Friday, April 3, 2009

Charlottesville Albemarle Real Estate: Many Generation Y Priced Out of This Market...Ditto Gen X

According to the Virginia Housing Development Authority (VHDA), the Charlottesville Metropolitan Statistical Area remains one of the top three most expensive areas in the Commonwealth. The other two are Richmond and Hampton Roads. No surprise, right?

In a recent presentation before the Charlottesville Area Association of Realtors, as part of their "Economic Summit," the VHDA defined the problem.

The historic price-to-income ratio for buying a house has been 2.5 to 1. In this area, it has been 5.5 to 1 for most of the decade. Recently, it has fallen to around 5 to 1.

This is a College town, nicknamed "The Hook" because it gets under your skin and you want to stay. But what kind of jobs are available to Gen Y's in this area? What kind of living can they expect to make? One that will allow them to participate in the "American Dream" of owning that white picket fence?

No, according to the VHDA. Real Estate prices put ownership out of reach of many younger folks...and some older ones, too. Even with historically low interest rates, and an $8K tax credit for those whose income qualifies...which should be Gen Y ($75K single; $150K married).

Without help from the parents, how many Gen Y's nowadays have the downpayment? Even the 3.5% FHA downpayment?

And without the first-time homebuyers taking over the "starters," any market will remain frozen.

Price-to-Income ratio has gotten too high. But another useful way to look at what the sale prices of houses "should" be is "rent to sale price ratio." Before the Bubble, the historic multiplier was 15x.

A major problem with the Cville area? There's a disincentive to buy. It's cheaper to rent. A renter gets more for their money, without putting down major Benjamins, and then having to pay taxes, maintenance, etc.

If you take a quick stroll through Craigslist offerings (we're not including specific links, b/c they'll eventually be dead) you'll see that renting a house can be much cheaper than buying one:

$1595: "Newly Renovated 4 BR / 2 BA House. New Kitchen with cherry cabinets. Hardwood floors throughout. Screened-in sun porch with slate floor. Central air and heat. Separate garage and workshop."

$1650: "Greenbrier: Spacious, sunny house for rent (3,000 SF) available Aug 15 for 1 year, possibly longer. 4 BR, 3 full BA, 2 offices. Beautiful wooded location. Great school district, convenient location to UVA and downtown."

$1650: "This 4BR / 2BA brick house sits on a quiet cul-de-sac in the Fry's Spring neighborhood, less than 2 miles to UVA and the hospital, and adjacent to a Rivanna Trail access point."

$1800: "4 bedroom, 2 baths, hardwood and tiled floors, nice kitchen, w/d hookup close to UVA."

$1995: "SPACIOUS 4 or 5 bedroom home...formal living room & dining room, home office, 5thBR, Family Room w/propane FP, large eat-in Kitchen, back deck overlooking fenced pasture, laundry room and over-sized garage....upstairs has large master suite and 3 additional bedrooms and full bath....less than 1mi to Stony Point School."

(BTW: Several of these rentals have accidental landlords: the houses have been pulled from the market during the Recession. Sellers still believe that they'll get the price they need, or hope for in the future. They won't. Barring a stroke of good luck.)

Multiply the above annual rents x 15: the result is $260K to $360K. What's offered for sale in this price range are often smaller houses in less desirable neighborhoods than what's available for rent.  Plus, you have the downpayment, taxes, mortgage insurance, maintenance.

DO THE MATH ON THIS. For a $260K house at 5% interest, with just 10% down, or $26K: with property taxes and mortgage insurance, the monthly payment is more than $1,700. So if you buy a house that's the same size you could rent for $1700K, same neighborhood, same level of're looking at $100-$300K more for "purchase" in the rental examples we've cited above.  Plus agent fees, closing closts, any renovations, etc., up front.

It's not just Gen Y's who are priced out of this market, however. There are members of the Baby Boom who are priced out (Baby Boom = 1946-63, with those born from '54-63 referred to as Gen X and/or Generation Jones).

But being priced out of the market right now for Gen X or Y isn't a bad thing. Prices have nowhere to go but down. There's not enough demand in this area to gobble up the supply. There aren't local salaries or future jobs that will provide buyers who actually need to put down 20% and carry a $2-5K mortgage per month.

And, a recent study shows, a late Boomer Homeowner has a net worth less than a Boomer Renter:

The median household with a person between the ages of 45 to 54 saw its net worth fall by more than 45 percent between 2004 and 2009, from $172,400 in 2004 to just $94,200 in 2009 (all amounts are in 2009 dollars). If the median late baby boomer household took all of the wealth they had accumulated during their lifetime, they would still owe approximately 45 percent of the price of a typical house and have no other assets whatsoever.

Which makes it perfectly understandable why Baby Boomer sellers are clinging to Asking Prices that are vintage 2006: they have little (or no) net worth, and chances are their retirement account has recently lost $$$ in the market crash.

But the days of inflated asking prices turning into selling prices are largely over--except when the random seller gets lucky.

And, as we saw recently, it's houses, condos, and townhouses on the lower end of the price point that are selling.

These are CAAR's live sales numbers:

Active Listing Inventory: 3,553
Number of Listings Sold: 7
Median price of Listings Sold: $225,000
Average Days on Market for Listings Sold: 188

Active Listing Inventory: 3,553
Number of Listings Sold: 134
Median price of Listings Sold: $245,500
Average Days on Market for Listings Sold: 148

The Virginia Housing Development Authority also indicated that the Cville area is 12+ months behind NoVa in terms of price correction, and wiping out the oversupply of houses, which will drive prices down. In addition to the oversupply, foreclosures at all price points, from all different kinds of mortgages, will continue to rise.

Read through the following two info sets, then be sure to check out the market data in total. The links are at the bottom of this post.

Access the full Virginia Housing Development Authority data here: VHDA Market Data - via RealCentralVA
Access more data from CAAR Economic Summit, including podcasts and handouts.
Related Reading:
The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble - Center For Economic and Policy Research
16 Million Homeowners Owe More Than House is Worth
Sellers Trapped In Their Homes


Anonymous said...

Considering the high amount of effort you put into all the numbers, perhaps the following - "Multiply the above rents x 15: the result is $240K to $299K." should have the term "annual" nestled between 'above' and 'rents'.
Otherwise, point well taken. UVa grads that want to stick around either need to get one of the few strong jobs around this one-horse town, live in communal style keeping up the college lifestyle, move to Waynesboro, or have Pops help them out. Two more years of Pops tuition would be a fine down payment.

Anonymous said...

The rent issue is exactly our dilemma. We rent a 3 bed 2 bath yard attic basement deck porch walking distance to downtown. $1800 month.

The houses for sale on Locust Ave of equivalent size desirability etc. are about $500K. After putting $100K down monthly mortgage payment is $2500.

That's a bad financial decision. That's not pride of ownership.

Waldo said...

My wife and I are in the same boat. We're Gen Yers (or whatever one cares to call our generation), dual incomes (but we live on the lesser of the two and bank the other), no kids, excellent credit (~800 each) and we rent. We own 31 acres of Keswick mountainside land, with a driveway and a homesite, but coming up with 20% down on the little 1,380 square foot home we've had designed is going to take a *long* time. So we're renting, despite having a ready-to-build lot, until we can save up the cash.

Compare that to 12 months ago, when a local mortgage officer tried to convince us to take $450k (!) to build a house, far more than we needed, didn't understand why we didn't want to roll the closing costs into the mortgage, was trying to give us a no-money-down mortgage, and was stunned when we insisted on a 30 year fixed. That seemed like a lot of red flags, so we called off the deal. Then the housing industry collapsed, the mortgage industry crumbed, and suddenly the healthy chunk of cash we'd saved up to cover some construction costs out of pocket has to be supplemented by a huge additional chunk for that 20% deposit.

I find the switch a bit stunning, particularly since we're precisely the sort of folks that banks should be tripping over themselves to lend to. We're bring a valuable asset to the table (land), our score shows that we're no risk, and we're building significantly less house than we can afford. But banks want to give us the same deal as somebody with a 650 credit score, not a penny to their name, and no land. I don't get it.

In the Belmont Hood said...

I've been watching a house in my neighborhood (have also seen it on this blog). Great example of why buy when you can rent:

702 Belmont mls 460742

On the market almost a year. Started at $520K, now down to $449K. (Still absurd price IMO).

After it didn't sell last summer rent on Craigs was $2K then got dropped to $1600K.

So if you buy at 449k,

After you put 100 thou down, you're looking at $2400k per month

Total Interest paid: $341,770
Total Tax $168,375
Grand total $860,145

Why would you do this to yourself, especially when your neighbors paid 100-200K LESS for similar houses AND property values are declining?

You gotta love the lie or the RE Ponzi. You can't love a little house enough to do this, IMO, it's just an object.

Rita said...


You're right that Baby Boomer sellers are clinging to the asking prices of 2006: They have little (or no) net worth, and chances are their retirement account has recently lost money in the market crash.

These are tough times for boomers. Many are delaying their retirements and many are planning to work after age 65.

My blog is The Survive and Thrive Boomer Guide at


Anonymous said...

702 Belmont has an open house today. Sunday April 5 1-3 pm.

Philip said...

Excellent presentation. The struggle of baby boomers and others in denial who have not accumulated enough and are desperately holding out for higher prices is true in many places.
Two caveats. First, owning will probably stay expensive relative to renting in more desirable areas. But renting is the way to go objectively. Second, gen x is the generation born roughly 1965-1980. Baby-boomers were born 1946-1960.

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

Anon #1, thanks for that important distinction. We made the corrections.

Waldo, Anon #2, and Belmont Hood, thank you for the examples. Waldo, we're curious to see if Jason Crigler from Crown Mtg Svcs and Mortgage Buzz will have any commentary on your scenario.

Rita, thanks for the link.

Philip, thanks for the demographic distinctions. We know some late baby boomers, aka the Generation Jones, born between 54 & 63, who consider themselves Gen X'rs in terms of habits, taste, and predilections, and know that some demographers, social sci's, etc., include them in the Gen X numbers as well....You also see them here in the Hook: you know, the middle-40's couples who just got around to having a baby or two and are shopping for their "starter home".....

Re owning v. renting...and owning in a desirable area will remain more expensive: Yes. But it makes less and less economic sense.

For some people, actually retiring at some point before they die vs. "pride of ownership" just don't compete anymore.

Now that the longterm investment strategy of the stock market is gone for everybody, and houses won't sell for what they used to--even here in Nirvana--people need to hold on to cash more than ever.

A house isn't typically an investment; it's a place to sleep, play, eat, and pray.

jason said...

Waldo, it sounds like you have a credit profile that is attractive to creditors/banks - you're a low risk borrower. But as you touched on, the Lending Tree utopia is no longer and we're now living in a different financial landscape. The credit crunch is still alive and well.

Keep in mind that the mortgage market is being propped up by the Govt through Fannie/Freddie, FHA, VA & USDA. A borrower with good credit and equity will get a better deal through a conventional program (Fannie/Freddie) compared to a borrower with lower credit and equity. But your suggestion about getting the same deal as a 650 credit borrower is correct if you're talking about Govt Agency loans through FHA, VA or USDA. That's how they're setup - they're "subsidy" programs. The "good" subsidize the "bad". (Conventional doesn't escape this entirely, though)

Mortgage programs have been scaled back across the board, including the type you need which is a construction or construction-permanent loan.

Philip said...

You raise very good points. Firt, about aging baby-boomers' attempts to act younger than they are and postpone the inevitable aging process. (I am one of the older boomers.) Second, that changing attitudes about "investment" over time will affect the rent-buy dynamic.

I think it would be interesting to see (1) how much asking prices have come down in many cases, but certainly not all or maybe even most. (2) compare eventual sales prices of houses sold so far in 2009 with their asking prices even after price dreductions. (3)How many empty houses are on the market? (4) Check the houses that are both for sale and rent and see what the multiplier there is.

If, as seems likely, the spring selling season proves to be a bust, attempts at a positive spin may wither.

michael guthrie said...

owning has always been more expensive that renting in desireable areas. this is not new to this market. this statement is true everywhere I have ever lived. the question is "do you want to begin building equity" in a home that is not exactly your dream home or continue to save and hope prices where you want to live come down to a price you are willing to pay.

Philip said...

I agree completely. My wife and I are renting now elsewhere but we're willing to buy in Charlottesville at today's lower prices even though they may well fall some more. Renting is only a temporary solution for us.