Connecticut is experiencing a shortage of so-called “trade-up” homes such as this one at 410 Lovely St. in Avon, which is currently on the market for $359,000, leading more buyers to build new dwellings as a result.

Real estate sales in Connecticut are slowing down, and a drop in conveyance tax revenues coupled with a jump in housing permits has led experts to believe that more consumers are building new homes rather than buying old ones. A lack of second-home supply isn’t helping the picture, either.

“It appears that existing real estate sales are slowing down, so the amount of money generated from taxes levied on those sales is declining,” said Mark Prislowe, associate economist with the Connecticut Department of Economic and Community Development.

In a recent report published by the DECD, it was noted that the year-to-date amount generated by the conveyance tax is $12.6 million – a drop of 12.5 percent from last year.

“I think the big news is that new housing permits have shown a remarkable jump of 46 percent this year, most likely because of low interest rates,” added Prislowe. Theoretically, he said, that means that people are building new, rather than buying old.

“What we’re seeing is a continuation of a trend that really started last year,” said Steve Richards, vice president of operations for northeastern Connecticut at Prudential Connecticut Realty in Rocky Hill. “Over the last year-and-a-half, there haven’t been dramatic changes. We’re not in an era of dramatic up-or-down swings. It’s a fairly consistent and stable market. It’s a very strong real estate market.

“In Connecticut, sales prices have been very strong, and primarily driven by low interest rates. The only area that may be soft is the extreme upper end. The number of days on the market is staying fairly steady, with a house spending an average of 40 to 45 days before it sells.”

One interesting trend that Richards spotted is that actual unit sales are down, while average sale prices remain strong.

“Unit sales seem to be slipping and at the same time we have very strong average sale prices. Low interest rates are clearly still our best friend,” said Richards. He again noted that there is softening at the upper end of the market.

“We get some numbers from Sotheby’s, and looking at those numbers I see that there is a good supply of homes at the upper end in relation to the number that are selling,” he said.

According to Richards, the new-construction marketplace in the northern half of Connecticut is very strong. One reason for that is a low supply of resale homes on the market.

He added, however, that the low supply may be misleading. Traditionally houses in the area stay on the market for 90 to 100 days before they sell but recently they have been selling very quickly, resulting in a low supply of homes.

A significant weak spot is the supply of “trade-up” homes, or second homes.

“There is really a gap in that price range in most markets. These are housing in the $275,000 to $395,000 range, and when you have a gap in the market it affects the overall cycle,” said Richards. “We get a lot of towns where that inventory range just isn’t there, and that’s precisely the price range when new construction that’s desirable starts. So people are gravitating toward new construction rather than trading up to a second home because those second homes aren’t there.”

‘Somewhat Concerned’

Bill Ethier, executive vice president of the Home Builders Association of Connecticut, said that midyear housing permits are down 4.1 percent in 2003, from 4,796 through June 2002 to 4,598 through June of this year.

“The market is still busy, and all the members are reporting that they are active and they’re busy,” said Ethier. “They’re obviously somewhat concerned about the decline in the number of permits, but I think a lot of that can be attributed to severe weather. We had a really harsh winter and a very wet spring, but a lot of our membership is optimistic about the second half of the year.”

Ethier noted that although interest rates are rising slightly, the increase won’t necessarily be a deterrent for consumers.

“We are seeing interest rates tick up a bit, and that might continue to put a damper on things, but it shouldn’t. The rates right now are still excellent, and much better than they were a few years ago,” he said.

While spring and summer are traditionally the busiest times for construction teams, Ethier noted that because of lengthy approval processes and complicated land-use regulations, contractors have had to rearrange their schedules to accommodate year-round construction.

“It’s not like 10 years ago. Activity is done year-round now,” he said.

Ethier said the determining factor in when a house is constructed is the marketplace, and when the customer is looking to have his home built. However, the approval process can take upward of six months to complete, so the schedule isn’t necessarily set in stone.

“The amount of approvals we need increase all the time. It’s amazing, all the new restrictions we see,” he said. “A lot of it has to do with the land development process and approving the lots. Once the lot is approved and you’ve gone through zoning, planning and environmental, the building permit process is relatively easy. There’s only one state building code in Connecticut.”

Even with a sharp rise in mortgage interest rates in recent weeks, however, housing markets are expected to maintain strong levels of activity for the balance of the year, according to the National Association of Realtors.

David Lereah, NAR’s chief economist, said mortgage interest rates are still fairly low. “Fixed mortgage-interest rates recently were below 6 percent – that is very much the exception to the norm and led to better-than-expected home sales during the first half of the year,” he said. “We now think the 30-year fixed should stay below 6.5 percent for the balance of 2003, and that’s still very favorable when you look at where rates have been over the last four decades. Home sales in the second half of the year won’t be as robust, but we’ll still see an annual record.”

Lereah projects a record 5.65 million existing-home sales in 2003, up 1.5 percent from 5.57 million sales last year. New-home sales should rise 1.9 percent to 992,000 units, also a record, and housing starts are forecast to rise 0.4 percent to a total of 1.71 million units.

The national median existing-home price should continue to rise above historic norms, increasing 5.9 percent in 2003 to $167,600, while the median new-home price should rise 3.2 percent to $193,600, according to NAR.

Growth in the nation’s gross domestic product is projected to rise to an annual growth rate of 4 percent in the second quarter, with GDP for all 2003 expected to be up 2.4 percent. Consumer price inflation is forecast to be 2.3 percent this year.

Lereah predicted that as the economy improves during the second half of the year, the unemployment rate should decline to about 6 percent in the fourth quarter, and edge down to 5.8 percent for 2004.