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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Long New Canaan 12 comments
    Oct 29, 2013 10:10 PM

    I first went long New Canaan real estate in December 2011, but am writing up my thoughts on this market for the first time. I think that it remains a compelling investment for a number of reasons.

    New York City is about to become a much more expensive place to live. Unless something heavy lands on his head in the next few days, Bill de Blasio will become NYC's next mayor. It is reasonably likely that he will institute an asset tax that could create a wave of refugees heading towards Fairfield County. New York will become a very different place to live, much more like the city was in the days before Giuliani made it harder on criminals and easier on employers. While many may simply leave the region, many more will relocate within the area in order to avoid what could amount to a major confiscation of private wealth.

    Home prices in New Canaan are up over 5% over the past year. About three quarters of homes in New Canaan are single family homes. The most common size is over 3,600 square feet. The most common years of construction are from 1960-1980, but some are much older. There are currently almost 300 homes on the market.

    New Canaan was ranked the wealthiest town in the nation on CNN Money's list of the top-earning places in the United States and it has one of the highest median family incomes in the country. Crime is negligible. Over 95% of residents are white and Asians make up the largest minority group. Under 2% of families live beneath the poverty line. The town is accessible to many jobs; commute into the city takes about an hour.

    The school system is one of the best in Connecticut. Each of the five schools in New Canaan's school system scores a top rating according to Zillow (NASDAQ:Z). The student to teacher ratio is low and students consistently achieve average scores well above Connecticut's averages, which in turn are well above the national averages. Parents give top markets to teacher quality, principal leadership, and parental involvement. Here is some recent commentary, which is typical of parents' reactions to the schools:

    West school is fantastic - the teachers are extremely attentive and supportive and the school has an excellent curriculum.

    Just graduated my last child (of four) in 2009 after 13 years at West School. Great education and friendly caring environment with great teachers. We live in this town based on a large part of great public education and what the schools can offer.

    I have been a West School parent for the past 3 years. My kids quickly adapted to the new school with the kindness and help of teachers and staff. It provides a warm and enriching environment from the principal to the maintenance staff. My kids love the school and are doing great academically with their instruction. I couldn't be happier and wouldn't even think of moving as a result.

    West School has an outstanding preschool program. Our daughter came here as a pre-kindergarten 5 year old after two years in another pre-kindergarten program. We felt she would benefit from the extra year prior to kindergarten based on her shyness small size and a lack of confidence in herself relative to peers. She has flourished and grown in every way in this nurturing environment small class size excellent teachers amazing teacher to student ratio wonderful facilities. Every child is respected and given individual attention. Special needs as well as non-special needs grow learn and feel that they are special individuals. Those who are shy as well as those who are boisterous and everybody in between grow together and feel respect for each other in this program. My daughter truly loves this program and so do her parents.

    How does this impact home values? It makes a big difference whether or not you plan to enroll your own kids. The value of access to such a superior school system is measurable. Compared to otherwise comparable homes nearby, the added value is over $250,000 per home. Since buying a home in New Canaan, I have bid on another dozen homes via an auction process. My thought was to load up on some decently sized, but lower priced homes close to town. At lower price points, the value of the school access was a more concentrated part of the value proposition. Incidentally, while I was able to outbid other bidders, Bank of America (NYSE:BAC) kept pulling properties from the auction block whenever it wanted to protect the prices at which it carried the mortgages on its books.

    Following the financial crisis in 2008-2009, there was little in the way of shadow inventory of foreclosed or ready for foreclosure homes. By late 2011, the market had stabilized. There is little open land in desirable locations remaining for sale. All around town, one can see building projects on increasingly marginal lots. This has a certain cost in terms of charm, but it is a revealing data point in terms of robust demand and finite supply.

    So, if you're looking to buy in New Canaan, where are the bargains? I think that the best opportunities are in geographically and architecturally unique properties. For the most part, lots are larger further from town, starting at a quarter or half an acre and increasing towards four acre lots in the horsier points furthest from town. However, there are a few outliers here and there of large lots closer to town. I think that is where to look. Also, in theory there is an infinite supply of new construction, but a finite supply of historical properties. I expect the older properties to hold value better. In particular, I have been wary of construction techniques during boom times. While I've bid in auctions for homes built in the 2000-2008 era, my bids took into account occasionally shoddy quality by builders eager to sell and then frantically go on to the next build. In earlier, slower markets quality was better. I've also tried to take into account peculiarities of zoning regulations. Because open porches count against coverage requirements (limiting the percentage of one's acreage that can be improved), many open porches have been covered. If you can find a property with a lot of porches, it is likely to become increasingly rare over time as many neighbors build or renovate without them in order to get the maximum amount of interior space. If there is a subsequent submarket for classic homes with a lot of porches on large lots close to town, there will be little supply and these could command high prices.

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Comments (12)
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  • George Spritzer, CFA
    , contributor
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    One of the worst investments will be rent-stabilized "occupied" NYC apartments. If de Blasio is elected, there is good chance of a total rent freeze. There will also be many opportunities for tenants to file lawsuits for rent rollbacks. About twenty years ago, I bought a few of these for a tax write off, but fortunately sold the last one a few years ago.
    29 Oct 2013, 11:06 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » Smart investment.


    It is less and less clear what it means to "own" property in New York when you have tenants that appear to have virtually limitless control. Strangely, this adds all sorts of highly regressive features to the real estate market for prospective renters. Owners needs to pour over every aspect of tenants' finances to ensure that they can pay; if owners had control of their private property, they could take anyone off of the boat who could scrape together rent.
    30 Oct 2013, 06:41 AM Reply Like
  • JDanziger
    , contributor
    Comments (37) | Send Message
    Why do you think he'll institute an asset tax? Dont think that's even in his authority to do.
    30 Oct 2013, 09:35 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » I don't know what he'll do in practice. However, I think that the demographics of NYC have changed dramatically since Giuliani was first elected; were Giuliani to run against Dinkins in 2013, Dinkins would win (using today's population and Dinkins and Giuliani's vote share per each part of that population). Confiscatory taxation is a pretty routine topic within the left and such policy preferences will be utterly unchecked. In short, he'll be able to do whatever he wants and there is no outward bound, no limiting principle constraining what he would be willing to take from the private sector.
    30 Oct 2013, 09:42 AM Reply Like
  • JDanziger
    , contributor
    Comments (37) | Send Message
    Hmm, tend to agree with your comments on the left. But NY gov Cuomo though would ultimately need to approve the tax increase, and he wouldn't want a massive exodus. So you'll have a bit of a check there. Even his proposal on the city tax increase is a relatively minor impact. Will someone making 700k a year really leave the city for a thousand dollars in extra tax if they hadnt in the past?
    30 Oct 2013, 11:20 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » You may well be right; also, it is not as if they're paying low rates today.
    30 Oct 2013, 11:29 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » The Fat Cats’ Veto


    For taxpayers of all sorts, moving trumps voting.


    By Kevin D. Williamson


    With a rueful eye on the local mayoral election, my colleague Charles C. W. Cooke noted: “I’m moving out of New York City in three weeks. Good timing.” I had had similar thoughts myself, remembering my time commuting in to Buckley Towers in Manhattan from nearby Connecticut. (You know who most misses the much-lamented New York Sun? Train commuters, for whom it was the ideal newspaper.) I suspect that many others had similar thoughts. In fact, I have a half-baked theory that Republican candidate Joe Lhota was derailed by the subconscious trains of thought of all of us potential refugees to the suburbs: “I might be perfectly happy in Connecticut or Westchester County, if only the trains weren’t so awful,” which is exactly what an underdog New York mayoral candidate would want potential voters to be thinking — unless that underdog is, like former mass-transit boss Joe Lhota, associated in the public mind mainly with awful train services. The more we thought about Bill de Blasio, the more we thought about trains, and the more we thought about trains, the more difficult it was to get excited about Joe Lhota. Better he had been head of the sewer department, given the raft of you-know-what that is headed New York’s way under Mayor de Blasio.


    Perhaps those of us who were on Wednesday morning wondering if Pennsylvania really is too far a commute are simply the right-wing versions of those crybaby movie stars who promise to move to Zimbabwe if a Republican is elected president. But there is a bit more to it than that.


    The other big news on Tuesday, largely overlooked in the Election Day cable-news natterings, was that India launched an unmanned Mars mission, and did so for the shockingly low cost of $73 million, well less than NASA’s $2.5 billion Curiosity mission. That is, as I noted on Tuesday, really something remarkable for a country that within my lifetime saw its public discourse dominated by the issue of famine prevention and as late as the 1940s saw millions die of starvation. Radical economic change is possible; unhappily, it is possible in both directions. India’s economic turnaround was inspired by factors ranging from humanitarian concerns to plain national self-interest, but it was also motivated in part by shame. “There are rich Indians in Germany,” a stridently nationalistic Indian politician once told me, “and in England, and the United States. The only place you find poor Indians is in India.” From the 1970s to the present, Indian leaders have fretted about the “brain drain,” and there was a great sense of pride in the 1990s when that began to turn around — followed by a new round of despair when those homecomers, frustrated, began to re-diaspora-ize themselves. “Disillusionment with India’s political dysfunction and seemingly ineradicable corruption and inefficiency has made many of them want to go back to relatively low-growth but less challenging and more secure economic environments,” Pankaj Mishra noted last month. He might want to start putting together a guest column for the New York Post.


    That’s because New York City experienced a similar (if much less dramatic) trend over the past 30 years. In pre-Giuliani New York, the only people much inclined to stay were those so fabulously rich that they were insulated from the effects of the city’s moral collapse and those who were so lamentably poor that they had no hope of escaping. The billionaires and celebrities may have stayed, but the doctors and small-business owners went to Connecticut and New Jersey. There is still a sort of inverse Indian principle in the city: You meet rich New Yorkers from all over the United States and from all over the world; poor New Yorkers come from New York. It took something like an economic miracle to get well-off, highly educated, globetrotting Indians to return to India, and a miracle of a different sort to make New York a widely attractive city once more. From 1950 to 1960, New York saw its first population drop; from 1970 to 1980, it suffered the largest population drop ever experienced by a U.S. city, with nearly 1 million taking flight over the course of the decade. It would be the new millennium before the city recovered from that loss.


    Some immigrants cross oceans, some only cross the city limits. The suburbs of Philadelphia and Detroit contain some of the loveliest communities in all of the United States, which probably is less testament to the inherent desirability of those communities and the wisdom of their municipal leaders than to the incompetence, corruption, and rapacity of the political machines that dominate those cities. Philadelphia lost a half-million residents in the second half of the 20th century, but the population of the five-county metropolitan area remained stable — people simply packed up and moved to the suburbs. The problem for such cities is that it matters — and matters a great deal — who leaves and who stays. The people with the most to lose and the most options are, naturally enough, the first to go. People with more wealth, income, and education are the first ones to figure out where the city limits are, especially if they are married couples with children. The people left behind tend to have less, and they are less capable of demanding good governance from city authorities. The existence of places such as Villanova and Bloomfield Hills means that there are thousands of business executives, doctors, professors, business owners, and well-heeled ruckus-raisers who have no personal stake in whether Philadelphia has decent schools or Detroit has safe sidewalks.


    One of the few natural advantages of New York City has always been that Manhattan is an island, meaning that a gunshot fired in Harlem might be heard on the Upper West Side, where dwell people who have the clout to get a city councilman on the telephone and be taken seriously when they demand that something be done about it. That advantage persists in a diminished state, but other related advantages do not. The most important of New York’s was that the city long enjoyed a kind of monopoly status as a place that certain kinds of people simply had to be in order to conduct business: If you were in finance, you needed to be near Wall Street. If you were in publishing, media, or fashion, you needed a presence in Manhattan, which gave your employees a strong incentive to want to be there, too. That is no longer as true as it once was, and that is a problem for Bill de Blasio and his central campaign promise, which was, if you have forgotten, a very large transfer of wealth from New York City’s private sector to its public sector. His tax-the-rich program overlooks that an ever-dwindling number of high-income people and firms have a strong financial attachment to New York. You meet a lot more hedge-fund guys in Dallas these days than you used to. The headquarters of a fair number of Manhattan-based financial firms already have over the years followed their employees to Connecticut or beyond.


    The super-rich may or may not mind that much — especially given that their income tends to come in the form of capital gains, which receive preferential tax treatment — but your $100,000-a-year midlevel workers already have discovered the roads to Charlotte and Salt Lake City. And as Mike Bloomberg was lambasted for pointing out, you can’t ignore the super-rich, either, given that fewer than 100,000 New Yorkers pay half the city’s taxes, and 500 of them pay 15 percent of the city’s taxes. That is problematic in and of itself, but it’s not like everybody else gets off the hook — de Blasio’s tax hike on those who make $500,000 or more will have real consequences for people in less rarified income brackets. When your landlord, vendors, or customers get a tax hike, their problems have a way of becoming your problems, which is why a fair number of people who will never have incomes approaching that cutoff point understand that they will nonetheless be affected by it. That and a great deal of skepticism about de Blasio’s commitment to sustaining Mayor Giuliani’s crime policies have a fair number of New Yorkers across the income spectrum rethinking their leases.


    People will come, and people will go, and that’s the natural state of things. But the inescapable fact, unfair as it may seem, is that the people with the highest incomes are almost by definition those in highest demand; they are the easiest to lose, and the ones that it hurts a city — or a country — most to lose. While we may not be inclined to weep for the private-jet set, it is worth keeping in mind that a great many of our so-called fat cats got fat starting and running businesses. In 2011, an average of nearly five businesses a week left California, 28 from Orange County alone, seven of which relocated to or expanded in Texas. It is almost always popular to promise to raise taxes on the fat cats, and the crude arithmetic of democratic politics means that it is usually profitable to promise to tax a wealthy minority and give the money to a less-wealthy majority. A majority may very well vote for such redistribution — moving is the fat cats’ veto. And as dysfunctional, Democrat-dominated cities around the country have seen, it becomes the middle class’s veto, too.


    — Kevin D. Williamson is National Review’s roving correspondent and the author of The End Is Near and It’s Going to Be Awesome.

    7 Nov 2013, 09:39 AM Reply Like
  • JDanziger
    , contributor
    Comments (37) | Send Message
    Thanks Chris. I am really not sure I buy the tax angle. Deblasio is proposing (and it's not clear he can get it through!) a 50 bp increase in the city tax for amounts over 500k. Is someone who lives in NYC making 1mm, and already paying high taxes really going to leave over an extra $2500?


    If Di blasio's policies make the city less safe or convenient that will have a much larger impact than his tax proposal.
    7 Nov 2013, 11:43 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » I agree that the changes to law enforcement could have the greater impact. However, I don't believe that the ratio of taxes/spending/regulat... market distortions promised in political campaigns to those implemented are 1:1. It could be significantly more expensive than currently proposed. We'll see...
    7 Nov 2013, 11:59 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » Make me move:
    12 Sep, 01:45 PM Reply Like
  • Aharon Levy
    , contributor
    Comments (117) | Send Message
    As you say, we'll see. New Canaan has plenty of appeal to be sure, but...


    We live in Brooklyn and receive postcards every week from brokers desperate for inventory. So far serious crime is down a bit overall since de Blasio took office. Plenty of time for all of that to change, of course.


    But if modest crime, infrastructure and school improvements continue--that is, if New York becomes a slightly nicer place to live as has been happening for the past two decades or so--its appeal will likely hold. And since a large part of that appeal is having relatively low-salary workers available for a large variety of tasks, some (only some!) "confiscatory" and redistributive policies which allow lower-income people to continue to live here actually benefit richer people as well.
    15 Sep, 05:26 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4230) | Send Message
    Author’s reply » Well written and I hope you are right.
    15 Sep, 05:27 PM Reply Like
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