A Contrarian Bet

In the beautiful valley by the lower reaches of the Connecticut River, the rich are a diminished tribe. Too many are passing away or moving to the sunbelt; their numbers are not being replenished by locally generated wealth or fresh influxes from New York or Boston. More people are leaving the area than are coming – and evidence suggests that this trend is much more pronounced at the top end of the income spectrum than elsewhere.

High-end real estate prices reflect these changes: immaculate, million-dollar-plus homes on stunning properties can now be bought for half their former values. Many cost less than what it would cost to replace the existing buildings, with the land thrown in for free – never a good sign.

Sure, somebody will eventually buy these homes, and one man’s loss is another’s opportunity to buy for less than would otherwise have been possible, but most of the buyers will be less well-to-do than the sellers, they will patronize local services less open-handedly and they will give less to local charities and the arts. They will also challenge the former tax assessments of their new properties, ultimately resulting in lower tax receipts by local towns.

A contrarian to my core, I have just agreed to purchase one such deeply discounted, former-trophy property as an investment. A bargain, I hope, but the market says otherwise.


Twenty-seven miles to the south of here in the Hamptons, non-oceanfront properties that a couple of decades ago would have fetched prices comparable to elegant properties in Old Saybrook, Essex, the Lymes or Chester now go for ten times as much.

Why is the lower Connecticut River Valley running out of gas in both absolute and relative terms?  It has many natural advantages over rival areas. In my view, unless you need roaring surf, the Valley is a nicer place to be than the Hamptons. Physically, it has beautiful homes, great restaurants, picturesque old towns, a grand river with numerous coves, estuaries and border islands, and great hills in a verdant and varied countryside. Socially, it is low key, and residents have ready access to high-quality local service providers at reasonable prices.

The immediate cause of the slow-motion, high-end exodus and the resulting panic-selling in expensive real estate was probably the recently announced departures of some of the state’s most important employers: GE is moving its headquarters from Fairfield to Boston, Aetna is moving its headquarters from Hartford to New York, and Pfizer, which was stopped from moving its headquarters to Ireland by threats from the Obama Administration is instead sharply downsizing the management  functions at its former headquarters in New London. Senior executives from these companies will no longer want their magnificent country homes in the Connecticut River Valley.

These departures are just the exclamation point in a sentence that was twenty-five years in the writing, though. Connecticut has been losing ground ever since Governor Weicker, then a nominal Republican, pushed through an income tax in the early nineties, promising that a 4.5% rate would forever solve the state’s fiscal problems. Before the income tax was instituted, the absence of an income tax was a huge lure – making Greenwich one of the wealthiest commuter towns in the country and the Connecticut River Valley a wonderful place for a vacation home or to retire in.

Since 1991, Connecticut’s highest marginal income tax rate has risen – to a current 6.9% (on top of already high property and sales taxes) – and the state’s fiscal condition has continued to worsen.

Connecticut is now rated dead last among the 50 states for per-capita state debt (http://www.governing.com/gov-data). Local politicians saw the gusher of income tax revenues as an excuse to spend profligately – and they saddled the state with both the nation’s largest per-person debt load and enormous unfunded off-the-books liabilities for future retirement benefits for state employees. They bought votes with income taxes and public IOUs. For good measure, they also made the state hostile to business from a regulatory standpoint.

But here’s the thing the politicians forgot about individual taxpayers and businesses: they can leave.

In other words, the state threw away its competitive advantages in attracting the well-off, and the result has been a gradual exodus, now accelerating via the departures of the headquarters teams of major employers.

To write that these trends are unsustainable is an understatement. If they are not reversed, Connecticut will face a collapsing population, broken promises to retirees and defaulted bonds. This beautiful region – equidistant between economic dynamos New York City and Boston – could become, in the memorable phrase of an article about formerly-prosperous-but-now-economically-desolate upstate New York “Detroit, with grass”.


So why am I buying now?

I believe that the voters of the Connecticut can and will reverse course. The avalanche of departing employers has to have stunned the electorate out of its complacency – and the sad examples of Puerto Rico and Illinois make it all too clear where the present road leads. The voters know that there will be no federal bailouts of bankrupt states – even the Obama Administration couldn’t bring itself to bail out Puerto Rico, and besides, the feds have overcommitment issues of their own.

A change of course will be painful, and it will take time; it is awfully difficult to unmake promises. But with changes in leadership and policy, gradually, there will be fewer corporate departures, then maybe some actual good news. Connecticut has too many natural advantages to let itself go over the waterfall. Democracy is designed for self-corrections, after all.

And if the state gets its act together, today’s prices will come to look absurdly low.

That’s what I’m telling myself anyway.


M.H. Johnston

One comment to A Contrarian Bet

  • Jeff  says:

    As a former Connecticut resident disgusted with local politicians of both parties there but especially the Democrats that control the state and its major cities (which also face financial woes), I wish you good luck with your investment. Unfortunately, I don’t see a reversal anytime soon. It seems to me that the only way out of the state’s fiscal disaster is some form of bankruptcy forcing cuts in state worker pension and healthcare obligations and possibly a restructuring of debt.

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