The Intersect first launched its quarterly rundown in February 2022 with the goal to bring readers a succinct but informative bulletin on the state of Connecticut’s housing market. Throughout the year, our blog has covered a range of topics from the impact of COVID-19 on inventory and vacancy rates to the rising unaffordability of single-family homes and rental units in the state. Now, as we enter into a new year, The Intersect brings you a rundown of the most important trends from 2022 and shares forecasts of what is to come for the housing industry in 2023.
Throughout 2022, our blog highlighted the drastic reduction in single family inventory caused by effects of the COVID-19 pandemic and other global events including the war in Ukraine. Labor shortages, supply chain issues, and rapidly rising inflation increased the cost of construction for new housing by a projected 14% in 2022 according to CBRE’s U.S Construction Costs Trends Report. In the same report, CBRE discussed how the Great Recession saw an exodus of construction labor from the market, resulting in shortages of builders and the inability to meet construction demand. The impact of these forces in Connecticut is highlighted in the below chart. Here we see how economic conditions have shaped the state’s housing supply in the past decades. There is first a major drop-off as a result of the Savings and Loan crash and economic unrest at the end of the 1980’s. Recovery from this period was slow and then devastated once again at the onset of the Great Recession. During this time, Connecticut saw large reductions in single family new construction, and in particular, homes under 1,500 square feet which are priced to first time homebuyers.
The onset of COVID-19 saw a marked dip in construction as well, particularly when it came to buildings with five or more units. While full 2022 data is not yet available, permitting numbers through November indicate a small rebound in construction. Permits issued in 2022 (4,771 through November) exceeded the total number of permits issued in 2021 by over 120. Construction for multifamily properties rebounded significantly, with a 50% year-over-year increase. Conversely, upward pressures on construction costs appear to have deterred single-family new build activity. In a recent Hartford Courant article, a local builder cited that inflation, particularly in wages, has pushed the costs per square to frame a house to $10, up from $3-$5 in recent years. Data through November 2022 shows a decline in the construction of new one-unit properties by 22%. Going into 2023, construction costs and consequently the number of new single and multifamily units will be critical in addressing both housing need and affordability.
Homebuyers Faced Continued Challenges in a Competitive Market
Historical impacts coalesced with current events in 2022 to create a shortage of housing supply which has driven up prices for potential homebuyers. The median residential sale price in July 2019 was $250,000 with prices reaching a peak of $340,000 in July of 2022. Pre-pandemic, most Connecticut markets saw about 20% of homes sell above the list price. As of September 2022, all Connecticut markets remained above this marker, with between 40-60% of listed homes selling above asking price (see Chart XX). This rate exceeds the United States average of about 30%, indicating Connecticut markets are cooling at a slower rate than the nation as a whole, as demonstrated in the below chart which utilizes Zillow home sales data from the past five years.
The start of 2022 continued trends from the previous year, with low interest rates benefitting homebuyers primarily through the first quarter. However, as the year progressed, interest rates began to climb as a result of the Federal Reserve’s attempts to slow down inflation. Interest rates grew from 3.45% at the start of the year and peaked just below 7% in October. This reflected a year-over-year interest rate increase of almost 4%, the highest growth in interest rates since the 1980s.
Higher rates increased the burden of access to homeownership for many Connecticut residents. In a blog post from Harvard’s Joint Center for Housing Studies, researchers shared a map assessing the required income to afford a median priced home in each state. For much of Connecticut, the median sales price in 2022 was around $350,000. The Center estimates that to comfortably afford a purchase of this price, a household would need to be making between $80,000 to $100,000 a year. Based on the most recent American Community Survey data for the state, almost half of Connecticut’s households make less than this amount.