Changes in Demographics, Housing Market, May Impact State’s Long-Term Fiscal Health

Spring 2013 Galley of CT Economic Quarterly
Spring 2013 Galley of CT Economic Quarterly


Spring 2013 Galley of CT Economic Quarterly

Demographic changes in Connecticut are creating an imbalance between housing supply and demand that could threaten the long-term fiscal health of the state, warns Bruce Blakey, a contributing editor with The Connecticut Economy quarterly.

Blakey’s analysis of an emerging mismatch between housing preferences and housing stock in Connecticut is among several articles focused on the Nutmeg state’s housing market in the quarterly’s recently released Spring 2013 issue. Record-low mortgage rates and a shrinking inventory of homes on the market have been supporting a gradual recovery of housing prices.

“Whether the state can build on a small comeback in housing prices, let alone preserve these gains is an open question,” note Connecticut Economy editors. “Maintaining the momentum depends on making smart policy choices.”

One critical policy objective for Connecticut is keeping its housing market healthy for the 169 towns the state has traditionally depended on to deliver a wide range of public services such as schools, fire services, public parks, road maintenance, and other amenities.

For most local governments, property taxes are the primary source of revenue to finance public services. For example, an analysis of town budgets in 2011 by Connecticut Economy co-editor Dennis Heffley and economist Ekaterina Gnedenko, shows that about 72 percent of municipal revenues were generated by property taxes; a share not much changed in 25 years.

Despite disagreement over the equity and efficiency of the property tax – many consider it a regressive tax that takes money from people irrespective of their ability to pay – “until someone devises a better alternative, it’s likely to stick around,” maintain Heffley and Gnedenko. “It helps that activities funded by the tax often increase the value of the property being taxed.”

Others question whether a rise in property values can be sustained. For example, problems surface when property values fall and towns raise tax rates to maintain public services. Hiking tax rates can further erode property values, with negative consequences for towns because of their dependence on the property tax.

The problem originates with the unprecedented post-World War II construction boom of single-family homes fueled by Baby Boomers, then in their 20s and 30s, moving into suburbia. Single-family homes have long played a major part in Connecticut’s housing scene. Since 1971, some 70 percent of housing permits in the state have been for single-family dwellings, notes Blakey, adding that these homes have grown increasingly large over the years.

“The median square footage of new single-family homes in the northeast United States grew from approximately 1,500 in the 1970s to 2,336 in 2010, over 50 percent,” he observes. “Two-thirds of Connecticut owner-occupied homes have two or three bedrooms, while 30 percent have four bedrooms or more.”

Despite some market fluctuations over the years, single-family home prices escalated steadily through the end of the 20th century. Now, Boomers are looking to downsize; they no longer need nor want their large homes, as these dwellings are expensive to maintain, costly to heat, and the taxes are high.

“[Downsizing] won’t necessarily be easy,” says Blakey. “The current housing market makes it difficult for retirees, whose homes are for many retirees their largest savings, to downsize even if they want to. Also, retirement is being delayed because of the loss of wealth during the [recent] recession.”

Another significant factor is that Connecticut’s population is aging – the Connecticut State Data Center’s estimates predict a 55 percent jump in the retiree population (aged 65+) by 2025. And consumer preference surveys show that many retirees also want to retire near family and friends, so many Connecticut workers will at least try to retire here, says Blakey.

At the same time, the group most likely to purchase the Boomers’ larger homes, Connecticut’s working age population, is projected to decline by 12 percent due to historically low U.S. birth rates. In addition, Blakey says that many “Generation Y ‘echo boomers’” entering home buying age are burdened with high levels of college debt that has caused them to delay buying homes.

Others lack resources for down payments or face potential job relocation, Blakey explains. “These are major caveats to the assumption that Generation Y will duplicate the housing preferences of their parents, which was to own a single-family home in the suburbs.”

Evaluating how these housing trends might affect municipalities in Connecticut, Blakey cautions that with flat population and job growth, it’s hard not to see demand for single-family homes remaining weak – and with it, property values.

“A decline or stagnation in single-family home prices could adversely impact property taxes and town services,” he cautions. “Ironically, this problem would be particularly severe for suburban communities that are dominated by single-family homes , which is the main source of revenue.”

The Connecticut Economy is a quarterly journal published by the University of Connecticut’s Department of Economics that offers data, forecasts, and substantive, data-driven analyses of current events, longer-term trends, and public policies that affect Connecticut’s economy. Read the new Spring 2013 issue at Past issues of the journal, going back to 1993, are also available in The Connecticut Economy archives.