A series of factors is pushing the Connecticut real estate market so high that it’s excluding many renters and buyers, according to one analyst.
“If you don’t take control of that by possibly raising interest rates, then you’re going to see this possibly unsustainable rise,” said Jeffrey Cohen, the Kinnard Scholar in real estate and a professor of finance at the University of Connecticut School of Business.
The repercussions of that uncontrolled rise in rental and sale prices could be as serious as increased homelessness.
“The question is, what’s that going to do to people who are trying to buy, and if fewer people are going to be able to buy, they’re going to have to either live somewhere or they’re going to be homeless,” he said. “There’s got to be something that gives.”
One factor is record-high demand. Candace Adams, CEO of Berkshire Hathaway Home Services, said recently in a statement that “showings per listing and offers per listing remain at record highs,” and “most homes sold in Connecticut are selling considerably above the list price.”
“More single-family homes were sold in the first quarter of 2022 compared to 2020, 2019, 2018 and 2017,” she wrote.
“There’s a backlog of people who wanted to get into the housing markets in Connecticut, and they haven’t been able to just because there hasn’t been enough volume of supply for people to be able to purchase,” Cohen explained. “So, there’s a backlog of demand.”
That lack of available inventory is also pushing rents higher.
“Rents have been rising, partly because people who wanted to get into the housing market, there’s not an opportunity,” Cohen said. “So they’re staying in apartments longer, they’re not able to move to single-family houses as fast as they otherwise might. And so that puts a lot of pressure on the demand for rentals.”
Another factor is what Cohen called “institutional investors.” Large companies, some of them based overseas, buy huge swaths of available housing in a given area, pushing prices higher and making it harder for individual families to compete.
“Institutional investors are, in some ways, forcing a lot of other people to rent who might otherwise be buyers because it takes away from the supply in the market,” Cohen said. “That means there’s a lot less available for people who want to buy, which can push up the price for an owner-occupied house.”
The pandemic has also been a factor, particularly in Connecticut, where families have felt they can move to get out of cities like New York or Boston as work went remote, Cohen said.
Overall inflation is having an effect, too.
“There’s just a general level of price increase and everything in the economy right now,” Cohen said. “When the cost of fuel goes up, the heating cost goes up. If you’re in an apartment, the landlord’s gonna have to pass that on to the tenants.”
It could, Cohen said, lead to a nationwide housing crisis.
“If you view it as important in society for people to have a place to live, and if there’s not an easy way to make sure that everybody has an affordable place to live, that could lead to a crisis,” he said, and it may already have begun.
Cohen lives in West Hartford and, anecdotally, he’s seen more examples of financial struggle.
“You see people standing on street corners with signs saying ‘Help.’ I’ve lived in Connecticut over 22 years. I’ve never seen that in West Hartford before,” he said. “To me, that’s a sign that people need help, obviously.”
The last housing crisis was in 2007 and 2008. Prices were driven up to an unsustainable level though that resulted in what Cohen referred to as a market correction, while others have called it a crash.
“That could be what we’re going to see some time in the future. Exactly when, we don’t know,” he said. “Rising interest rates could trigger that if it gets to a certain point.”
Cohen does not expect that to happen within the next six months.
“At least in the short term, I don’t see that happening,” he said.
“I think there still is such a backlog of demand of people who want to get into housing markets in Connecticut,” he said. “I mean, people who are working in New York City have been moving to as far away as Maine, to find places that are affordably priced.”
The continued rise in housing costs and lack of inventory particularly affects the middle class, who might not qualify for affordable housing but who now cannot afford to live in Connecticut.
Cohen said that could have a deleterious effect on the job market, affecting “The ability of people to accept employment opportunities, which has been making it hard for some employers to fill jobs.”
There is a “silver lining,” Cohen said.
In the past, the Connecticut real estate market did not go as high as that in New York and Boston, and other places around the country. That left property owners with less equity, but it also insulated them from the worst of the crash.
“When there’s a big correction in other parts of the country that have gone way up, Connecticut has seen a small correction as well, but nowhere near as large as the other cities because they haven’t appreciated as much,” Cohen said. “It’s about time in some ways that the homeowners in Connecticut have started to build a little bit more equity.”