Is the Real Estate Bubble
11/03/2006

Is the Real Estate Bubble Bursting in Waterbury?

By Bob DeCosmo

The question is, considering the recent real estate upsurge in home prices that has propelled housing costs across the country to record highs, is the bubble about to burst? Obviously in certain markets it already has with values retreating in the double-digit range, but how about Waterbury?

There are a couple of variables here in our city that make that answer a bit uncertain. First and foremost, we are still at or near the bottom values in selling prices in Connecticut so we are still considered a bargain and affordable by some investors and homebuyers. For instance a 3-unit multi-family in Waterbury is selling today for an average price of $203,000, yet in the Bridgeport market, that price is over $300,000, so we are much less expensive.

Secondly, the new Jewish Yeshiva growing in the former UCONN campus on Hillside Avenue has attracted many investors from out of the area under the presumption that Waterbury Connecticut will be transformed into a Lakewood New Jersey after the success of the Yeshiva that moved there several years ago. This fact has put Waterbury on the radar screen for many investors who would never have found our city in a hundred years if it not for the Yeshiva setting down roots in our community.

One problem emerged very quickly as far as the investors go; many of our Waterbury tenants are very poor and have limited resources to pay their monthly obligations. So when the New Yorkers began buying up properties, they raised rents thinking Waterbury was just like other communities but under-priced, but did they do their homework?

Real Estate sales are one thing, but real estate rentals are very much different and that is my specialty, rentals and management. Our rental markets suffers from several things, an over supply of available rental units, a large amount of subsidized housing and many families with limited financial means. So when investors came calling, they lacked this knowledge and raised rents in their buildings only to find out that their income projections where all wrong. Instead of collecting higher rents, they faced tenants who either moved out or stopped paying their rent and needed to be evicted.

I have met with many investors over the past year or so who asked me to either rent their apartments or manage their properties. When we discussed the rental rates for their buildings, often I was told that they expected to collect $1,000 per month for their units. I asked, if someone has the capacity to pay you $1,000 per month, don't you think that the tenants would buy the property instead of renting it from you?

The truth is that Waterbury is not a suburb of New York City like some investors kept telling me that it was and unfortunately most of the investors I met with I sent packing back to where they came from. The reason is a realistic rent for a 3 bedroom apartment in Waterbury is about $725 per month in the inner city and $850 in better neighborhoods, both of these values are much less than the $1,000 the investor needed to make their numbers work!

How could there be such a large discrepancy in the numbers? Some of the burden can be attributed to the many new real estate agents who recently got licensed and they did not have an adequate knowledge of our rental structure and probably believed themselves that the rents could go up in our city.

Speaking recently with David Merenstein, owner of SY Management, one of the larger property management organizations in the area, Meresnstein was commenting that many investors that came from New York and bought up buildings are on the sidelines currently. Not because of just the pricing and rental rates, but because the city seems to have issues with keeping bad tenants in check. The investors who came up have had a very difficult time with vandalism, drug dealing and non-payment situations with their properties. He mentioned that if these types of problems are not resolved, you could expect this large sum of money from the New York investors to pass Waterbury over when the buying picks back up in the spring!

So let's get back to the bubble-bursting question, is the boom over? I say the soaring prices in real estate have gone flat now for a couple of reasons, the numerous hikes in interest rates have increased debt service and the huge increase in utility costs have hit home. Alex Velesis, broker and owner of Covino Realty in Waterbury says that "the market has slowed down dramatically this year and that he now has an abundance of listings where as last year, it was difficult to get properties for sale because they moved so fast, he couldn't get enough of them to sell." He believes that we will have a small correction, but does not anticipate a dramatic crash like what occurred in the late 1980's. Velezis says, " that today if a property is priced right, it sells, but the feeding frenzy of buying is gone right now."

I agree with Mr. Velezis's assessment about the market conditions because some of us real estate veterans who where around 20 years ago will mention that it was the banks themselves that brought on much of that crash.

The banks did so by over-leveraging buyers and lowering underwriting standards and not anticipating a slow down in the market. This forced the bank examiners to re-classify many of their loans as risky and took away the banks operating capital by requiring loan loss reserve accounts to be established within the banks, thus cutting off the banks ability to lend money. This created a huge credit crunch that fueled the collapse of real estate values and created many bank closures in the late 1980's.

Can the Waterbury demographics keep the demand for properties in our city strong in a down market? I say it can as well. Waterbury is strategically located in Connecticut and with the new legislation passed that results in a phase-in for the elimination of the personal property taxes on new manufacturing equipment there is a small glimmer of hope. The question remains, can this new tax break for industry create new businesses in the city shortly and bring much-needed jobs here? Waterbury will benefit greatly from this business tax burden relief because of our high mil rate that forced businesses to relocate out of our city and left the community with a well stocked component of skilled labor, now largely under-employed.

Although the benefits from this tax relief legislation are down the road a bit, it is worth being optimistic about because the negative impact that high taxes have had on manufacturing businesses. This fact has always been an issue for companies doing business in Waterbury. Numerous businesses where forced to address the issue of why operate your business in Waterbury and suffer because of high taxes when all you had to do was move the operation a few miles over the city line and prosper. They still enjoyed many of the same city benefits like our transportation system and water and sewer facilities and yet they could save tens of thousands of dollars on property taxes, the result was too many businesses moved out and took their jobs with them, now leaving Waterbury itself to suffer!

So what should one do currently in real estate in Waterbury? I say, buy value, which is look for properties that will out perform the market when the prices begin to rise again. Value means look for amenities like off street parking, upgraded units and functional apartment lay out for multi family properties. Residential property buyers need to find homes that are in good repair and have features like upgraded heating systems and decent yards for their families to enjoy. Remember the old adage about real estate; look for three things when choosing a property, location, location and location, you can't go wrong if you follow those three rules, good luck!

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