Monday, November 16, 2009

Charlottesville Albemarle Area Real Estate: To Buy Or Not To Buy, That Is The Question

And if you do decide to buy, how do you decide what to offer?

This post is an aggregate of the local, regional, and national information that is currently available (mid-November 2009) to buyers.  It comes six weeks into the Fourth Quarter of 2009.  It quite possibly tells a buyer (and seller) everything they might need to know ()....And if it doesn't, there will surely be additional material posted in comments.

This post began in response to a query by a reader who says s/he is about to buy, in the comments after a post about the extension of the Homebuyers Tax Credit. 

To recap, the buyer is looking in Western Albemarle County, desiring something close in to the City of C'ville, about 2500 sq ft, 4 bedrooms, 2.5-3 baths.  The buyer has been watching the market and believes purchase prices have dropped 15-20% in the past year, and that there is not much further "flexibility" (ie, declines) coming in that particular area; additionally, rents seem to be holding steady in the area where buyer wants to be. 

Q: So why should the buyer wait?

Answer #1:  The buyer shouldn't wait.  As we noted in the comments, they have compelling reasons to buy: they want to settle, and they want control over their environment.  They seem to have come up with a numbers scenario (downpayment, morgate math) with which they can live.  And if the buyer is going to buy right now in the half million range, they are obviously secure in their employment.  They have saved a large downpayment, in addition to a year's worth of living expenses in the event of illness or job loss.  Additionally, the buyer must have enough financial "cushion" so that if the house drops in value, they can weather the loss of equity.  And part of the "weathering" would come from the fact that they plan to stay put for at least seven years.  (What would make the value drop further?  A rise in foreclosures at that price point due to Option ARM resetting, or a sudden onslaught of those waiting to sell putting their houses on the market, or an increase in unemployment...to name a few).  So if all these elements are in place, sure, why not?  Why not buy? 

Answer #2:  The buyer should wait for several reasons:

A.  Because of what "Crunching Numbers" says in the comments:  To rent will be $1850 per month, while to buy will be $3250 per month.   UPDATE:  but is this math accurate?  See how Crunching Numbers gets to these figures here, and then read the original commenter's disagreement with the numbers in the Comments section following this post.  The  rent versus own numbers are much closer in terms of what the original commenter considers monthly expenses.


B.  Additionally, there are many unknowns in the housing market right now--locally, regionally, nationally.  And if a buyer doesn't negotiate a prescient deal now, there's lots of financial chaos that could ensue.  (For a proposal on how to make an offer on a house, see Salvatore's comment after this post.)  (And if you want yr blood to go cold, read around here.)

It's the knowns, and the unknowns, to which the rest of this post will be devoted--things that would make some buyers wait.   It's these local topics:


1.  Appreciation
2.  Wages v. Home Prices 
3.  Sales
4.  Unemployment
5.  Foreclosures
All leading to 

6.  "Recovery" 

Before getting to the list, however, a few things to keep in mind: 


The "bad news": 

1.  The Federal Housing Administration now has about 40% of the housing market, from about 2% a few years ago.  It now guarantees one in five loans for single family homes, and its cash reserves are below what Congress mandates.  Bailout?  No: Treasury.  In announcing this debacle the other day, Housing and Urban Development Secretary Shaun Donovan  said "We are in an exremely volatile period...We are in uncharted territory." (Read more here.)  
2.  Mortgage rates for 30 yr fixed are below 5%...but mortgage applications are at a nine year low.  
3.  Foreclosure filings were beyond 300,000 for the 8th straight month in October. 
4.  More than 2.4 million homes are expected to be lost to foreclosure in 2010.
5.  Making Home Affordable, the mortgage mod program, has not actually helped 4 million homeowners avoid foreclosure, as per original projections. 
6.  Fannie and Freddie are due for more losses.   That is, the taxpayers are.
7.  National Unemployment is at 10.2%, and a shocking 17.5% when including underemployed individuals, those who have stopped looking, those whose hours and wages have been cut, etc.
8.  Shadow Inventory, estimated at 7 Million Homes.  Mortgage guru Howard Glaser, via Realty Check:

What I am most worried about is March and April of next year.  What happens to a housing market that seems like it is finding its footing at that point?  Because several things will happen simultaneously:  You've got the option ARM resets beginning to kick in, you have the home buyer tax credit expiring, maybe for  real that time, and you have the Federal Reserve maybe running out of money to buy mortgage-backed securities. If we add on top of that, banks beginning to release some of this inventory ,which they have been holding on to for a long time, those three items are potentially very destabilizing to the  marketplace.   So I'm concerned.  I think buckle your seatbelts for Spring of next year.

9.  Housing in VA won't regain its values until 2023.

The "Good News": 

1.  The Homebuyer Tax Credit has been extended/expanded, and is in place until April 30, 2010. 
2.  The Federal Reserve has extended its purchase of Mortgage-Backed Securities through March, 2010, which should effectively keep mortgage rates around 5%. 

Now, to the list.  Everything that comes below tells the Buyer one thing:  The Asking Price is a starting point.  And usually a high starting point.  The Offer needs to take all of the following info into consideration.  Starting at 10% below asking, and making further deductions--and as frequent commenter Downtownenvy says, The best tool for negotiating in this market is your feet.


1.  APPRECIATION

Area Appreciation
Anybody who has lived in the area for more than a couple of years has seen housing prices, and asking prices, skyrocket; only recently have both begun falling.  The real data?

The Federal Housing Finance Administration (FHFA, formerly the OFHEO, Office of Federal Housing Enterprise Oversight), compiles data on pricing in a purchase-only, seasonally adjusted index.  For existing single family (detached) homes in the Charlottesville Metropolitan Statistical area (Cville, Albemarle, Greene, Fluvanna, Nelson):

Five year appreciation: 2005-2009 Q2: 33.70%.  The Rank is 168 of 296,  -3.58  for 1 year,  -2.56 for the quarter. This is the "slow down."  See pdf.  But the bigger jumps come earlier.  Data to 2007 shows: 


The 10 year appreciation ending in 2007 in the Charlottesville MSA was 135%.  Charlottesville ranked 64th.  See here.  Note that for the 10 year appreciation, most of the states ranked higher than Cville are all "Big Bubble" states--California, Florida, Arizona, New York, Maryland/DC. 


The five year appreciation (2003-2007) in the Charlottesville Area was 69.22%.  Charlottesville ranked 74th.  See here.

For FHFA  quarterly percentage increases, go here.  Maps of Metropolitan Statistical Areas here. 

The logical responses to these numbers are HUH?  and WHY?  Bubble, and "protected market."  To put the bubble years in context, let's look at 

NATIONAL APPRECIATION 

Throughout the recorded history of home sales, which is about a Century, property appreciation has been startlingly consistent, averaging about 1% per year, plus 1-2% for inflation.  In Bubble periods, it's a whole other ball'o'wax...until it isn't.

Click for larger image in new window 

 
The chart in its original is here; the updated version (above) is from The Big Picture.


2.  WAGES V. HOME PRICES

As in many areas, wages and home prices got detached from each other during the bubble.  This was possible due to "liar loans"--no necessity to state an actual income, or to prove it, as well as Option ARM loans, a loan that would start low and eventually reset to a higher rate.  According to the Thomas Jefferson Partnership for Economic Development, in a recent presentation to the Charlottesville Area Association of Realtors, 


The average wage in the Greater Charlottesville Area is $42,588:
Click for larger image in new window 



Historically, the prudent buyer would spend no more than 2.5x annual wages on a home.  The Charlottesville MSA is one of the most expensive areas of the state, where buyers have spent nearly 6x income for a house.  The following graph is from the Virginia Housing Development Authority
Click for larger image in new window


The orange bar is where we are now.  


Median and Average Prices for Sold Single Family Homes in the Charlottesville MSA:
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THE NATIONAL MEDIAN HOME PRICE IN Q3-09: $177,900.


According to the VHDA,
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Red line = Cville.  Earned wages and housing prices don't have a realistic relation to each other in this market. 


3.  SALES 

Is it any wonder that with the fairly low median wages combined with high appreciation and the end of "easy" mortgage products,  area sales are at a decade low? 

The graph below is from August 2009; in September and October there were stronger sales than seasonally expected, as the $8k homebuyer tax cred was slated to expire November 30. 

"May be near bottom," as the graphic says, is hopeful speculation on the part of the VHDA.  Sales have picked up in other parts of Virginia due to mass foreclosures which caused rapidly falling prices and made housing more "affordable" than during bubble years.

Click for larger image in new window




Another graph, this time for all of Central Virginia, through the end of 3rd Quarter 2009, September 30.  Data from CAAR, graph from a reader.
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When things do sell, they're at the lower price point. As an example, 69% of all single family (detached) home sales in the City of Cville this year have been under $350K:


Via Nest Realty.

There's been a significant lack of move-up buyers, and higher-priced homes are selling very slowly.  "Higher priced" as in above $500K; and above $1M in this area?  Fuggedaboutit.


TOTAL SALES through the 3rd Quarter in 2009 as compared to 2008, via Nest Realty Group.  The Group decided to include Louisa in these stats, hence the "E" for extended.  (Louisa is not part of the Metropolitan Statistical Area.)
Click for larger image in new window

Lastly, the Charlottesville Area Association of Realtors publication of total sales numbers for the 3rd Quarter in 2009 and previous years.  "Total sales" include single family detached houses, townhouses, condominiums.  Again, notice that areas outside of the Metropolitan Statistical Area are included: Louisa County, Orange County, Greater Augusta (Augusta County, Cities of Waynesboro and Staunton):

Albemarle County sales down 50% from 2005 peak
Charlottesville sales down 48% from 2006 peak
Fluvanna sales down 63% from 2005 peak
Greene sales down 45% from 2005 peak
Louisa sales down 36% from 2005 peak
Nelson sales down 71% from 2005 peak
Orange sales down 55% from 2005 peak

Click for larger image in new window


WHICH, of course, brings up the question:  IF SALES ARE SO SLOW, WHY AREN'T PRICES ADJUSTING MORE QUICKLY?

THIS is the quarter million dollar (half million dollar, million dollar) question, isn't it?

4.  UNEMPLOYMENT 

Local Unemployment has doubled in the past year.  It is currently at a 20 year high.  UVA has a wage and hiring freeze.   The troubles are not necessarily over.  Private business growth has ended, and jobs are declining. 

And evidence of this is everywhere you look, in the form of commercial real estate signs "For Sale," and "For Lease."

NGIC and DIA are bringing jobs to the area--but they're already spoken for.  In the future, the employees may require goods and services that create new jobs: but this growth will be slow, over the next few quarters/years.    

The latest round of cuts?  Postal Employees face the axe.



5.  FORECLOSURES

Add the following foreclosures numbers for the Charlottesville Area, and the result is 676.  The total sales for same period YTD for the Cville MSA are 1559...676 is 43% of 1559....

So nearly half of what was sold was replaced by something that will once again come on the market...and at a lower price. 

Add this to the inventory from sellers who are "waiting out the market" to list?  Buyer's market continues....



And there will be trouble from Alt-A loans:




The VHDA presentation opens with the following slide, but we'll close with it:





But what does "recovery" mean?  A return to pre-bubble prices?  A drop in asking prices?  A return to the historic metric of price-to-2.5xwage ratio?  Sales levels that don't keep declining?  A halt in foreclosures?  A point of view that understands that a house is not an "investment" primarily, not a profit machine or an ATM or HELOC, but a place of comfort for an individual or family? 

Related Reading
Virginia Housing Development Authority Forecast Link  
Lack of Move-Up Buyers in Charlottesville/Albemarle
Median Prices Charlottesville Albemarle Area 2001-2009 
Higher Priced Homes Sell At Snail's Pace
 Graphs Showing Declining Sales 2003-2009

17 comments:

downtownenvy said...

Great post guys and gals. Love all of this info. Every time my friends ask why we haven't purchased yet, I just guide them to your website.

Anonymous said...

Very helpful summary of present state. Thank you.

Anonymous said...

Hey, this is the original "Anonymous" headed seriously toward buying. I responded at length back on the older post to the "Crunching Numbers" claim that to buy at $520K down is equivalent to $3250/mo., and that this number is to be compared to $1850/mo. for renting a comparable property in a comparable location. Since you repeat this claim in this current post in bold, though, just wanted to reiterate here that

1) I never claimed that $1850/mo. in rent would secure a home for my family comparable to a $520K purchase-price house. In fact I don't think it does at all in the area where I'm looking. We're jammed in an $1850/mo. rental with no yard that we're really uncomfortable in, looking to buy a comfortable house in a great neighborhood for around $520K. My original post noted that then paradoxically, seeing the difference in what we can get for the rental vs. the purchase, these two options didn't seem that far apart in overall costs over the relatively near term, according to the buy-vs.-rent calculators, even though we would get WAY more house/land by buying.

2) I disagree rather strongly with "Crunching Numbers" that to purchase a $520K home with 20% down at current interest rates nets out to $3250 a month. He/she got that number by doing things like insisting that 6% of the total purchase price be factored in monthly over the first five years (to pay off a hypothetical realtor when we hypothetically sell the house we are not intending to sell in the next five years); totally ignoring the very real tax savings we would gain on the mortgage interest; charging us 1.8% annually "opportunity cost" on our invested downpayment, when any anti-bubble blog will tell you that housing has historically appreciated at that rate, so what's the cost there?; including homeowner's insurance while ignoring renter's insurance (and the fact that renters are charged much higher rates to dollar amount covered--for us it breaks even); and assuming that our rent will hold static over the next five years, which is ridiculous especially given likely inflation. "Crunching" my own numbers I come up with a difference of $20.00/month to own a $520K house bought today five years from today versus continuing to rent the same dump we're renting now for $1850/mo. with an annual rent increase of 2%/year. And using the NYT and Bankrate "buy vs. rent" calculators comes out a lot closer to my amateur math than to that of "Crunching Numbers."

Just saying, since the "Crunching Numbers" post is cited here as truth. If there is something real obvious I'm missing in that truth, pls correct me.

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

Thanks for inputting the numbers here, original anonymous. It seems that both calculations are the kind that buyers would take into consideration. Some buyers won't include agent fees or closing costs in their monthly calculations, looking at them as one-time events, but others will. For a buyer who is comfortable doing the former, such as yourself, the monthlies are much closer to each other in amount.

There will be a note in the post as well directing readers to comments here and in other post.

The link to the original post and comments (embedded above) is reproduced again here:

http://realcville.blogspot.com/2009/10/homebuyer-tax-cred-extended-through.html

Not Anonymous said...

Anonymous buyer, you sound like you've given this a lot of thought but you should still read the Mark Hanson post about the coming price declines and foreclosures of the $500K + market, a "slow moving trainwreck of mid to high end housing' and borrower reality from "Mr. Mortgage"
This was cross posted on Business Insider. Go to

Mark Hanson's Blog

Anonymous said...

Thanks!

downtownenvy said...

This is the kind of information that is keeping us from buying immediately. We are also going to be looking long and hard at our own deal when our lease/purchase comes to the buying point in 12 months. No house is worth our family's long term financial health.

whee said...

$100,000 "appreciation" in 4 years. God Bless Glenmore! 3542 Glasgow Lane MLS 471533

Anonymous47 said...

I'm deeply impressed by the huge amount of statistics and opinion you assembled here, ostensibly in response to a reader's stated wish to buy a house in Western Albemarle.

Unfortunately, most of your opus in progress has nothing to do with answering the question. The primary issue is the buyer's financial situation, which seems sound and realistic. In addition, there is a big difference between buying and renting in terms of comfort and peace of mind.

Second is the local market, which has little or nothing to do with the national situation. Despite the continual whining on this blog, the fact is that Virginia in general and this area in particular have fared much better than the national averages during the downturn. The relatively low unemployment rate here is the best evidence of that.

Another fact is that actual selling prices have indeed come down substantially. The asking prices often are still too high. But then they are frequently reduced. And the solution is obvious: Make low offers!

In case you attempt to impugn my credibility, I sold my house elsewhere in early 2008, rented for 18 months and last summer bought a house locally for 20% less than the original asking price, with a 4% mortgage.

longtime reader said...

You must have missed Answer #1 Anonymous47 which states "buyer shouldn't wait." Your paragraph #2 says exactly what answer #1 does.

The blog does track price reductions and
periodically updates which properties sold for how much.

We've been on the market for nearly two years and have witnessed how much prices have come down in this area. They're still due to come down more which even our realtor recognizes. No other blog pulls together this info and there's no other source keeping track of it in the region that's not written by somebody who's trying to sell real estate.

To believe that this market has nothing to do with other markets in the area let alone nationally is foolhardy to the nth degree. There's an unprecedented property value and foreclosure crisis in progress. Its impacting all property values.

Congratulations on your purchase. Too bad it hasn't made you happier.

Real Cville said...

Anonymous47,

A state agency, the Virginia Housing Development Authority, is quoted in this post, and its graphics are used. Follow the links to the entire presentation.

VHDA puts this area into the context of other parts of the state with the understanding that the regions are interconnected, as are the economies. VHDA asserts that the area remains "unaffordable," especially when looked at from the perspective of earned wages to housing prices. The VHDA expects this area to follow other parts of Virginia in declining prices and rising foreclosures, through 2010.

This blog has frequently asserted that there are reasons, besides money, to buy a house. But to think that it is an "investment"? That's another story.

It seems like you are "whining" about something yourself. Maybe it's the presentation of State-generated data.

Debaser said...

Hi Anonymous47,

Please don't take this as an attempt to impugn your credibility, I am genuinely curious.

You write:
"the fact is that Virginia in general and this area in particular have fared much better than the national averages during the downturn."

Are you talking about the local economy or the local housing market? If housing market, what metric(s) are you basing this on?

Anonymous47 said...

Longtime reader says: You must have missed Answer #1 Anonymous47 which states "buyer shouldn't wait."

No, I did not miss it. Obviously, there are two answers presenting the pros and cons. But answer #2 presenting the cons is much, much longer, isn't it?

I agree fully—and have never denied--that prices overall likely have not yet bottomed. But my point here relates to one buyer purchasing one house.

I have also said several times in the past how helpful this blog was to me in the long process of finding and buying a house here.

That's part of my key point: Use the information to achieve your goals. Don't let it prevent you from doing that.

If you think the market in Charlottesville or Albemarle is related to the market in Florida, California and Michigan, you are sadly mistaken. Real estate is primarily local.

Why you say it's too bad my purchase hasn't made me happier is beyond comprehension.

Real C'ville says: This blog has frequently asserted that there are reasons, besides money, to buy a house. But to think that it is an "investment"? That's another story.

Of course. Therefore, why do you constantly present it as an investment decision only?

I certainly am not whining about your sacred "State-generated data." If you really need to characterize my post as whining, then I guess it's about your own whining.

Anonymous47 said...

Longtime reader says: You must have missed Answer #1 Anonymous47 which states "buyer shouldn't wait."

No, I did not miss it. Obviously, there are two answers presenting the pros and cons. But answer #2 presenting the cons is much, much longer, isn't it?

I agree fully—and have never denied--that prices overall likely have not yet bottomed. But my point here relates to one buyer purchasing one house.

I have also said several times in the past how helpful this blog was to me in the long process of finding and buying a house here.

That's part of my key point: Use the information to achieve your goals. Don't let it prevent you from doing that.

If you think the market in Charlottesville or Albemarle is related to the market in Florida, California and Michigan, you are sadly mistaken. Real estate is primarily local.

Why you say it's too bad my purchase hasn't made me happier is beyond comprehension.

Real C'ville says: This blog has frequently asserted that there are reasons, besides money, to buy a house. But to think that it is an "investment"? That's another story.

Of course. Therefore, why do you constantly present it as an investment decision only?

I certainly am not whining about your sacred "State-generated data." If you really need to characterize my post as whining, then I guess it's about your own whining.

Anonymous said...

Anonymous47, the unemployment rate maybe low in comparison to 10.2 nationwide or to the Southside of the State, but for Charlottesville it's terrible, at a 20year high. As for Virginia faring better, are you familiar with what has happened in NOVA in re: Case Shiller Index and price declines? 35%. Not in the District but further out. Closer to us, Culpeper is a disaster area. You don't want to compare the area to other markets except to say they're better? It seems like this area is just slower.

Anonymous said...

Sad to see you need to censor mildly critical comments. No wonder your readership must be dropping, as shown by the fact that your entries get so few comments any more. If a tree falls in the forest, etc. All your work for nothing. You guys are irrelevant.

Anonymous said...

So let's summarize. In six days, you've had a grand total of three comments, including one of your own. All three are related to Anonymous47, whom you are now censoring. Smart!!!