Government Intervention in the Real Estate Market

While reviewing real estate transaction data, the following chart caught our attention. It shows the number of single-family home sales that have closed in Hartford County over rolling 12 month periods. Said another way, each data point is the number of total sales over the previous 12 months. Note that this chart has nothing to do with values, only transaction counts.

Tax Credit - Trailing 12 Month Sales

The line in the chart bounces around in the 8,000 deals-per-year range from the beginning of the data through a peak in September 2005. From there it begins to fall off and makes the low point in June 2011, before turning upwards again. But the bottoming of the market is not smooth – the peak in June 2010 is what stands out to me.

The economy of the late 2000s was defined by the financial crisis that began in the housing market and spread to most corners of the financial markets. The government made multiple attempts to fight the ensuing recession, one of which was directed specifically at the real estate markets. Beginning in 2008 buyers could get help with their purchase through a program that evolved over time – see the end of this article for descriptions of the program. The June 2010 peak in the graph marks the end of the Federal Homebuyer Tax Credit Program.

Were the government’s efforts effective? What did the Tax Credit accomplish in Hartford County?

The Tax Credit appears to have motivated buyers to act when they otherwise would not have. It is very easy to imagine a smooth curve from the 2005 market peak to the 2011 market bottom and the back up again. We worked with many buyers during that period who were counting the tax credit as one of their reasons to buy. The Tax Credit added liquidity to the real estate market, which benefited sellers and everyone involved in the transaction process (real estate agents, mortgage lenders, real estate attorneys, etc.)

The Tax Credit does not appear to have been responsible for turning the real estate market around. Buyer activity plummeted after the credit expired in June 2010. Deal count did not find a bottom until the year after the Tax Credit expired.

It’s not clear if the Tax Credit prevented market activity from falling even lower. One of the main challenges of economics and studying any real world market is that there is no control group. We do all these experiments on the economy and can only guess at how it would be different if we had pursued an alternative path.

That said, there was definitely an element of opportunism among buyers. Of their multiple reasons to purchase a home, the tax credit was mostly responsible for the timing. Our view is that nobody decided to buy a home solely because of the credit … the tax credit didn’t create demand for real estate.

The financial crisis was caused by too many marginal buyers purchasing, so the buyer pool was more conservative during this period. And even if they weren’t, mortgage lenders were much more strict with their underwriting standards. The homes that were purchased during the tax credit era were bought by people who wanted a home. These buyers understood the tax credit was a unique opportunity, and some were willing to change their timeline in order to capture it.

The Tax Credit may have actually delayed the deal count bottom in this area. By encouraging buyers to accelerate their purchase (in order to get the free money), the credit depleted the buyer pool and left a big demand void in the fall of 2010. The market basically shut down in June that year. Had the tax credit not pulled all those deals forward, then it’s possible that the bottom of the market would have happened sooner.

The previous argument, that the credit delayed the deal count bottom, may be both true and also not particularly interesting. It assumes that the real estate market operates more or less independently from the rest of the economy. It doesn’t. Home buyers not only need to have jobs, but to also feel secure enough in their employment situation to make the commitment to real estate. Along this line of thinking, the housing recovery happens when the overall local economy turns around – layoffs stop and firms begin investing again.

Our overall conclusion is that the Federal Homebuyer Tax Credit had no meaningful effect on the local housing market. It shifted the deals around, and gave those of us in the real estate industry something to talk about, but at the end of the day the housing market began to recover after the credit had expired and once the local economy stabilized.


Federal Home Buyer Tax Credit Over Time
After the Home Buyer Tax Credit (May 6, 2010)
Sellers and the Home Buyer Credit (Nov 24, 2009)
Buyers and the Home Buyer Credit (Nov 23, 2009)
Existing Homeowners and the Tax Credit (Nov 19, 2009)
Homebuyer Tax Credit Update (Nov 5, 2009)
Renewing the Home Buyer Credit (Oct 26, 2009)
Will You Take Advantage of the $8,000 First Time Buyer Credit? (Aug 24, 2009)
$8,000 First Time Buyer Tax Credit Change (May 13, 2009)
My Thoughts on the 2009 Homebuyer Credit (Feb 22, 2009)
First Time Homebuyer Tax Credit – Part 1 (Aug 1, 2008)

Learning from Portsmouth, NH

We found Portsmouth to be a very interesting place. And as residents of an area trying to build the type of vibrancy that they seemed to already have, it was difficult not to compare and contrast Portsmouth with the Hartford area.

Market Square

For background, the City of Portsmouth proper is only 15.6 square miles and has a population of about 21,000. This is about the same geographic size as our municipalities, as the City of Hartford is 17.3 square mile with 125,000 people and West Hartford is 21.9 square miles with 63,000 people.

Downtown Portsmouth as a Neighborhood and Destination

We spent most of our time in Downtown Portsmouth. That’s where our hotel was, and that seemed to be the center of activity – shops, restaurants and attractions. Downtown has a critical mass of stuff, and we’re guessing it’s attracting people from the neighboring towns since there didn’t appear to be enough housing Downtown for all the people we saw out and about.

Portsmouth NightlifeThere were a lot of tourists/visitors there, but it wasn’t clear why they were in town. Many (like us) were there for the local beaches. Others staying in our hotel were there on business. But unlike visiting Downtown Hartford during a big event, it was not obvious why they were there.

Defining the Built Environment

In terms of geographic size, Downtown Portsmouth is about the same size as Downtown Hartford. Both have many street blocks while remaining very walkable. My unscientific way of measuring is that I can get the most interesting parts of each Downtown into a single screen at the same zoom level of Google Maps (Portsmouth, Hartford). If anything, Downtown Hartford is a bit bigger.

In terms of building scale, Downtown Portsmouth is about halfway between Downtown Hartford and West Hartford Center. Most buildings are mid-rise structures (generally 4 levels or fewer). There are no skyscrapers (as there are in Downtown Hartford), but there are also very few single level buildings (as are common in West Hartford Center).

There are very few super-blocks in the active part of Downtown Portsmouth. Most of the blocks were small, with multiple buildings on them. Downtown Hartford, and to a lesser extent West Hartford Center, have numerous examples of a single structure occupying entire blocks (or more).

BakeryHighway access to Downtown Portsmouth is very good. I only recall seeing one public garage in addition to the on-street parking. I do not recall any surface parking lots in the Downtown core itself, though I see online that there are four. There is bus service in town, and it looks like they have their own Downtown loop route – like the Hartford Star Shuttle.


Portsmouth is charming. The historic buildings are interesting to look at, and because there are so many of them they define the look of the town. It is an attractive place to visit.

Every space was utilized. There are some hills in Downtown Portsmouth, so you see buildings where there are walkout basement levels around back on a little side street/alley. They were almost always finished spaces that were shops, restaurants, or apartments.

Their main museum (Strawberry Banke) is Downtown, making it very accessible for visitors.

They were the only game in town. There did not seem to be any other downtown areas competing for the attention of locals or visitors. There were big malls, and there is outlet shopping. But if you want an urban feel in that part of the country, then Downtown Portsmouth appears to the be only option.

There were few national chain stores or restaurants. This was very surprising to us, and we’re not sure if it’s because chains don’t see opportunity in Portsmouth or if the locals discourage chains from entering the market. Either way, the dominance of local shops makes Downtown Portsmouth even more attractive since it’s a different experience than going to the mall.

Street SceneThoughts

Our main takeaway is that Portsmouth has done well for itself given its location, size and history. It has its challenges (economy dependent on cyclical military spending), but it has been consistent in prioritizing history as a core asset to build around. It’s a fun place, and we will likely go back to visit again.

Downtown Hartford is much larger than Portsmouth and the two aren’t really comparable. However, we have many of the same types of complementary attractions, and may be able to learn from them. They have a summer tourist season due to their coastal location. We have visitors coming to town year-round for events at the convention center. They have a modest park on the water, we have a park along the water and a much larger park integrated into Downtown. They have one main museum, we have multiple signature attractions.

The main difference we see is that Portsmouth is a complete and integrated economic system that can easily handle the ebb and flow of visitors. Downtown Hartford sees much larger surges of visitors. When we’re prepared and geared up for it, everything goes smoothly and our guests enjoy the City. But at times it seems like the visitors overwhelm the system.

Hartford projects that are under discussion should improve our baseline economic activity. More apartments and the proposed UConn campus will boost demand for goods and services in Downtown Hartford – many of the same things that visitors need. The iQuilt project is already helping guide visitors through the City to the various attractions.

Hartford seems to be taking positive steps. We have the potential to evolve into a unique Downtown environment that is not only a mixed use neighborhood, but also regularly draws in (more) visitors from surrounding towns. Once we get the baseline activity up to a critical level, we will hopefully see a snowball effect and see development projects that don’t rely on subsidies to be viable.


Related Posts
Enjoying Portsmouth, New Hampshire

Buying Single-Family Homes in Bulk

Horse on the East Hartford RiverfrontWarning: What follows is a long, dry, stat-heavy summary without much original commentary or insight. It’s here because putting this together helped me think through the subject better. Proceed at your own risk. Hopefully at least one other person will find it interesting…

I came across an article a while back that I’m still trying to wrap my head around. It’s a wide-ranging piece on the Bloomberg site called Private Equity Has Too Much Money To Spend On Homes. The author/editors include quotes from a huge range of people, and the narrative bounces around to all different points of view. It’s a dizzying collection of factoids and thoughts that covers a market we have very little visibility to here in Greater Hartford.

The overriding theme is that investors have raised a lot of money to buy and operate distressed single-family homes as rentals, but so far they have not been able to acquire many properties at all. Below I’ve reorganized the points to first focus on the supply and then the demand side of the equation.

Supply of new distressed homes has been down in recent years, and is controlled by a limited number of mortgage lenders and government entities.

Fannie Mae is reviewing final bids on the bulk sale of 2,490 properties. A couple paragraphs later the author cites a Guggenheim Securities LLC note that said future REO-to-rental bulk sales by Fannie Mae and Freddie Mac may be delayed to “monitor the properties in the pilot program.”

Fannie Mae’s bulk sales will be based on regional pools – Atlanta, Chicago, three regions of Florida, Las Vegas, Southern California, and Phoenix. Pools will either be sold outright or used for joint ventures with Fannie Mae. 85% of the homes have rental tenants. Buyers will face restrictions on resales to prevent flipping and flooding a market. A March filing showed that Fannie owned 114,157 foreclosed homes and that 8% of them had tenants.

The FHA (Federal Housing Administration) manages about 35,000 repossessed homes, and “plans to sell 5,000 properties with delinquent loans.” (KB: It’s not clear if this would be a bulk sale or individual property sales. Also, how do you sell a property with a delinquent loan? I can understand selling a loan. Or foreclosing and selling the property. But not “properties with delinquent loans.”)

Bank of America is avoiding bulk sales with their REO inventory, preferring to approve short sales, sell properties through real estate agents or auction them off individually.

Foreclosure processing – the taking of homes – has not yet recovered after the robo-signing issue and related settlement.

Short sales are increasing, and RealtyTrac expects them to exceed the number of REO sales in the second quarter of 2012.

CoreLogic reports that there are 1.6 million homes that are either owned by banks and not yet for sale, or are more than 90 days delinquent on their mortgage. They refer to this as shadow inventory.

PIMCO (Pacific Investment Management Co) believes that 6 million homes will be lost through a distressed sale in the next five years, and that will create demand for 4 million new rental units. By their calculations, $6 billion spend on foreclosures, at an average price of $150,000, only equals 40,000 homes. So the opportunity is much larger than $6 billion.

On the other side of the equation, there are many different groups hoping to buy and rent single-family homes in the United States. Here is what they are seeing in this market.

Investors have committed at least $6.4 billion to this investment theme. A managing director in the real estate investment banking group of Jeffries Group Inc. is quoted as saying “less than $2 billion of institutional capital has been spent.”

A company called PropertyAccess currently manages about 10,000 single-family rentals for banks and investors, and is expecting to be able to buy 500 to 1,000 per month by the fourth quarter. The gentleman quoted from that firm thinks the ability to buy these types of properties is more of a challenge than the ability to operate them.

Private Equity firm Colony Capital hopes to buy $1.5 billion worth of single-family houses by April 2013, and believes the operation of the properties is more of a challenge than the acquisition. The gentleman quoted estimated that 7.5 million homes with a market value of $1 trillion will be lost to foreclosure by 2016.

Investors at Carrington Capital Management LLC, who received a $450 million commitment from an Oaktree opportunistic fund, believe the primary challenge is finding homes to buy.

GTIS Partners, another investment firm, hopes to buy $1 billion worth of single-family houses by 2016, but prefers not to buy in bulk. Their chairman is quoted as saying “if you buy by the pound, I think you’ll underperform” since you haven’t done your due diligence on the individual properties and will end up with a lot of junk.

Delavaco Properties Inc, an owner/operator that is planning to go public, focuses on single-family homes that generate a stable rental income. They own 450 homes and also like to be selective in their purchases.

The Phoenix area was specifically mentioned a couple of times, with the point being that investor demand for distressed home is outpacing supply.

Landsmith LP sold 75 homes they had previously bought in the Phoenix area for about 3.4x their purchase price. (KB: No information was provided about how much they spent improving the properties) They are now looking to other markets that are earlier in the foreclosure cycle.

American Residential Properties, Inc., a REIT that is planning to go public in 2013, also sees the Phoenix market as more competitive.

Finally, it was noted that real estate agents hate the idea of foreclosed homes selling in bulk. One reason is that brokers feel the buyer market is deep enough to absorb the coming inventory. Additionally, the Chairman of brokerage firm Realogy was quoted as saying that large-scale foreclosure sales “would put further downward pressure on home prices, take away local investment opportunities, and enrich Wall Street investment funds.” The author concludes by noting that real estate agents do not receive commissions for the bulk sales.

Since this article was published, Fannie Mae has put out this press release about the next step in their REO program.

Now that I’ve sorted through all that information…

There aren’t enough distressed situations in Greater Hartford to warrant bulk sales of repossessed homes. There are a handful of agents who seem to have relationships with the banks and government organizations and they handle all the REO sales. The rest of us – the vast majority of local real estate agents – work directly with owner/sellers who are not in distress. There are short sales periodically, but they are not overwhelming the system either.

A billion dollars is a lot of money. For example it would be almost enough to buy all of the single-family houses in the City of Hartford (about 7,100 of them), which the Assessor valued at $1.12 billion as of October 1, 2012 in the most recent revaluation. If another billion-ish dollars were laying around it could be used to buy all the two-family and three-family properties in the City (another 6,300 total), which were valued at $1.11 billion.

Six million homes (or 7.5 million) lost to distress is an even larger number. So they’re saying that nationally the problem is about 1,000 times worse than if every single-family home in the City of Hartford were lost to foreclosure.

According to this recent housing survey on, there are about 79.7 million detached single-family homes in the country and 125.5 million residential units in total. So somewhere between 5% and 10% of them are going to be lost, with much higher concentrations in some areas.

What does this mean for Connecticut real estate and for Greater Hartford in particular? Are we late to the foreclosure party, or was the housing boom and bust so tame in this area that we’re going to miss the mass foreclosures entirely?

Unsafe Neighborhoods

Neighborhood WatchYesterday Amy noticed a story come across the wire about a new Microsoft patent. One of the main benefits, which appears in the abstract of the actual filing, is that it will allow walking directions to be provided that take into account “unsafe” neighborhoods.

The story caught our attention because as real estate agents we are not allowed to talk about neighborhoods as “safe” or “unsafe.” An area’s level of safety is a personal perception and by expressing our opinions we could be steering our clients to areas we like and away from areas we don’t like, which might not be right for them. Instead, we have to allow our buyers to make their own decisions. We can point people in the direction of crime statistics. And we can encourage them to visit an area during different times of the day. But we cannot characterize a neighborhood as good or bad.

So how will this new patent be implemented? What factors will be used to determine if a particular area should be avoided by pedestrians? How granular will the data be – if crimes occur in one part of town, will the entire town be declared unsafe? Will factors related to the built environment, like a lack of sidewalks, factor into the algorithm? At this point there are obviously far more questions than answers. It will be interesting to see what kind of information Microsoft, or any potential licensee, is able to incorporate into their maps.

Taking a step back, I would love to see a block by block map for crime, perhaps in the form of a heat map. Since crime statistics sound like an input to the pedestrian route algorithm, this should be a relatively easy task. The primary challenge would be getting programmatic access to the crime statistics from each community. If it were possible, and if the resulting maps were intuitive and sufficiently granular, then they would be a huge help for home buyers trying to understand a new region, town, neighborhood, and block. (Perhaps a good one already exists? I know of a couple sites that show crime stats, but they seem user unfriendly in their interface and overburdened by advertising.)

Everyone has an opinion about which areas are safe and which are unsafe. Those opinions are often strongly held in the Greater Hartford area. They are also often based on what “everyone knows” rather than data or even personal experiences. Presenting factual data in an accessible format would definitely be helpful, and could surprise a lot of people.

2011 Average Prices and Sales Mix

Warning: What follows is quite dorktacular. You have been warned.

Last week we looked at the really big picture transactions data for Hartford County in 2011. The main concern we had with how the numbers turned out was that the average single-family home price appeared to rise slightly from 2010 to 2011, which was not what we saw in the market on a house by house basis.

There is no easy way to track the price trends in a region because every house is unique. Repeat sales is the best method I know of, but it’s too hard for us to use. Anyway, we were talking averages in the post. Our hypothesis as to why the average might be misleading in this case is that averages can be influenced by a change in the mix of homes that sold between the two years. They are especially susceptible to sales of expensive homes since one million dollar property contributes as much to the total sales volume as five $200,000 homes.

The first step we took to test our hypothesis was to look at how the mix of sales changed between the two years.

Hartford County Single-Family Sales by Price Band

The chart shows that the number of sales increased in the sub-$100,000 price band and also in all three price bands above $500,000. It also shows that the $100,000s remained almost exactly the same. Finally, the number of deals in the $200,000s fell by about 20%, while both the $300,000s and $400,000s fell by about 12%. The chart confirms our anecdotal observation that there is was more interest in high end properties in 2011, but doesn’t address our hypothesis in a convincing manner.

What if we plotted the total sales volume for each price band instead of the number of deals? That would put each of the price points on equal footing in terms of their contribution to the average.

Amount Spent on Hartford County Single-Family Homes

This chart shows that the homes that sold for less than $100,000 matter very little in the average. But otherwise the chart is not conclusive about whether the average remained the same due to prices holding steady between the two years or some other reason.

Maybe we should just throw in the towel on the average as a proxy for home prices and move over to the median. Between 2010 and 2011 the median single-family home price in Hartford County fell 3.3% from $230,000 to $222,500.

Or we can just trust our observations of the market … home prices fell in 2011.