What would happen to home prices in Connecticut if a recession hit?

The Trumbull house met the definition of a quick hit in 2008, when it sold for $40,000 more than the $330,000 the owner had paid nine months earlier.

Under 2022’s definition of a flash sale, it’s now under contract to change hands again for $439,000 after just a few days on the market – but down $36,000 from what the owner originally had sought.

As home sellers guess what buyers will pay amid higher interest rates that further weigh on the cost of a mortgage, the impact of any economic downturn looms ever larger on the horizon. This could put any purchase plans on hold if there is fear of losing a job, a raise or a bonus.

It’s an especially risky prospect for first-time home buyers who don’t have an existing home they can sell to help secure the new purchase. Last year, just over a third of residential purchases were made by first-time home buyers.

The economies of Connecticut and the United States showed continued resilience in June, but nearly half of economists polled by Bloomberg this month predicted a national recession in the next 12 months, compared to 30% of those polled in June.

“Every recession has its own characteristics,” said John Clapp, real estate expert and professor emeritus at the University of Connecticut at the UConn School of Business. “The recession of 1981, with the rise in interest rates at that time,[…]had an impact on the housing market. It was not so much the recession as interest rates that caused a substantial drop in housing.

As home sales and prices soared during the Great Recession of 2009, this slowdown was caused by the housing market bubble that burst after brokers cooked up sketchy ‘jumbo’ mortgages with adjustable rates allowing people to buy bigger homes – and banks willing to bundle those loans into securities to resell at a quick profit. As interest rates rose just as the labor market began to slump, large numbers of borrowers could no longer make payments, with many losing their homes to foreclosures.

If the economy, interest rates and headline inflation have sellers and buyers at a new crossroads, there is one major difference in the 2022 market compared to 2008 – household finances are in much better shape. shape, after two years of federal stimulus that injected much of the cash people have been spending to fuel a booming job market.

And banks have checked borrowers’ credit much more diligently since the Great Recession – according to an index from the Federal Reserve Bank of New York, credit scores have been significantly higher on average for new mortgages since 2009, including during last year’s property market boom.

“Consumers are in good shape,” Jamie Dimon, CEO of JPMorgan Chase, said on a conference call in mid-July. “They’re spending 10% more than last year, almost 30% more than before COVID. Businesses, you talk to them, they’re fine, they’re fine. We’ve never seen credit to companies be better, ever – like in our lifetime.

“Always ahead of 2019”

This has spilled over into the 2022 property market, although sellers are increasingly looking at their asking prices after two years of bidding battles for properties the previous two years.

The S&P CoreLogic Case-Shiller National Home Price Index in the United States fell slightly in April to a 20.4% gain from a year earlier, but remained near an all-time high due to of the continuing echo effect of the COVID-19 pandemic. Connecticut home values ​​have skyrocketed since March 2000 as New York families have sought alternatives, prompting opportunistic sellers to buy new digs in turn, often in the orbit of their old homes for family ties or work.

Of just over 4,000 Connecticut properties to appear on the Realtor.com website in the first three weeks of July, about 5% of owners had already reduced their asking prices after just a few weeks. That compares to 11% of all homes currently listed for sale in Connecticut that have been re-evaluated, regardless of how long they have been on the market.

For the group listed in July, discounts ranged from $455,000 on a six-bedroom apartment in the Cos Cob area of ​​Greenwich, which is now priced below $3.5million; at $5,000 off a six-bedroom country house in Lebanon, bringing the price down to just under $465,000.

However, the majority of sellers continue to stick to their original asking prices, and the Connecticut market remains hot by historic standards more than two years into the COVID-19 pandemic. This has convinced more people to ditch city life for leeway in leafy neighborhoods, free for the time being from commuting in the age of remote working.

“In this part of the country, I think we have a serious supply and demand problem, for many reasons,” said Candace Adams, CEO of Wallingford-based Berkshire Hathaway HomeServices New England Properties. “I don’t think we’re going to see a lot of price reduction – some, a little, but not a lot.”

Until June of this year, the median price of properties sold in Connecticut – the midpoint of all deals – was just above $335,000, for a yet to be built ranch in the Loveland Farms development in Hebron. , 20 miles southeast of Hartford. According to Berkshire Hathaway’s mid-year report on Connecticut’s housing market, that was about $17,000 more than several homes salvaged in the first half of 2021 at the state median, an increase by 5%.

Transaction prices were already stabilizing heading into the summer months as the Federal Reserve set interest rates higher, making some buyers think twice about taking out a mortgage, and that the number of new registrations was down from a year ago. Bankrate’s online mortgage calculator suggests that a one percentage point total interest rate gain represents an additional $65,000 in interest payments on a $300,000 mortgage at a fixed rate for 30 years assuming a good credit profile – or $180 per month on average.

In a publication by the Urban Institute, researchers analyzed the most recent period in which the United States absorbed at least a 1.5% increase in interest rates in less than 12 months, between 1994 and 1995. House prices were still on the rise, but on a lower trajectory of 2.6% versus 3.2% previously.

Paul Breunich, CEO of William Pitt Sotheby’s International Realty in Stamford, said interest rates generally don’t significantly influence luxury home purchases in Connecticut, given the wealthy’s ability to absorb higher rates. high given the windfall gains they derive from other investments such as bonds.

“The high end is still on the move – it’s still well ahead of 2019,” said Paul Breunich, CEO of William Pitt Sotheby’s International Realty. “It’s Manhattan and New York money, in my opinion, moving in.”

Impact of seizure?

Whether upscale or to make ends meet, buyers are hoping for a break after two years of rampant prices on everything from starter homes to waterfront properties.

The last national house price plunge lasted five years according to the US Census Bureau and HUD, from the peak of the bubble in early 2007 to the end of 2011, coinciding with the rise and fallout of the Great Recession.

Earlier this month, a research note from JPMorgan Chase pointed out that nominal house prices in the United States are now 40% higher than the low they fell to in 2012 – and, strikingly, 4 % above the previous peak in 2006.

A new source of low-cost properties — those in foreclosure that lenders are looking to offload — has yet to impact the Connecticut market significantly. Under a law passed after the Great Recession, banks must go through a long period of mediation with landlords to try to find mortgage payment terms that allow families to stay in their homes.

And homeowners behind on their mortgages got a major bailout at the start of the COVID-19 pandemic, after Connecticut banks agreed to a moratorium on opening new foreclosures that lasted more than a year. According to Attom Data Solutions, in March, Connecticut had one of the five longest intervals for banks to foreclose, at four and a half years.

“We’re seeing some foreclosure activity starting up again — it’s going to be on the low end,” Adams said. “Foreclosures have been on the sidelines for two years, and I think the banks are catching up on their backlog.”

[email protected]; 203-842-2545; @casoulman

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