Wednesday, January 7, 2009

Good-Bye & Good Riddance to 2008 in the Charlottesville Area Real Estate Market

2008 is gone. It was a bad bad year. But we have high hopes for 2010. That's right, 2010. Like many regular joes, economists and finance experts, we expect 2009 to be an exceedingly challenging year--to put it mildly.

As we've said before, we're pro-homeownership. But not ownership at the expense of the entire US economy and a global credit crisis. Houses--homes--are about security and comfort, and should reflect the habits, tastes, and predilections of their owners. Houses are not meant to be cash cows.

And btw? We're anti-spin, not anti-Realtor. Realtors who survive this downturn are the ones who don't lie to the American public.

We have a couple of "predictions" for 2009. But first, a look back at 2008.

1. INVENTORY - There's a lot to choose from.

By the end of December 2008, the Charlottesville / Albemarle area alone had 26 months of inventory, which translated to sales significantly down from 2006 and 2007.

2008 down from 2007
: 10% City, 33% County, 25% Region.

2007 down
from 2006: 17% City; 20% County; 19% Region.

More comes on the market nearly every day. 26 months was December's figure. By the beginning of January, the figure is down to 18 months for the region.

But the available numbers don't tell the whole story.

CAAR's 'number of homes on market' fell by 181 properties between Dec. 31, 08 and Jan. 1, 09. Expired listings? Withdrawn listings? This number is not reflective of sales. (Please feel free to correct this in comments.)

And not everything "for sale" appears in the MLS. We've discussed "shadow inventory": homes pulled from market because they'd been on too long; or were rented; or homes that are in the foreclosure process or REO. Today, Jan. 7, there's a post on local shadow inventory over at RealCentralVA.

Nationwide, the number of pending home sales in December dropped. (Thanks, JH). January typically has fewer sales than December. Combined with the expected dismal retail sales reports on 1/8, and the shocking unemployment rate on 1/9...January's not looking good.

2. BUYER'S MARKET - Last June, on the front page of the Sunday Daily Progress, an industry professional stated homebuyers should not be greedy. We're not likely to see an article like this in 2009.

The bubble's burst, the US economy is in recession, State, County, and City govs are having budget issues.

But Asking Prices often remain high. This is because many Sellers have to make a certain amount
due to having paid a bubble price or having a HELOC...though their homes are no longer worth what they paid.

What Sellers call "a protected market," buyers call a "bubble." Nationally, prices are down to 2004 levels. Sure, we're not a major metropolitan area; we just have the prices of a major metropolitan area.

Here are just a few examples of "bubble" asking prices, ioho. The impetus behind each price of course varies with each seller, but some reasons include a "need to make" a certain amount, knowledge that a neighbor's property fetched a certain amount, love of/sentimental attachment to the home, poor advice from a professional, a belief that it's still 2005, a belief that Charlottesville is a protected market, or a disconnect from the wider world:
  • 708 Park Street originally had an Asking Price of $850K. The place went through significant renovations, but still couldn't find a buyer at the upper price point. After almost a year on the market, $470K = sold price.
  • In the Belmont Bubble eight cottages have been available since July. These properties haven't changed hands for decades; no individual or investor is biting at the +/-$200K prices. Unsold.
  • In the middle price range of City housing, this collection of properties, offered by one seller, have "appreciated" by 100%-237% over time spans of 3-8 years. All unsold.
  • At the higher end are these "$1M" Asking Prices: 615 Kelly Avenue, assessed at $245.5K - Unsold. 517 2nd St NE, assessed at $664.8K - Unsold.
  • At the top end: Coran Capshaw's Seven Oaks. Asking: $12.5M; dropped to $10.5M in October. Purchased in 2000 for $2.5M; assessed: $4.4M. Unsold.
The properties that sell are those where sellers are able to set prices to reflect the "new reality" of the burst bubble and the US recession.

Most buyers no longer believe homes will appreciate, that in this area they're more likely to depreciate, since the correction has been much slower.

Those buying right now seem to be doing it for the "right" reason: because they need a "home."

Lowball offers will prevail. We wrote about lowball offers last Spring here and here. You may also find information from a professional point of view here.

3. THE FUNDAMENTALS REMAIN WEAK - In late September, Charlottesville Area Association of Realtors CEO Dave Phillips, not himself a REALTOR, stated in the Daily Progress:

"The turmoil on Wall Street will not affect Charlottesville’s housing market. Unless you’re in the financial business, it’s not going to affect you.

Phillips also suggested that the troubled economy was the result of media spin. This caused shock and disbelief on this blog, at the DP, and on RealCentralVA. We're not likely to see a real estate professional make such a pronouncement--ever again.

We invited Phillips to clarify this statement, and he obliged.

4. BUILDERS GO BELLY UP - Contrary to "the fundamentals remain strong" idea, Church Hill Homes principals Jamie Spence and Josh Goldschmidt knew they were in trouble: they unloaded 11 properties at "green community" Belvedere to Eagle Construction of Richmond and took jobs with the company. In October, Church Hill Homes faced mass foreclosures. And at the end of the month, The Hook's cover story detailed hundreds of thousands of dollars of liens owed subcontractors.

On December 31 the DP reported Weather Hill Development also faced mass foreclosure; the developer says Hauser Homes is to blame.

5. REAL ESTATE OFFICES CLOSING - Real Estate III is closing a couple of offices. Call it "merging," call it" streamlining," call it going green: the fact remains that the bubble is over and downsizing is key.

6. COMMERCIAL REAL ESTATE FALTERS - Landmark Hotel construction paused--or did it? Silverton Bank of Georgia defaulted on payments--or did it? In any event, Developer Lee Danielson is off the project. The money man, Halsey Minor, hired a new developer for the $31M luxury hotel on the Downtown Mall. But much on the Downtown Mall is empty. Some storefronts apparently have future tenants lined up; but other businesses are closing, due to the economic downturn.

7. FORECLOSURES ARE ON THE RISE - C'ville Weekly ran A Tale of Two Foreclosures in mid-December about the travails faced by RE/MAX Realtor Doug McGowan, who used "Option ARM" loans to pay for three properties "bought" during 2005-2006, totaling more than $1.3M, with usurious interest rates of 7%-13%. He then re-fi'd--and fell behind on payments. His properties were scheduled for auction, and he failed to notify his tenants. The article elicited a veritable firestorm of commentary at C'ville and on this blog.

McGowan's not alone, however. The Daily Progress in December ran an article on the rise of foreclosures in this area.

Additionally, local bankruptcies are "skyrocketing", in part due to Option ARMs, falling home values which prevent refinancing, and rising unemployment.

8. REALTOR, VICTIM - Judy Savage, the Broker at RE/MAX and current President of CAAR, logged on to the comments at C'ville to defend Realtor Doug McGowan as a "victim." She was, she said, speaking as a "friend."

In defending him, she put him in a larger group of professionals who apparently made similarly infelicitous business decisions:

She asserted:
  • "Many of us have seen our incomes fall 75% from just a few years ago."
  • "The Realtor in question is only one of many facing foreclosure and bankruptcy..."
  • "I know of several Realtors and Lenders who have now been foreclosed on because they relied on this bad loan product."
  • "Just about every restaurant and big box store in town has a Realtor working there part time just to keep their head above water."

9. IT'S A GREAT TIME TO SELL? - Whether it's 26 months or 18 months of inventory, it's a lot. Ray Caddell, Broker at Century 21 on Rio Road put 15 properties up for sale the weekend before Christmas. From the buyer's perspective, this seems mystifying. But we're 100% sure Caddell knows many things we do not.

10. SALES PITCH: DON'T AREA REALTORS NEED SOME NEW MATERIAL? - We suggest that the phrase "Charlottesville is a protected market" be stricken from everybody's sales pitches until 2010 or later--whenever this area hits bottom.

"Protected" or "Insulated" is supposed to mean that the market is buffered by the presence of its largest employer, UVa, a regular fount of buyers and sellers--and thereby protected from the wider world.

But UVa faces budget cuts and more endowment losses. Some recent Endowment loss info is here and here. The Endowment is currently worth $3.9B...but $1.6B is in uncalled commitments to private investors, due over the next five years. UVIMCO CEO Chris Brightman still believes there's such a thing as long-term investing.

We suggest "protected market" be dropped until the "fundamentals" around here really are strong again. Or until UVa gets that Federal bailout and doesn't have the feared wage freezes and layoffs this Spring due to state budget cuts.


"PREDICTIONS" for 2009

We looked into our crystal ball. FWIW, we hope most of these do not come true.

1. Mortgage rates are currently at 37 year lows. Lately, much of the mortgage activity has been confined to re-fi's, even in our area. Still, many sellers may use this as an excuse to keep their Asking Prices at 2008 levels.

2. "Lowball offers" will become the "norm." Buyers tend to be realistic when Sellers can't or won't. (See #2, above.)

3. More builders will face mass foreclosures.

4. There will be civil suits filed against local builders for fraud.

5. Retail closings: couple big boxes, some smaller mall chains, a number of privately owned stores/galleries/services, and a couple of car dealerships.

6. Local unemployment will rise due to #5 and the contracting national economy. The pool of Realtors will contract.

7. Foreclosures will rise. They're already on the way up... this recent study occurred before the Stock market crashed in October.

More optimistic:

8. A major regional media outlet will do a story about the local Real Estate market and won't rely on spin from NAR, VAR, or CAAR.

9. The Obama Administration will take swift and decisive action--specifically for the housing crisis. Deficit, shmecifit. A high deficit is better than a Depression. And action could help ameliorate "predictions" 5, 6, 7.

10. There will then be some progress made toward returning this area to "realistic" housing values and the historic paradigms of 1:4 income to price ratio and the price to rent ratio.


Anonymous said...

I know this sounds really awful, but we have found the exact house that we want, and now we are just sitting around like vultures until 2010:) It may sell before then, but at its current listing price we are willing to take the chance. We really do believe we are going to end up getting a great deal on it when the price eventually becomes more sane.

Anonymous said...

Anonymous, why aren't you "lowballing"?

Anonymous #2

Anonymous said...

A recovery in 2010 seems awfully optimistic to me. We're just beginning to see fallout from state budget cuts and the endowment issues at UVa. Unemployment in this region isn't anywhere near its likely peak.
There are many properties in the city that in their current condition aren't worth anything near what their current "owners" owe on them. And without a return of investors to the market, it just doesn't seem how the imbalance of supply and demand in this market will resolve itself anytime soon.

Real C'ville - The Bubble Blog said...

Anonymous #1, have you researched sale history on the property? And on similar houses? And those in the neighborhood?

Anonymous #3, Agreed that 2010 won't really be the "bottom" or a "recovery" around here. Just hoping that 2010 will be better than what 2009 looks to be....

Liesl said...

I just can't help but feel really sorry for the "first family" over at Belvedere, and the few others who have moved there.

I don't have a "crystal ball" but does anybody really believe that Belvedere is going to be "finished" or even close to whatever "finished" might mean in the next few years?

Are SOCA and ACAC still planning on making the move?

The latest blog entry, from about a month ago, still seems really positive, which is admirable. I'm sure they don't want my pity or anybody else's...but still, it's a sad turn of events, I think, for these people who have so much to offer a community.

Anonymous said...

I agree with my anonymous brothers above. I too am waiting on the sidelines -- there's no way the local market is going up in 2009, so why jump in now and risk buying an overpriced, depreciating asset when there are plenty of great rentals available. I don't see how any responsible buyer's agent could counsel a buyer to pay anywhere near asking price in this market.

Anonymous #4?

DK said...

We've been looking for a house for about a year. We're basically sick of renting. We have the same fears as lots of others, such as losing jobs, house values going down for much longer than anticipated, or some unforeseen wrinkle in the economic crisis, but we've been moving forward because we want to put down roots. We found a place that's been on the market for months. We announced to our realtor what the offer would be basically 30% less than the asking price. He didn't even blink. Didn't even need to hear our reasoning. Now I'm having cold feet, thinking that even if we do plan to stay in the place for more than five years, the price is still too high.

no name necessary said...

Run, DK, run!

Larsen B said...

Real estate agents DO spin a alot. Seems to be part of the job. I think a lot of people are biased against agents because during the boom they seemed to be making a lot of money without doing much and then they kept up the It's a Great Time to Buy bull for a few years after it wasn't. Also, I think that there's an expectation around here that agents will be just as highly educated as the carpenters, waiters, and store clerks are (or used to be. There's that joke: Q: what do you call your waiter? A: "doctor" because so many people had PhDs but not career-oriented jobs). But agents don't seem very over educated. Plus, the classes for licensing come from their own association. I have to say that the agents mentioned in this post, who were speaking to major local papers, really don't come off very well. I'm sure there are many great agents who had fine eductions but the ones in the media spotlight don't reflect it. Also, it's still hard to buy or sell a house without an agent (Oops, I guess I'm supposed to call them "Realtors"_) even with all the internet sites devoted to real estate and this makes people resentful as well. So maybe the ones who make it through the next couple of years will be quality types, and the others will keep working or become managers at the big box stores and restaurants where they're moonlighting right now.

Anonymous said...

The only difference between an agent and a used car salesman is a set of tires. Why would you expect a PhD educated agent?
I personally would care less what their higher education level is if they're great at their choosen profession.

DK, make your offer and just buy the house if its the one you want. Paying 5% for 300,000 is roughly the same monthly payment as 7.5% for 200,000. Just be prepared to stay in the hosue for awhile, maybe even a long while

Anonymous said...

Yes, let's encourage everyone to wait for the bottom. Not the bottom, but the low, low bottom, in a year or two. This way the companies who maintain nice neighborhoods are out of business, HOA are crap, sidewalks and streets in those neighborhoods fall apart with only banks to maintain them (HA-HA - yeah right.....) and the quality of life in Charlottesville will have gone way, way down for all.

Charlottesville IS unique in that there are 3 industries that will survive this mini-depression. We have: Education, Health, and Government jobs. All statistics show those industries will be the least affected. Yes, they will decline or freezes in employment will take place, however, our town will never completely collapse, like others in our country will.

Do I think there are too many fingers in the real estate pie? Absolutely. Do I think there has been too much development? Absolutely. Do I think the banks are as much at fault as builders or developers? Yes. Do I think there has been false information and false hopes for the future spewed by so-called "professionals"? Absolutely.

But, do I think our town can save itself in some way, yes, I do. People need to wake up and smell our world's new reality. I think people in C'Ville are in major denial that it's happened here....

But, to wait on the sidelines for that ultimate bottom? If we're all in this together in Charlottesville, than that collective mentality will take us all down in the end.

Anonymous said...

I don't think many are holding out for the absolute bottom. I know I'm not, it's just too hard to predict.

I want to own a nice home here as soon as possible -- I have no interest in seeing anything deteriorate. What I would really like to see is some sanity in this market -- it's not 2006!

I'm not looking to bail out someone else who made a bad, or badly timed, purchase. I took my lumps when I sold my house.

And I'm not going to go casting all around town with so-called "low-ball" (i.e., realistic) offers when listing prices are so obviously out of whack. It's too hard and time-consuming trying to find the rare seller here who is not totally delusional.

Price your home fairly and you will start to see some real buying interest. Until then, this market will remain essentially frozen.

cville realtor said...

Sellers are beginning to see that lowering their prices to realistic levels does make a difference. Over this last week, I have heard of several properties that were realistically priced having multiple offers on them. Not sure what it means but it does show that homes get priced right, there ARE buyers who want to buy them.

Real C'ville - The Bubble Blog said...

To work our way from the most recent comments to some of the earlier comments:

Cville realtor...wondering what you mean by "realistic" levels. You've heard of several properties that are "realistically" priced and have multiple offers on them. What kind of properties are these? And is it "realistic" in terms of a property having "increased" in value 120% in the past four years, or in the new reality we all find ourselves in...which is that (according to all experts except perhaps Lawrence Yun) home values/prices are going to continue to decline for some time to come, and when homes start appreciating again, it will be more along the lines of 2% annual inflation, plus a percentage or two more....THIS kind of reality, or a Cville-is-starting-to-rejoin-the-rest-of-the-planet reality?

It's January, of course, and sales are slow. But the REGION currently has 24 sales for the month, and there are only 10 days left in January. Certainly sales are NOT at a TOTAL STANDSTILL...just close: there are MANY MONTHS (18? 26?) of inventory.

But there's always the truism that people need homes, and there will always be SOME activity, even if slow.

In terms of the "new real estate reality", please see this post:

It's the words of an expert whose mind is much greater than ours.

To Anonymous who said:
"Yes, let's encourage everyone to wait for the bottom."

This blog doesn't do this. That, actually, is the job of the bubble blog called Check them out.

This blog tracks the post-bubble housing decline, economy, recession, etc. And encourages buyers to use all tools at their disposal so they don't become like the ONE IN FIVE home"owners" who bought in the past ten years NOW UNDERWATER.

Bottoms, as you know, can only be called AFTER the fact. This area has three industries, but two of them are entering a period of struggle. There's coming unemployment, and wages aren't going up any time soon.

This blog IOHO tracks listing and sales trends that are like what Anonymous describes, who says "I don't think many are holding out for the absolute bottom....[but]listing prices are so obviously out of whack. It's too hard and time-consuming trying to find the rare seller here who is not totally delusional." We would substitute "delusional" for "optimistic" and "in dire need of making a certain amount of $."

To the Anonymous who suggests that DK just live with a purchase price, pointing out that a $200K mtge at 7.5 is roughly the same as $300K at 5%: The math is a little off.

Here it is:

(Neither include mortgage ins. or annual prop. taxes):

Loan amount $300,000.00
Term of loan 30 years
Interest rate 5.000%
Monthly payment $1,610.46
Total payments $579,769.69
Total interest $279,769.69

Loan amount $200,000.00
Term of loan 30 years
Interest rate 7.500%
Monthly payment $1,398.43
Total payments $503,433.66
Total interest $303,433.66

The difference is roughly $75K. That's a lot of cash. Right now, that's two years of private college fees. It's a big input into a retirement fund. It's lots of vacations. It's perhaps the courage to have the second or third baby. And invested even conservatively at 3% over 30 years? Do the math on that.

And what if the buyer puts down 10-20%? In a market that will continue to decline, the downpayment is automatically eaten. If buyer CANNOT stay for the long term, buyer is going to make the same misguided purchase millions have made in the past five years....

Larsen B, a lot of "spin" came from David Lereah, former economist for the nat'l assoc of realtors. He's gone. Many people still distrust agents/Realtors because of his spin during the housing boom. Many agents and Realtors, however, are now going out of their ways to NOT be like this man.

And Liesl, we don't have the Belvedere answer. Just from observation, there are five or so properties on the market. A lot of woods that have been clear cut. And a lot of room for hundreds of structures that haven't begun to be built.