Is there a housing bubble? If so, when will it burst? These are the two most prevalent questions about today's housing market. And while there is speculation about these issues, one thing is clear: Connecticut's housing market continues to expand. This article will examine the State's housing results for 2004 and what they mean, including perspectives on production, sales, and pricing, as well as supply and demand.
According to recently released and revised 2004 data from the Bureau of the Census, Connecticut's cities and towns authorized 11,837 new housing units, the highest level since 1998 and second highest in 15 years. This level of production represented an increase of 13.4 percent from 2003, and 21.6 percent from 2002.
New Haven County authorized the most new housing units with 2,534, followed by Fairfield County with 2,495, Hartford County with 2,389, and New London County with 1,348. The four counties combined accounted for 74 percent of the new housing market in 2004.
Last year, more than 78 percent of new permit applications were for single-family homes (six percentage points below the average of 84 percent for the previous ten-year period). Among counties, Litchfield County had the largest share of single-family homes among its applications with 98.6 percent of the total new permits for single-family homes. Windham County ranked second with 95.6 percent. By comparison, New Haven County had the smallest share with 69 percent.
Effect of Demolitions on Inventory
Demolition data is an essential component to determining the net gain to the housing inventory, defined as existing units (as counted by the 2000 Census), plus new production, minus demolitions. The Department of Economic and Community Development's survey found 1,729 demolition permits from cities and towns in 2004. Thus, the net gain was 10,108 units and that brought the housing inventory to an estimated 1,421,070 units in 2004. Of these, 918,190 are single-family houses and 502,880 are multi-family dwellings such as apartments or condominium units. The data suggests that the State's housing stock split between single and multi-family units is 65/35 percent.
In many Connecticut communities, stringent zoning regulations and limited land space contribute to a tighter housing market. In Fairfield County more than the rest of the State, as suggested by the demolition data, homeowners and developers tear down existing houses and build bigger homes with many amenities. Almost half of the units demolished were in Fairfield County, more than a quarter were in New Haven County, and Hartford County registered 12 percent of the total units demolished. Seven of the top ten municipalities, as measured by number of demolitions, are located in Fairfield County.
Home Sales and Prices
Home sales in Connecticut continued to be strong in 2004. Although the Federal Reserve raised interest rates a few times, and mortgage rates reacted upwards, this did not appear to dampen the housing buying market. As for existing home sales, Connecticut's rate of sales was much higher than in other states in the U.S. and New England. The State's average growth rate on home sales stood at 1.9 percent annually, more than twice that of the national rate of 0.7 percent between 2000 and 2004, according to data appearing in New England Economic Indicators, published by the Federal Reserve Bank of Boston. For the New England region as a whole, home sales grew at a more moderate pace of 1.4 percent during the same period.
Evidence of Connecticut's robust housing market is apparent in the rapidly rising median home sales prices. The State median selling price increased 15.8 percent to $219,900 in 2004, making it the third consecutive year of double-digit increases as sellers tried to capitalize on a strong market. All eight counties posted double-digit median home sales price increases over the year. Middlesex County experienced price increases of 19.0 percent to $225,000 in 2004 from just a year ago, the largest percentage increase among all counties. Fairfield County was not too far behind with gains of 17.5 percent, and Litchfield County enjoyed a 16.1 percent price appreciation. Hartford County showed slower growth of 12.1 percent in comparison to the statewide average.
Supply and Demand
The number of new housing permits authorized is a lead indicator in determining housing supply. In Connecticut during the 1980s, the oversupply of new housing units was one of the reasons that led to the real estate crash. Table 3 shows that, between 2000 and 2004, new permits grew at six percent annually, less than half as much the increase from 1980 to 1984. This indicates that the housing supply is at an adequate/moderate level. Today, oversupply is not an issue in our State.
Is Connecticut Experiencing a Housing Boom?
The Federal Deposit Insurance Corporation defines a housing boom market as one in which inflation adjusted prices for homes rise by 30 percent or more in a three-year period. Overall, though impressive by state historical growth rates, the rise in Connecticut housing prices is nowhere near the definition of a boom market.
As baby boomers and affluent young buyers seek "better" and more spacious living arrangements than their parents' generation, single family homes are getting bigger and, due to the ever-increasing cost of raw materials, labor and land, more expensive to own. Many new homes are equipped with "luxury" features such as larger rooms, crown molding, spas, kitchens with granite counter tops, stainless steel appliances, high ceilings, pools and fitness rooms. American Community Survey data indicated that 12.7 percent of households surveyed reported home values worth more than a half million dollars in 2003, compared with 7.1 percent in the 2000 Census.
As a result, in Connecticut an estimated 163,000 homeowners are making mortgage payments of $2,000 or more each month, a 45 percent increase from 113,000 homeowners in 2000. Households with $2,000 or more in monthly mortgage payments accounted for 30 percent of homeowners, compared to approximately 22 percent in 2000. Median mortgage payments increased from $473 per month to $533.
Current production, sales, pricing, and supply/demand confirm that housing market conditions in Connecticut remain strong. Due to low mortgage rates, home value appreciation, and a rising demand for second homes and vacation properties, the outlook is still positive. Even on the national level, Federal Reserve Chairman Greenspan has described the trend as "froth" instead of a "bubble." The lone indicator, if any - that the strong market trend might slow down at all - is Chairman Greenspan's more recent statement that since the economy is healthy, higher interest rates may be ahead. Ultimately, higher mortgage rates should slow all housing markets. Until that time, Connecticut's housing market will continue its current strong expansion. All indications are that this growth can and will be sustained and therefore there is no "bubble."