via CT Insider

By Alexander Soule | Published on December 27, 2024

Throughout 2024, the Hartford area has been a fixture on lists of the hottest real estate markets in the United States, with plenty of buyers beating the streets.

As the calendar flips to 2025, will real estate pick up the pace in more Connecticut locales? That depends on homeowner decisions on whether to cash out while buyers are on the hunt — and on interest rates that impact both sides of the real estate equation.

After rocketing to life at the onset of the COVID-19 pandemic, Connecticut's real estate market cooled in 2023 and this year, with those most eager to sell having already taken offers on their homes. Real estate agents say more homeowners would follow suit, but that many hold mortgages locked into rates far below what lenders are offering today.

That creates an ongoing disincentive to sell, if the purchase of any replacement home would require a new mortgage at a higher rate.

"Five to 10 years ago, people were getting somewhere between a 2% and 5% mortgage rate," said Holly Bellucci, a broker affiliated with Keller Williams who covers much of eastern Connecticut. "All of those people who might now be putting those houses on the market — which would give us a normal inventory — don't want a 7% mortgage. So everyone's been holding onto their houses."

Since the Federal Reserve launched a cycle of interest rate cuts in mid-September, mortgage rates have only risen higher with banks tending to set rates according to yields on bond investments. As of the third week of December, Freddie Mac report an average rate on a 30-year mortgage at 6.8%, slightly higher than the average rates of the first six weeks of 2024.

In accompanying commentary, Freddie Mac's chief economist said homebuyers are "slowly digesting these higher rates and are gradually willing to move forward with buying a home."

Connecticut listings still low

But in Connecticut, there are too few homes available to purchase at prices buyers find palatable, factoring in post-pandemic valuations, higher mortgage rates, escalating property and casualty insurance premiums, and years of having to pay more for any number of other everyday living expenses.

Heading into the weekend before Christmas, just over 3,600 houses and condominiums were listed for sale on SmartMLS and other Connecticut multiple listing services tracked by Zillow, only about 600 more than had been sold statewide over the prior 30 days.

The Connecticut market did not roar to life in January 2024 as many hoped at the time, with just 2,500 houses getting listed and some of those for a second or third try after their owners had pulled them off the market in earlier months or years.

Despite the slow start, a stronger second half for new listings helped push Connecticut's total new listings through November to nearly 700 properties above the totals for the first 11 months of 2023, according to Berkshire Hathaway HomeServices New England Properties. And if some buyers waited for prices to come down before putting in offers, they often found themselves in competition from others who had done the same — on average, sales transactions were 3 percent above final asking prices through November, according to Berkshire Hathaway.

"Though inventory levels remain below pre-pandemic norms, and prices are high, there is optimism that multiple rate reductions will help stabilize prices and increase inventory," said Candace Adams, CEO of Berkshire Hathaway HomeServices New England Properties, in the Wallingford-based firm's recent report on the autumn Connecticut market. "With time, patience, and continued favorable rate adjustments, the outlook for buyers is increasingly positive."

Commission rules taken in stride

With no boom real estate market to match the first few years of the COVID-19 pandemic, 2024 may be remembered most for a National Association of Realtors settlement that upended how brokers get paid.

In multiple lawsuits nationally, plaintiffs had challenged the industry practice of sellers picking up the cost to compensate the agents hired by buyers, on grounds the practice amounted to collusion with the end result of higher prices being paid in real estate transactions. Last summer, NAR established new disclosure forms for buyers to review before hiring agents, that clearly spells out the compensation structure.

In a 2023 study, Stifel subsidiary Keefe, Bruyette & Woods estimated at $100 billion the commissions that are generated annually in U.S. real estate transactions.

Last January, real estate website Home Bay calculated Connecticut's average commission at 5.41%. If factoring that average into the nearly $18.8 billion in Connecticut real estate sales through November tracked by Berkshire Hathaway HomeServices New England Properties, that would equate to more than $1 billion in revenue for residential real estate agents, not including commissions from properties that Connecticut brokers may have helped buy or sell in other states.

In October, Redfin reported that buyer's agent commissions were down only slightly in the first weeks after the new rules took effect, suggesting the industry had taken the changes in stride.

SALT cap repeal?

Many Connecticut homeowners similarly had to live with a new financial reality during President-elect Donald Trump's first term in office, after Trump approved a law that capped at $10,000 the federal IRS deductions taxpayers could take on state and local taxes they pay, for those that itemize taxes for deductions.

After Trump pledged to end the cap on SALT — the acronym for state and local tax deductions — a member of the Trump transition team told Bloomberg the incoming president is considering doubling the cap instead, which would allow for up to $20,000 in IRS deductions. New York Gov. Kathy Hochul was among several politicians to critique that alternative, calling on Trump to deliver on his original suggestion of a full elimination of the SALT cap.

While the Connecticut General Assembly authorized a corresponding tax break for limited liability companies that homeowners could create, not all Connecticut taxpayers took advantage of the measure, with some benefiting from a higher standard deduction as an alternative to itemizing deductions for tax purposes.

In a study of tax filings in 2016, the National Association of Realtors reported Connecticut as having the second highest IRS deductions on state and local taxes, at just over $19,500 and with 42% of taxpayers taking the deduction.

With nearly 980,000 owner-occupied units of housing in Connecticut according to the most recent estimates by the U.S. Census Bureau, that could mean that hundreds of thousands of taxpayers could take a bigger deduction from their IRS taxes if they chose. In a September analysis, however, the Tax Policy Center reported any SALT cap change would have little impact on all but the highest earners, factoring in the impact of the higher standard deduction.

"The biggest winners from repealing the cap are households ... making about $1 million or more annually," a TPC analyst wrote. "Their after-tax income would rise by about 1.6 percent, or roughly $35,000."