Thursday, March 18, 2010

9 Reasons Home Prices Will Continue Dropping in the Charlottesville Albemarle Area

Forget the Snowpocalypse.  It looks like a "perfect storm" is hitting Charlottesville Area real estate.  

It's Spring Selling Season, and transactions are happening.  But inventory is piling up, and buyers are wary of making money mistakes.  More than ever,  "asking" prices in this market are sellers' hopes that buyers will not fulfill.  2008 saw the slowest sales in a decade.  And then, 2009 ended with even lower sales.  2010 kicks off with Government subsidized mortgage rates and the Homebuyer tax credit.  Come April 30, it's anybody's guess how low sales volume and prices will go.

Prices are primed to continue dropping--and drop fast, in some cases.  The Virginia Housing Development Authority lays the groundwork for what to expect in the February 4, 2010 presentation to the local Realtors Association: "The Charlottesville area market is likely to remain weak in 2010 and into 2011."

These are the elements putting "downward pressure" on Charlottesville Albemarle area real estate prices right now:

  1. Short Sales
  2. Foreclosures 
  3. Shadow Inventory
  4. Lack of "short term"buyers
  5. Lack of "move-up" buyers
  6. Higher Mortgage Rates - 2(?) weeks away
  7. Expiring Homebuyer Tax Credit - 5 weeks away
  8. Declining Tax Assessments
  9. Unemployment
    "For every regular purchase, there's a short sale"  Is this anecdotal observation accurate? Half the market is comprised of sales where the bank has agreed to take less than what the mortgage holder owes?  Even if the number were one in four, it would be shocking.  

    Short sales come about due to unemployment, a mortgage resetting to higher interest rates, lacking enough equity to refinance, etc.  Starting in April, the Obama administration is giving homeowners and banks incentives to complete more Short Sales. 

    That this area has a lot of short sales is to be expected.  Charlottesville had a big bubble.  Many of these short sellers bought in the past seven years, when Charlottesville was the 64th Largest Bubble in the Nation (see "Appreciation," ca. 2007).

    Examples of short sales: here  and here.  


    Foreclosures in the Charlottesville Area rose 57% from beginning to end of 2009. 

    There's an idea floating around that compared to the rest of the state, this area's foreclosures just aren't that bad.  Wrong.  Compared to the volume of overall home sales, the volume of foreclosures is staggering. (See "Shadow Inventory," below.)

    Currently, one in 10 Virginia mortgages are delinquent or in foreclosure.  Foreclosures at all price points, are not going to abate any time soon. The Virginia Housing Development Authority says, "Prices will remain depressed until inventories are reduced and the foreclosure rate declines." 

    When foreclosures come back on the market, they're always cheaper than what the bank paid, and much cheaper than how individual owners price their properties, and exert downward pressure on other listings' prices.

    Foreclosure examples: here and here. 

    More foreclosures will occur due to resetting loans, including interest-only and Option-ARMs.  From the VHDA: 

    3.  SHADOW INVENTORY 2009...and 2010

    All of these foreclosures create the large  Shadow Inventory from 2009 that's exerting downward pressure on prices.  These properties return to the market at lower prices than what the bank paid, and much lower than what individual sellers ask.  As stated in #2, this is an issue of volume. 

    What does "large" mean?  Consider:

    The Charlottesville Area Association of Realtors asserts there were  2,565 home sales in 2009.  However, there were 987 foreclosures in 2009That foreclosure number is 38% of the "sold" number. 
    Deduct  2565 "sold" -  987 "foreclosures"  =  1,578 actual sales for 2009 

    Some of the 2009 foreclosures already came back on the market and were resold.  But the rest will pop up in 2010.   And the 2010 Shadow Inventory continues to grow: check out Google Maps for local foreclosures.  

    What else is in the "Shadow Inventory"?  One big component is homes that sellers would like to unload, but are holding off, waiting for the market to "come back."  


    This market, with its declining values, is a perilous one for "short term"--under four years--let's be realistic and say seven years--buyers.   The now-dead "protected market" claim came from the idea that there would be constant fresh blood coming in, needing housing, due to UVA, Martha Jeff, and defense.  But many of those who have short commitments can no longer afford to buy without fear of $$$ loss.  Agent fees, closing costs, and just 3% annual upkeep adds to any downpayment that might be eaten by declining values.  


    This area's lack of move-up buyers is a significant, and ongoing, problem.   See these posts.  The high end of the market remains slow.


    Rates are expected to rise in two weeks. If they do, it's more bad news for sellers.  Because look what happens to prices:  On a $300,000 loan, the difference between a 5 percent rate 6.5 percent is $300 per month.  That's nearly $100,000 over the life of the loan.  So if rates do go higher, those larger monthly payments will cause housing prices to fall.  The WSJ takes a look at the impact of the Fed's behavior after March 31.


    This gift from a Socialist government  incredibly expensive attempt to prop up home prices judicious effort aimed at normalizing home sales expires in less than 6 weeks. With 58% of the current sales below $300k (as of early March), many buyers are using the tax cred as downpayment or for closing costs.  Take away "cash-challenged" buyers, and you take away the large part of this area's market.

    A tax assessment is not an appraisal.  But it is an indication of what a buyer paid last year for a similar property.  Tax assessments and asking prices are diverging now, sometimes wildly, not just in the tens but the hundreds of thousands.  Asking prices are often much more than assessments.   
    Buyers pay particular attention to tax assessments.  There has to be something extra special about a particular property for most buyers to pay more than the tax assessment.

    An extreme example of divergence at the high end is 1932 Blue Ridge Road, MLS #474114, Asking $2,485,000.  Assessed: $1,390,600.  
    And at the low end:  1421 Cherry Avenue, MLS #474721, Asking $224k.  Assessed: $157,500k.


    Update: 3/19 - 20 yr high: Charlottesville City unemployment jumps to 8%; County at 5.9%; Fluvanna 6.6%; Greene 6.7%, Louisa, 9.9% stats from January, released in March.

    Unemployment doesn't need to increase in this area for prices to continue dropping.  (And then it did--Update March 19.) likely will rise, due to City, County, and State budget tightenings.  Virginia just bumped up to 6.9%.  Charlottesville's area unemployment doubled in the past year.  

    Update: Jobless rate rose in February, as reported in late March, to 7.2% seasonally adjusted.   Virginia shed the most jobs Jan-Feb of any state in the union.

    While some will take solace in the fact that unemployment rates are lower here than elsewhere, the glitch in that idea is that home prices are higher.  Somebody who is unemployed in this area has farther to fall, faster, than somebody who has a lower mortgage payment.  If folks here are paying 6x their income for a house, versus 2.5x historic norm...."look out below."

    In conclusion, here's an explication of the obvious, courtesy of the VHDA:

    Snowmageddon was a walk in the park compared to the maelstrom in this 2010 Spring market. 

    Images copyright/courtesy of Virginia Housing Development Authority and CAAR.  Click for larger views in new windows.

    Top 10 Homebuyer FAQ (most interesting part of post is comments)
    The VHDA Presentation on C'ville Area Housing Market, Feb. 2010 
    2009 Sales in Charlottesville Area
    Graphs and Charts of incomes, sales, prices, appreciation
    The Shrinking Pool of Local Buyers


    Anonymous said...

    Match Day today and you don't find this information on any of the local real estate blogs or sites. What a surprise!

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

    Jim recognizes the issues: "This is going to be a telling year, as many of the outgoing UVA Residents are going to be selling and (some) incoming UVA Residents will be buying. Anecdotally, far fewer folks are buying than have in previous years."

    The post describes SunTrust doctors loans, w/100% financing, low interest. And then there's the $8k tax credit. In the past, many residents have chosen to add hundreds of thousands of dollars of mortgage debt to their hundreds of thousands of debt in college/medical school loans. Seems craxy--but not when it was a national trend.

    But this is a different economy.

    downtownenvy said...

    Bubblers, thanks for even more evidence of the state this local market is in right now.

    I feel more certain than ever that next spring will be a better time to jump into this market. Of course I said that last spring, but I am an eternal optimist that way ;). I still love Charlottesville, and I am still willing to wait.

    Anonymous said...

    211 Alderman $125k price reduction mls 474849 $699k, last year $825k, still won't sell because it's in the heart of UVA district, heavy traffic, and frugal is the new black

    Anonymous said...

    anyone care to speculate how much the average selling price for a detached home will decrease by this time next year? sure would make this blog entry more interesting. i'd say 3%.

    Anonymous said...

    would you expect high priced condos (>400k) to decline a lot more than single family homes?

    Anonymous said...

    both anonymouses,
    what would cause prices to rise?

    why wouldn't condos drop? the market is totally oversaturated with them

    Peter said...

    BubbleBloggers write: "Jim recognizes the issues [...]"

    Jim needs to stop endangering everyone's lives while producing his self-promoting sales videos WHILE DRIVING around our community.

    I can only hope he stops himself -- or that the legislature outlaws this dangerous behavior and he's summarily apprehended -- before he injures or kills someone. Forget texting, he's directing! It's reprehensible behavior.

    Bleed It said...

    Condo guy, look at this realtor's blog post about condos.

    Condos look like they're in more trouble than single family places except single family inventory is getting bigger by the hour.

    Neg60klady probably can think of a reason condo prices will go up next year, but nobody else can.

    Neg60K Lady said...

    Ok Bleedit I'll bite...

    For a different point of view, David Bach (the latte factor guy) thinks that the current combination of high inventory, falling prices, and low interest rates only comes around once every 20 years or so.

    Is your crystal ball accurate enough to time the bottom? Many have tried and failed...

    Anonymous said...

    Neg60K, February sales were down here, and cry "weather" all you want, just like the NAR. People should be running out and buying due to tax credit and mortgage rates but it's just not happening.

    In terms of prices this post has local data that indicates prices will go down.

    Please present local data that prices are going to stabilize and/or go up in the next year, besides "hope." "Hope" isn't data.

    We're nowhere near the bottom.

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

    Mortgage Rates Jump Up, Inventory Rises, Local and National Sales Are Low