in which the company purchases a home, makes upgrades and sells the property, giving the seller the money they need to buy their new home. The seller pays a fee and keeps any further profit from the sale, according to information on the Raveis Purchase program website.
Other companies are putting out information to homeowners about the market’s heightened prices in hopes of encouraging them to sell or adding addendums to sales contracts that allows the seller time to find a new place, agents say.
How about new homes being built to help with inventory?
Construction has slowed for much of the pandemic, in part because of labor shortages and supply-chain problems that have made it difficult to obtain certain materials.
The longer development takes, the more it tends to cost, Raveis says. And many of the new home developments, particularly in Fairfield County, have been luxury units. “The private contractors have chosen to put up homes at a higher price tag, so we are seeing new construction,” he says.
Condominium living is also growing in popularity, in part due to limited availability of houses. A handful of new condominium developments launched in 2021, and most units sold quickly, developers say.
Multi-family housing is often particularly difficult to construct in Connecticut because of what advocates say are restrictive zoning laws. Accessory dwelling units, or smaller homes located in the same lot as a standalone house, were also legalized last year. It’s up to municipalities to approve them, and advocates hope increasing the inventory will drive down the cost of housing in a state that is short thousands of units of affordable housing.
The National Low Income Housing Coalition estimates that Connecticut is short 86,717 rental homes for people with low incomes. “We have seen a lot of rental buildings going up in cities,” Felenstein says. “They’re renting just as fast as they build them. And they’re not cheap.”
The tight rental market is also impacting the housing market. “There is low inventory across the rental market as well, and that’s part of why there’s hesitancy for people to sell a house,” Cohen says. “In the past, people might have thought, ‘Gee, I’ll rent for a while to figure out what I’m going to do.’ ”
Will New Yorkers and other out-of-staters continue to stream into Connecticut?
Much of the demand in Connecticut’s housing market was driven by migration from New York City or Boston, real estate agents say.
Although the state saw a small net increase in population from July 2020 to July 2021, that rise may have been overblown, says Thomas Cooke, a demographic consultant in Connecticut. “Obviously what was happening is a lot of people have second homes, a lot of people have family in Connecticut, and so they left New York because it was horrible there, it was apocalyptic,” Cooke says. “And so people fled to family, friends, second homes.” Many of those people have returned to the city, he adds.
From 2020 to 2021, Connecticut saw in-migration of about 9,700 people. Just over 5,000 were domestic moves, according to data from the U.S. Census Bureau. But that data doesn’t reflect the effect of second-home purchases, which represent a noteworthy segment of the market, agents say. “You don’t have to have a big influx out from New York in order to flood our housing markets,” Breunich says.
Agents say they’re still seeing buyers from New York City, as well as many who moved into the state during the pandemic to rent, now looking to buy.
What’s the latest on remote work’s impact?
Continued work-from-home options have allowed people to live where they want and encouraged moves from New York City to Connecticut, agents say. As long as remote work continues, those who have moved to Connecticut will be able to stay without a frequent commute. “Remote working, that’s a game changer,” Breunich says. “That isn’t going to stop.”
A move to Connecticut often means more space for New Yorkers, and the commute is doable for those who have to work in the city just a day or two a week, he adds. “Most Americans now, they want a nice home, and a nice home is different for everyone,” Ferrari says. “But there is movement going on to find that home that fits you and your family. An important aspect of someone being happy is finding a home that you want to live in.”
Cooke, however, says that although recent trends show more movement toward suburbs, remote work options typically make people less likely to move, especially once they’ve chosen a home that fits them. Most prefer to stay in neighborhoods that are familiar, near family or near their support group. That’s especially true during times of turmoil, he adds.
“We’re having this long-term and short-term transition to remote work, and people don’t have to move as often,” Cooke says. “So if you lose your job, and you have a partner and a family and you’re connected to your neighborhood, you can stay where you are and adjust to not have to cut ties with all those things that are important to you.”
What are buyers looking for these days?
People are always interested in walkability, particularly those moving from New York, agents say. But since the pandemic, there has been more movement toward the increased space that rural locations offer.
In Greenwich, for example, homes in the bucolic backcountry north of the Merritt Parkway have become more popular. In years past, the multimillion-dollar estates were difficult to sell, says Jenny Allen, an agent with Compass. “People do appreciate a little bit more space, but there’s always a demand for in-town living such as Old Greenwich,” says Allen, referring to the coastal section bordering Stamford marked by a closer neighborhood feel and shopping options.
And with fewer days to commute to the city, people are more open to being farther from the train station. “Before in places like Westport and Darien, towns that have a little longer commute, people wanted to be as close to the trains as they could be,” says Leslie Clarke, a William Raveis agent. “Now, people are commuting two days, three days, or zero days, they’re moving west of the Merritt.”
Amenities such as pools have also grown in popularity; the wait for a pool placement is two to three years in most parts of the state, agents say.
More people are also seeking additional living space for their parents or adult children to visit comfortably for longer periods of time. Additional bedrooms for office or workout space are also desirable, Clarke says.
Modern architectural styles have also grown in popularity in Connecticut, she says. “We’re seeing a broader sense of style and architecture that is attracting buyers, where before I think it always felt like they were looking for that farmhouse Colonial with an open floor plan,” Clarke adds.
