Steven P. Lanza

English

Research Papers in Economics

4 The Connecticut Economy Summer 2001
By Steven P. Lanza
As we’ve noted before in these pages, housing in
Connecticut has become much more affordable over
the last decade.  But closer inspection reveals that
“more affordable” isn’t always “more desirable,” at
least not everywhere in the state.  Conversely,
“more desirable” isn’t always “more affordable.”
Confused?  Let’s unravel these seemingly paradoxical
propositions.
A Portrait of Extremes
When it comes to home prices, Connecticut is a
portrait of extremes.  According to year 2000 data
reported by The Warren Group, a real estate trade
organization, the price of the median home in
Connecticut’s towns ranged from a low of $78,000
in New Haven, to a high of $900,000 in New
Canaan.  Worlds away in price, the two towns are
only minutes away by car and both are in the
state’s Southwest region.  For the Southwest over-
all, which combines Fairfield and New Haven
counties, a median home price of $279,000 was
more typical.  Still, even that figure dwarfs a price
like $131,000—the median sales price for the aver-
age town in Eastern Connecticut, which includes
New London and Windham counties.  In Central
Connecticut—Hartford, Middlesex and Tolland
counties—the median price was $160,000, and the
Northwest county of Litchfield was $190,000.
Historical data show that median sales prices in
Connecticut’s 169 towns peaked in 1990 at
$174,000 before falling to $152,000 in 1994.  Since
then, home prices have rebounded to their old
heights and then some, reaching $194,000 in 2000.
Though many unique locational factors likely
explain much of the median sales price differential
among towns in the 1990s (see the following arti-
cle), population changes and income growth clear-
ly played a role in the relative rates of change.  As
job losses opened a population drain in the early
1990s, the real estate market suffered.  But an
improving employment picture and continued
gains in per capita income contributed to the hous-
ing revival later in the decade.  In fact, these two
variables alone—income and population—explain
more than a third of the change in home prices
across Connecticut towns over the period 1990 to
2000.  Both were important, but income changes
(estimated from the latest Connecticut Department
of Economic and Community Development data)
packed double or more the punch of population
changes (based on the latest Census figures).
The strength of these influences was particularly
dependant on a town’s level of urbanization.  The
average “urban” town (44 in total with a popula-
tion density over 1,000) saw home prices increase
2.8% between 1990 and 2000, while the average
“non-urban” town saw prices increase by 8.4%.
Across all towns, a one percentage point increase
in population produced a 0.4 percentage point
increase in home prices at the mean, holding
income growth constant.  But the effect of income
growth on home prices was more robust, especially
in urban towns.  There, every percentage point
increase in per capita income growth above the
average raised home prices by an additional 2.8
percentage points.  In non-urban towns, by con-
trast, every one point increase in per capita income
growth raised home prices by just 0.8 points.  This
result is not completely unexpected.  Income corre-
lates closely with socioeconomic variables (such as
education and employment) that influence neigh-
borhood quality, and these effects are amplified
when people live close together.  Since this rela-
tionship holds in reverse as well, a slower rate of
income growth has a bigger effect on home prices
in the cities than outside them.  In some areas, it
was enough to turn what would have been rising
property values into falling property values.
Affordability Takes Off
Even the highest priced homes can be affordable
if mortgage rates are reasonable and area residents
have the incomes to match those high home costs.
A year ago (The Connecticut Economy, Volume 8,
Number 4), we introduced a measure of housing
affordability patterned on a national index pro-
duced by the National Association of Realtors.  The
index measures a household’s ability to afford the
median home in its area by comparing the house-
hold’s monthly income to the cost of a monthly
mortgage payment.  When households can make
mortgage payments using 25% or less of their
gross monthly income, the index is at or above
100, and houses are “affordable.”  When mortgage
costs exceed 25% of income, the index drops
below 100 and homes are “unaffordable.”
Between 1990 and 2000, falling interest rates and
growing household incomes did indeed help shift
the affordability index from the unaffordable to the
affordable column for nearly every town in the
state.  In Fairfield, the state’s least affordable coun-
ty, the average town’s affordability index rose from
86 to 111.  In Hartford, the state’s most affordable
county, the index jumped from 98 to 162.  In 1990,
only 53 of Connecticut’s 169 towns had a housing
affordability index above 100.  In 2000, only 12
towns had an index below 100.  The centerfold
(pages 10-11), which maps housing affordability by
town for 2000, provides a vivid illustration of the
relatively high level of affordability in Central and
Eastern Connecticut and the lesser degree of
affordability in the Southwest.
Despite the generally rising level of affordability,
gaps between the highs and lows in the state
remain.  Often they have widened.  Among coun-
ties, Hartford’s affordability index has grown from
14% above Fairfield’s in 1990 to 46% above it in
2000.  Greenwich remains the least affordable town
in Fairfield County, and in the state.  In 1990 its
index measured 72, and by 2000 it had barely
4
Housing Affordability Returns,
But at a Price5 The Connecticut Economy Summer 2001
budged to 73.  But in Sherman, first in Fairfield
affordability in 1990 and tied for first (with
Stratford) in 2000, the index rose from 115 to 148.
So as housing grew more affordable in the 1990s,
the gap between the top and bottom towns grew
wider, even in Fairfield County.
“More Affordable” Isn’t Always “More
Desirable”
Between 1990 and 2000 there have been some
notable shifts in patterns of affordability, and the
fault line lies along an urban-suburban divide.
Cities have grown relatively more affordable, sub-
urbs less so.  In Fairfield County, the working-class
cities of Bridgeport and Danbury, which had
ranked 19th and 14th in affordability among the
county’s 23 towns, moved up to 3rd and 4th place,
while swanky Westport moved from 3rd to 20th.
In Hartford County, the blue-collar towns of East
Hartford and New Britain, which had ranked near
the bottom of its list of 29 towns, now rank 2nd
and 4th, while upscale Simsbury and the adjacent
town of Granby dropped from the top ten to 22nd
and 24th, respectively. Likewise, in New Haven
county, the cities of New Haven and Waterbury
climbed from 24th and 19th to 1st and 2nd out of
27, while suburban Madison and Guilford dropped
from the top ten to the bottom five.  
So this rising affordability in the cities is a good
thing, right?  Not if it is the result of mediocre
income growth, a dwindling population, and plum-
meting property values.  And unfortunately, that’s
exactly what has happened.  In the cities of
Bridgeport, Danbury, New Haven, Waterbury, East
Hartford and New Britain, income growth barely
matched their respective county averages.  And,
due to both this slower income growth and declin-
ing populations, home prices in each locale (except
Danbury) fell, most at double-digit rates.  This
same pattern appeared in the state’s other big
county, New London, but because the drop in
urban home values relative to the county average
was less severe, there weren’t the same big shifts
in town rankings.  In the state’s wealthier suburbs,
by contrast, income growth typically led county
averages, the population swelled, and the growth
in home values far outstripped the norm.
Beyond Affordability
Rising housing affordability, at least in some
portions of Connecticut, exacts a steep price.
Often, it is gained at the expense of falling proper-
ty values, a population drain, and a strained local
economy.  Economists often speak of the ability of
markets to harness self-correcting economic forces.
The renewed affordability of urban living should,
all things considered, attract new residents and
prompt a central city renaissance.  
But there’s another possibility.  The steady
urban population exodus may make city living
increasingly undesirable, and feed a cumulative
spiral downward, all against a backdrop of rising
affordability.  It’s not clear that either option is
inevitable, but it’s also not clear the latter option is
avoidable.  Making its cities both vibrant and
affordable may be Connecticut’s biggest challenge
in the decade ahead.
by Dennis Heffley
Southwest Connecticut—Fairfield and New Haven Counties—houses half the
state’s 3.4 million residents, but accounted for 57% of the state’s total personal
income in 1999.  And between 1989 and 1999, total personal income in the two
counties grew 62%, compared to 43% for the rest of the state.  Envious?
Don’t be.  Southwest Connecticut’s robust economy also has a downside: suc-
cess has generated conditions that could limit future growth, there and through-
out the state.  Among the area’s most pressing and highly publicized problems
are road congestion and high housing costs—two closely connected issues.
Location, Location,... But That’s Not All
Economic models of urban land use stress the link between house prices (or
rents) and transportation costs.  Other things constant, households will pay more
to locate nearer work to avoid long commutes.  Alone, this would cause residen-
tial property values, adjusted for structural size and quality, to decline with a
town’s distance from major employment centers.  But, besides location, other
local factors might affect the market value of a Connecticut town’s housing.
Neighborhood quality (per capita income, crime rates, road congestion) and
local public policies (educational and noneducational spending, property tax
rates, state aid to towns, and zoning) are likely candidates.  Like home prices,
these local characteristics vary sharply, even within a small state.
Last year, across Connecticut’s 169 towns, the median sales price of single-
family homes ranged from $78,000 in New Haven to $900,000 in New Canaan—
more than an 11-fold difference between two towns less than 40 miles apart.
The median number of rooms in owner-occupied units (from the 1990
Census—we’re still awaiting the 2000 figures), ranged from 5.4 in Bridgeport to
8.5 in New Canaan and Weston.  Per capita personal income in Hartford
($19,210) is less than one-fifth the level in New Canaan ($108,008).  Hefty differ-
ences also exist in crimes per thousand residents (Hampton’s 3.7 to New
Haven’s 97.2), per capita noneducational spending (Mansfield’s $431 to
Greenwich’s $2,674), equalized mill rates (Griswold’s 5.1 to Hartford’s 33.8),
and per capita state aid (New Canaan’s $49 to Hartford’s $1,687).  Even school
spending per pupil, long the target of state-level equalization efforts, is 75 per-
cent higher in Greenwich ($11,648) than in Colchester ($6,669).  Based on an
earlier study of local zoning practices, minimum lot-sizes range from zero (no
minimum) up to 5 acres in several towns.  Finally, the measure of road conges-
tion—daily vehicle-miles per square mile of land—is unavailable for towns, but
varies sharply at even the county level (Litchfield County’s 4,529 to Fairfield
County’s 31,223).
Despite large differences in median prices and local characteristics, the geo-
graphic patterns are hardly random.  Because potential buyers will pay more for
favorable features and require discounts for unfavorable ones, property markets
readily “capitalize” local characteristics into house prices.  We used town-level
data to estimate this relationship between the median sales price and local char-
acteristics.  Regression analysis showed that the nine characteristics noted above,
along with five location variables—distances from New York, Boston, Hartford,
Springfield, and the shore—jointly accounted for 93% of the variation in the
median sales price across the state’s 169 towns.  For 11 of the 14 variables, the
estimated effects on price were both consistent with housing market theory and
statistically significant (almost certainly not zero).    
What Matters?
Connecticut lies between New York and Boston.  Both of these major metro-
politan areas affect local property values.  Controlling for house size (median
number of rooms) and other town characteristics, the median sales price drops
about 14.1% for each 10% increase in distance from New York City, and about
9.4% for each 10% increase in distance from Boston.  As expected, price also
falls with distance from Springfield (MA) and from Long Island Sound, but nei-
ther effect is statistically significant.  Both effects may be quite localized:
Springfield’s influence may be concentrated in a handful of Connecticut’s north-
Costly Homes, Crowded Roads...
Welcome to Southwest Connecticut

Housing Affordability Returns, But at a Price

http://cteconomy.uconn.edu/articles/SL_Su2001.pdf

Housing Affordability Returns, But at a Price

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