Steven P. Lanza

English

Research Papers in Economics

Connecticut Home Prices Now
More Affordable
By Steven P Lanza
A state’s demographic profile may change with time.  Its num-
bers may grow larger, its average resident may grow older, and
its ethnic composition may grow more diverse.  But one constant
remains—a population needs a roof over its head.  And for
Connecticut at least, that requirement has grown easier to afford.
Years of falling home prices, rising incomes and tumbling
interest rates have combined to make Connecticut homes their
most affordable in decades…and more affordable than the typi-
cal U.S. home for the first time in nearly twenty years.  Even the
recent rebound in the state’s real estate market and tighter mon-
etary policy at the Fed have failed to dull the luster of housing
affordability in Connecticut.
Measuring Affordability
An affordability index measures the ability of a typical family
to buy a typical single-family home.  The National Association of
Realtors (NAR) produces one such affordability index for the
U.S. as a whole and for four broad geographic regions of the
country.  The NAR index shows what percentage of the mort-
gage payment on the median-priced home the median family
can afford.  The “median”, represents the home price or family
income that is exactly in the middle of a top-to-bottom ranking
for the area in question.  In calculating the index, the NAR
assumes a down payment of 20% and a qualifying ratio of 25%,
which is to say the monthly mortgage payment cannot exceed
25% of gross income.
Consider a Connecticut example.  In 1998, the median family of
four earned a monthly income of $6,300, so it could afford a maxi-
mum mortgage payment of $1,575.  But the actual mortgage pay-
ment on the median home, priced at $149,000, was just $789.
Thus the 1998 Connecticut affordability index was 199 
(= $1575/$789 x 100).  If the index is above 100 housing is “afford-
able” at the median, and “unaffordable” if the index is below 100.
NAR does not publish state-specific indices, but the same
methodology can be used to produce home-made indices for
Connecticut and the other 49 states.  All we need are three
pieces of data for each state: 1) the median price of an existing
single-family home (Economy.com, Inc. based on NAR data);
2) the median income of a 4-person family (U.S. Census
Bureau); and 3) the average 30-year fixed mortgage rate (Federal
Home Mortgage Corporation).
The Connecticut Experience
As the chart illustrates, Connecticut’s housing affordability
index has swung between extremes over the past quarter centu-
ry, ranging from relatively affordable in 1974, to unaffordable in
1981, and back to affordable in 1998 (the last year of Census
income data).  Over the same period, the U.S. index followed a
similar, though not parallel, course.  
In the 1970s, sharply rising interest rates and fitful income
growth caused the Connecticut and U.S. indices to drop sharply.
Then during the 1980s, a widening affordability gap opened up
between Connecticut and the U.S.  Nationwide, interest rates fell
and incomes kept pace with rising home prices, so the U.S.
index improved.  In Connecticut, though, a 228% jump in medi-
an home prices kept the affordability index fairly flat.  By 1986
and 1987, Connecticut ranked 48th in affordability out of 50
states, ahead only of Hawaii and Massachusetts.  In 1988 and
1989, Connecticut also became more affordable than
Connecticut, but we were still just 47th on the affordability list.
For the decade then, the median U.S. family could afford the
median-priced home or better, but the median Connecticut fami-
ly decidedly could not.
But the decade of the 1990s was a completely different story for
the state.  Steady improvement in home affordability for the nation
as a whole became, for Connecticut, dramatic progress.  Nationally,
vigorous economic expansion kept incomes and home prices grow-
ing apace, while interest rates fell.  The difference in Connecticut
was that real estate prices took a dive.  Hence, as early as 1991—
when Connecticut was still knee-deep in recession—its affordability
index had passed 100, and in 1995 (as incomes in the state finally
began to grow) the index jumped ahead of the nation’s.  In 1998,
the median Connecticut family earned twice the income needed to
finance the median-priced home, making Connecticut housing 13%
more affordable than in the U.S as a whole.
What has happened since 1998, when interest rates nationally,
and home prices statewide began to rise?.  Census data on medi-
an family income is unavailable beyond 1998, but substitute
data for average incomes is, and it suggests that for an average-
sized household in Connecticut, housing affordability by 2000-
Q1 had dropped 16% from its 1998 peak but still remains 12%
above comparable U.S. figures.
Whose Cloud, Whose Silver Lining?
Homeowners who bought at the peak of the market in 1989
and sold at the trough in 1995 suffered a 16.5% drop in the
value of their homes … and that’s using data at the median.
Fortunately, three-quarters of the gain in affordability over that
period came not as a result of falling prices, but as a conse-
quence of rising incomes and cheaper financing costs.
Still, for those forced to sell into a sinking market,
Connecticut’s impressive gain in housing affordability likely
seemed little more than a silver lining in a cloud that rained
buckets.  Some were over-leveraged real estate speculators who
had voluntarily assumed such risk.  But others were young
workers forced to leave the state for more promising opportuni-
ties in the south and west.  Those of “Steady Habits” who
stayed put, ate their paper losses and went about their business.
Among the likely beneficiaries of Connecticut’s more afford-
able housing: younger population cohorts and other new
entrants into the state’s real estate market.  Connecticut is apt to
appear a relatively attractive place for first-time homebuyers and
potential migrants from regions with less affordable housing.
The attraction should not only help to draw workers from out-of-
state, it should also help to keep more workers here—something
Connecticut employers, desperate for workers to help grow their
businesses, would welcome.
And for those who do call Connecticut home, the exhibit at the
bottom of the next page shows how their prices changed in 2000-Q3.
7 The Connecticut Economy Fall 2000
CONNECTICUT PRICES
Connecticut’s Housing Affordability Soars
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Developed by The Connecticut Economy based on data from Economy.com,
the Census. Bureau, and Federal Home Mortgage Corporation.  8 The Connecticut Economy Fall 2000
CENTER FOR ECONOMIC ANALYSIS
Weaker than expected growth in real
U.S. Gross Domestic Product (GDP)
sent a chill through Connecticut this
quarter.  Connecticut’s real Gross State
Product (GSP) grew by a lower-than-
expected 2.9% annualized growth rate
in 2000-Q3.  And with national figures
showing an economy that’s continuing
to cool, GSP growth is likely to moder-
ate further, falling to a lower, though
still respectable, 2.0% rate by this time
next year.
Connecticut added a healthy 22,600
jobs between 1999-Q3 and 2000-Q3.
Our forecast suggests that jobs will
continue growing through the coming
year, though at a diminishing rate.  By
2001-Q1, we expect a four-quarter
growth in jobs of just 14,500.  Labor
supply pressures and a slowing nation-
al economy are the major obstacles to
job growth.  Other economic indica-
tors performed modestly, with an
especially noticeable slowdown in the
growth of real state personal income.
Real Gross
State Product
Jobs
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GENERAL DRIFT INDICATOR
GDI Components
Coincident Index
Leading Index
GDI Momentum
By Steven P. Lanza
After a dizzying climb, the GDI
appears to have developed a fear of
heights. Mounting evidence sug-
gests the GDI may have reached a
plateau and is now struggling for
some solid footing.  The coincident
index grew at its slowest rate in six
and a half half years, and the lead-
ing index hit the skids once again.
The GDI is a composite measure of
the four-quarter change in three
coincident and four leading eco-
nomic variables, and is indexed so
1986 = 100.
The coincident GDI inched up
one tenth of a point, from a revised
114.2 in 2000-Q2 to 114.3 in 2000-
Q3, for a four-quarter growth rate
of just 0.4%.  Though the coinci-
dent GDI has experienced slowing
momentum since early 1998, this
quarter’s increase was the smallest
since 1994, a period soon after the
economy had pulled itself out of a
prolonged recession.  The Connect-
icut Manufacturing Production
Index declined for the second
straight quarter, dropping 2.2% in
the four quarters ending 2000-Q3.
Employment growth held steady, as
the economy added jobs at the
same 1.4% rate in 2000-Q3, as in
2000-Q2.  Higher prices, however,
cut into income gains.  Real income
made a four-quarter gain of 1.6%
in 2000-Q3, compared to a 2.0%
advance in 2000-Q2. 
Though hardly in a free-fall, the
leading index again lost ground,
slipping from 96.5 in 2000-Q2, to
96.4 in 2000-Q3.  The same three
variables that contributed to a weak
second quarter also produced a
third quarter loss, although the
damage was a bit less severe.
Housing permits suffered a 15.2%
four-quarter drop—a disappoint-
ment, for sure, but better than the
second quarter decline of 21.1%.
Average weekly hours dropped
0.4%, and help-wanted advertising
was down 5.4%.  Only initial
unemployment claims made any
headway, with 9.5% fewer new
claims in 2000-Q3 than in 1999-Q3.
The improvement, however, was
not enough to catch the fall of the
leading GDI.
GDI Acrophobia
Cost of Living by Region, 
Excluding Housing
Percent above or below four-
region average price level.
Connecticut Price Changes 
Percent Change 1999-Q3 to 2000-Q3
Food
Housing
Apparel
Transportation
Medical
Entertainment
Miscellaneous
Overall
H 6.9%
H 7.5%
P 1.4%
H 5.5%
H 15.7%
H 1.2%
H 6.9%
H 6.7%
A Chill Runs Through the Connecticut Forecast
Where the lines branch out, the red line shows
the predicted values for RGSP and jobs, and the
green lines show a one-standard deviation mar-
gin-of-error around the forecast.  
By Kathryn Parr

Connecticut Home Prices Now More Affordable

http://cteconomy.uconn.edu/articles/SL_F2000.pdf

Connecticut Home Prices Now More Affordable

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