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Relatively low mortgage rates, a growing population, new household formations, and the desire to upgrade current homes created strong demand within Connecticut's housing market in 2005.
Can the pace of housing construction be sustained? Will home prices rise? This article, by examining housing market performance in 2005, will attempt to provide some answers to these questions.
Housing Contribution to the Economy
The housing sector, through private investment and consumption spending on housing services, has been a vital part of both the national and state economies during the last few years. According to statistics published by the National Association of Home Builders (NAHB), the total value of housing activities contributed nearly 16 percent to the U.S. economy (measured by Gross Domestic Product, GDP) in 2002, the latest year for which estimates are available. Connecticut's housing share accounted for more than 15 percent of Gross State Product (GSP), just as significant as the finance and insurance industry.
NAHB has calculated residential construction jobs and wages for each state. In 2003, Connecticut employed 25,900 residential construction workers. This total accounts for 1.6 percent of all jobs in the State, with average annual pay at $41,100 per worker. In comparison to other states, Connecticut ranked 32nd in total residential construction jobs, 45th in the industry's share of all jobs, and 5th in average wages in the industry.
Housing Production, Demolition, Inventory
In 2005, the State authorized 11,885 new housing units according to the Bureau of the Census. As the chart on the front page shows, the level of production achieved in 2005 represents the highest total since 1989. Danbury led all municipalities with 598 units authorized in 2005, followed by Shelton with 474 units and Hartford with 353 units.
At the county level, Fairfield County authorized the most units (3,119), and experienced the largest percentage increase (25 percent) from a year earlier. Hartford County authorized the second largest number of units (2,487), a 4.1 percent gain compared to 2004.
DECD surveyed all towns in Connecticut for demolition information and the 127 municipalities that responded reported that 1,386 units were demolished last year. Just like in 2004, more than half of the units demolished occurred in Fairfield County to make way for bigger and more expensive houses.
The balance of new authorizations and demolitions for the year yields a net gain of 10,499 housing units in 2005 bringing Connecticut's total housing stock to an estimated 1,431,569 units.
The relationship between building permits, housing starts and completions is a frequently asked question. There are several factors affecting the permit-start-completion relationship, such as housing starts in non-permit areas, permits abandoned before start, and design change and misclassification. According to the Census Bureau, in general, the number of housing starts is two and half percent lower than permits, and housing completions are four percent lower than starts. That means approximately 94 percent of permits issued will turn into completed housing units.
Home Sales and Prices
The number of home sales is another indicator of housing activity, and mortgage rates directly affect consumers' home buying. Influenced by the Federal Reserve Bank's raising of interest rates, mortgage rates were on the rise in 2005. Consequently, according to the Warren Group/CERC, there were 81,733 all-unit transactions in 2005, showing a bit slower pace in comparison to the level of 83,272 in 2004, although significantly higher (12%) than the 72,452 transactions in 2001. This level of activity suggests that the housing market remained healthy and robust last year.
For the fourth year in a row, Connecticut's median home price registered a double-digit gain, rising 12.5 percent from $219,900 in 2004 to $247,400 in 2005. All counties, except Fairfield and Middlesex, experienced a median home price growth rate higher than the State as a whole. Sales prices of existing one-family houses averaged $356,000 in Connecticut, as reported by the National Association of Realtors.
Why do home prices continue to rise? Rising costs of building material, land and labor caused the total valuations of residential construction for all units in 2005 to be $2.2 billion, a 54 percent increase from $1.4 billion in 2000. The construction value represents only basic construction costs because it excludes plumbing, electrical wiring, outside improvements, etc. The steep increase in construction costs is one of the reasons that home prices are much higher in Connecticut than other states that have lower land and labor costs. The State average construction value for a new single-family home was $216,836 in 2005, an 8.6 percent increase from $199,730 the previous year.
Characteristics of New Housing
Based on data released in June 2006 by the Bureau of Census, the majority of new one-family houses built in 2005 were an average size of 2,414 square feet, 33.3 percent bigger than the 1,810 square foot homes built in 1978. The Northeast had the largest average new-home size for any region last year, at 2,556 square feet. Central air was in 89 percent of all new homes in 2005, compared to 49 percent in 1978. For almost all new homes in the southern regions of the U.S., a cooling system has become one of the must-have features. In Connecticut the percentage of "Energy Star" homes that meet high efficiency standards was 15 percent of all new single-family homes built in 2005, ranking the state 12th among all states.
In 1978, nearly two-thirds of houses were built with three bedrooms and 23 percent with four bedrooms. In 2005, the share of 3-BR homes decreased to just under half while the share of 4-BR increased to 39 percent of all new homes. Numbers of bedrooms and bathrooms are correlated. The data show 80 percent of homes built in 1978 had two or fewer bathrooms, while today one-third of new homes come with two and a half baths and another quarter of new homes have three.
Over half of all new homes now have fireplaces versus 44 percent in 1978. Homes with three or more garages totaled about 20 percent of all new homes built in 2005, while 64 percent of homes have a two-car garage, compared to 39 percent in 1971.
In recent years, vinyl siding has become much more popular, gracing the exterior of an estimated 34 percent of homes built in 2005. Conventional type mortgages (30 or 15 years with a fixed rate) remained the principal financing method for the vast majority of homebuyers.
Conclusion
Rising energy prices, more expensive materials, higher labor costs and higher interest rates will surely cause the Connecticut housing market to slow in 2006. Pent up demand and the critical need for more affordable housing should ensure that these negative forces don't completely dampen the housing sector in the State. Levels for 2006 will be lower than those achieved in 2005, however the housing market in 2006 will make a respectable showing. Frank Nothaft, chief economist at Freddie Mac, summed up the outlook for the housing market in the U.S. and Connecticut for 2006 when he stated recently that "2006 may not be a record-setting year, but the housing sector will still be a powerful engine that continues to fuel the nation's economy."
Introduction
Despite the softer sales recently in the real estate market, employment of real estate brokers and sales agents continues to be relatively stable. The increase in prices and a spike in interest rates are beginning to take their toll on housing. The surplus of newly constructed homes, together with longer selling periods, are creating a changing market for buyers, sellers, and real estate agents. It appears that the market for existing homes is somewhat better. Overall, these observations do not affect housing as a basic necessity. People will be starting new families, be relocating for various reasons, and some will be moving into higher economic levels resulting in bigger and newer homes.
In today's highly technical business climate, the buying and selling of homes and real estate in general is undergoing significant changes. Real estate websites are becoming the initial contact for buyers and sellers. Virtual tours, pictures, descriptions, and pricing are now computerized and are easily accessed by the public. Newspaper ads, flyers, and other publications are secondary sources of advertising. The role of the broker and agent is changing as a result of this process.
What do they do?
According to the Bureau of Labor Statistics' Occupational Outlook Handbook, 2006-07 edition, "Brokers supervise agents who may have many of the same job duties." Brokers often have their own offices and deal with other duties such as mortgage procedures, staff meetings, training, and other business matters. Real estate agents are independent sales workers who are licensed to sell real estate. Agents work on a preapproved commission based on the selling price of the property.
The selling of commercial and residential real estate properties is the responsibility of brokers and agents. Listings of properties originate with homeowners and commercial sources who are classified as sellers. An agent will meet with a prospective client for purposes of discussing price, time lines, commissions, closing dates, and other essentials resulting in the final sale. If properties are sold under multiple listing conditions, where another agent sells the property, the commission is usually halved. A full commission is granted when the original listing agent sells the property.
Working conditions
A state license is required to sell real estate in all states including the District of Columbia. An examination is required which includes certain legal, financial, and a technical understanding of real estate. Periodically, a license must be renewed which enables agents to update their skills and understanding of their occupation.
The conditions of work can be very stressful. Long hours, evenings, weekends and holidays are common. Successful closings can be elusive at times depending on mortgage approvals, inspections, and other factors. Competition for listings is also difficult. There are only a certain number of homes for sale during a particular period of time. Because of this, many agents are attempting to get the listing.
For those who wish to aspire to higher levels in this occupation, there are opportunities for starting your own business, becoming an appraiser, mortgage officer or property manager. Earnings will probably increase as experience and time come into play.
Earnings
Real estate agents in Connecticut earn an average annual wage of $73,060 statewide, according to the Connecticut Department of Labor. Real estate brokers reported higher wages at $80,525 statewide. Real estate agents working in the Bridgeport-Stamford, Hartford, New Haven, and New London regions had earnings ranging from $64,680 in New Haven to $95,385 in Bridgeport-Stamford. The Danbury labor market area ranked below the range at $49,280. (See chart). The variance in wages throughout the State is related to the residential, commercial, and industrial properties purchased or sold.
Employment outlook
In Connecticut, job openings for real estate brokers is forecasted at 26 annually, on average, through 2012. Overall employment of brokers is expected to be relatively stable between 2002 and 2012. However, the employment of real estate agents over the same period is expected to grow by 4.1 percent. At present, openings for agents are projected at 56 jobs annually. Should the State population increase at a greater rate than present, more jobs would be created since housing and other services would be in higher demand.
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