Tuesday, December 13, 2011

3 Realtors and A Bubble Blog, Part 3 - On the Charlottesville Area Housing Market and the VHDA Forecast, Unemployment, and Mortgage Rates

This is the third in a four-part series.

Since the second 3 Realtors and Bub Blog post, more info has rolled in:


1. In reviewing the VHDA Report on Charlottesville Market, what jumps out at you?

For the past several years, Barry Merchant, senior economist with the Virginia Housing Development Authority, has made a presentation to the C'ville Area Association of Realtors, covering sales, prices, mortgage issues, demand, foreclosures, short sales, nat'l issues.  The previous two years' reports may be found here; and this is the report for 2011.

Searching for a New Bottom, after expiration of 2009-2010 Homebuyer Tax Credit


Not much has changed. Uncertainty remains the greatest enemy, second only to politicians' insatiable urges to prop up the housing market, when what they need to do is get out of the way.

Last year Merchant opened with:

• Recovery of employment
• Reduction in mortgage defaults
• Stabilization of home prices
• Revival of a stable private mortgage market

Not much has changed, year over year. Unemployment remains a huge challenge, defaults and short sales remain sizable segments of the Charlottesville real estate market, home prices continue to subside.

This year he mentioned student loans and the impact that they are going to have on the housing market. This has been something with which have been concerned for years. I met someone last night whose daughter is graduating from med school with $200k+ of debt. She won't be able to buy (or want to buy) a house for years. This is going to be a tremendous issue over the next few years. (decades?)


I always look forward to the Merchant report.  When I saw his first report a few years ago, I knew immediately it would help us explain the market and support what many of us knew, but did not have the graphs and data to support on a local level.  Looking back, the affordability chart was always the most interesting to me.  Unfortunately, he did not look at it again.  His analysis of loan defaults, underwater homeowners, and the distressed inventories are very important.  It's important to note we are in better shape than many areas around the state.  His position has moved from not predicting a bottom to 'the worst is behind us.' I liked the way he stated the current conditions than moved his attention to the future and the obstacles we need to overcome.  it's impossible to predict the future, but I think his timelines are pretty good.


The affordability chart is Slide 25 of last year's presentation.  It shows that many homeowners have been paying 5-6x their salary for the median price of a single family home, whereas analysts believe that a "safe" ratio of borrowing is 2-2.5x annual salary.  In the C'ville Area the median income (2008) for a family of 4 is $68,500.

As of mid-year, median price had slid -13% since 2008, from $308k to $272k.  That's an aggregate price for the single family home in the entire MSA.   Certain areas are having larger collapses in pricing, which is bad for sellers but makes housing more affordable for buyers: the Scottsville area, North Garden area, Schuyler area, plus Louisa and Fluvanna and Nelson Counties.  The closer you get to the City, and to Glenmore/Keswick to the East and Crozet to the West, the higher prices are, and more in line with 5-6x median income for a "family sized" home or mini-McMansion.  Not that many are selling; the prices are stickier, and there are a lot of sellers taking losses.

What C'ville Bubble finds interesting is what is not in the VHDA presentation:

MICHAEL GUTHRIE didn't include a specific answer to this question, feeling that his other answers covered the same material.

2.  Do you have an understanding of the jobs situation in the Charlottesville Area?  Any hopes for housing getting  a lift from jobs? 

Unemployment recently dropped.  But it is still high for the areaIt has more than doubled in five years...and five years ago we were still in the grip of the bubble.  In November, 2007, C'ville had one of the lowest unemployment rates in the nation: 2.1%.

Current rates:

C'ville  5.7%
Albemarle 4.7%
Louisa 6.7%
Greene 5.2%
Fluvanna 5%


(Image is from the EVAP)

I  meet a lot of people who move into the area and I'm always surprised at the diversity of backgrounds that cross my path.  This is a remarkable place to live.   I don't have much to share on this topic.  There is a slide on this topic that references "boutique manufacturing."  I find this interesting.  I think there are a lot of small, niche companies in this area of which a lot are unaware.  I'm often surprised by how far folks are willing to commute to get their families into this area.  A recent client of mine commutes to Atlanta on a weekly basis.


Small businesses remain a positive segment of our market - Charlottesville provides a welcoming environment for startups, but the employers who scale - UVA, Government/defense jobs are seeing more short-time contracts (gov't) and long-term buying decisions. I have heard of a few employers who are considering moving to or growing within the Charlottesville region, but nothing concrete as of yet. I have reasonably high expectations for the impact that CFA is going to have on the local economy. They're a solid, stable, large company that is poised to provide economic stability and growth both to that part of the City but also to the Charlottesville/Albemarle urban area. There are likely to be ancillary jobs associated with them as well.

As with number one, uncertainty remains the greatest concern; buyers not feeling confident in their employment situations and sellers faced with losing their jobs, having to move, wanting to move, job/life mobility has become a much greater issue.


I don’t think the employment situation is as bleak as some would like to have you think.  I have heard that NGIC is done hiring but I have also heard there are more to come including another department that will come because of BRAC.  Suffice it to say, the 10% defense cut will certainly curtail some of this movement at least in the short term.  What some don’t realize is that a fair amount of private defense contractor jobs are coming in to support NGIC.  I have heard as many as 3 private jobs for every on NGIC/DIA job although that seems quite high.

There are small private firms around the area who are quietly growing as well.  Many of the folks they are employing will rent initially but I believe will become 1st time buyers once they get themselves established and know their jobs are secure. Should mortgage interest deductions go away for 2nd home owners, this could curtail another segment of folks who will at least think twice about inventing in a 2nd/resort  home.


In Charlottesville / Albemarle, private sector jobs have vanished: a net total of 11 new jobs were created in 2010.  Boutique Manufacturing, which Greg Slater mentions, and some financial employment, which Jim Duncan mentions, will provide some homebuyers: but not enough.   Five years ago City unemployment was at 2.1%.  The lack of high-paying jobs combined with what is high unemployment for this area helps explain the glut of unsold houses in the $400-800k range, which for this area was the "move up" price.  The feeling of wealth and optimism and striving for the "upper middle class" has evaporated from this area.  And now buyers can get new houses (and smaller, greener) for less than what the bubble era current sellers paid.  Toss in to this the fact that 1 in 5 local residents can't pay their bills...and you see how small the pool of available buyers is.

NGIC is pretty much done hiring locals (+/-75 jobs) and importing potential homebuyers.  UVA has announced 200 teaching positions over the next 5-7 years, some of which is replacing retirees; this will be a trickle of buyers starting around 2014.

3.  What are your hopes or fears for what's being rumored in the mortgage pipeline...3% interest rates?  Do you think more buyers will wait for this?  (word is 6-9 months from now)


I am more worried about interest rates going up rather than them going down even more.  Should the government slowly stop buying mortgage backed securities, the end result will be increased interest rates because the private sector will demand a better return on the their investment.  If I am correct then buyers waiting for lower home prices will lose some of their buying power of about $10,000 with every ¼% increase in interest rates.


Interest rates - I'm not going to speculate on what interest rates are going to do or not do, but I'll say this: interest rates aren't going to matter until they rise above 6%. They're low. They've been low. They're projected to stay low. When they rise, they are going to affect affordability (make it harder to buy) and home prices (likely drive them down). What matters now is that if you're buying, buy well and smart and be confident that you're going to be in your home for at least six to seven years so that you can take advantage of the low rates and the stability provided by a consistent mortgage payment. If you're moving to the Charlottesville area, rent first.


No hopes or fears.  I don't know many who are willing to predict the future of interest rates.  I have not come across anyone waiting or thinking of waiting for lower rates in the future.  I think the market takes interest rates in the 4% range for granted now and the fluctuations are less impactful than ever.


If we see 3% rates, it will be because the Federal Gov't / Federal Reserve has taken some kind of action specifically to boost the housing market and specifically aimed at the First Time Home Buyer.  For a $225,000 mortgage, w/ 3.5% down, add in PMI, assume +/- $2k annual taxes, and the difference between 3% interest and 4% rates is about $120.00 a month.  That's a cell phone bill, or the cable bill, or a latte habit.  If a buyer can't afford the home at the 4% rate, they shouldn't be buying. There are some nice sized houses out in the Counties now mid-$200's and below...but buyers have to include car gas as part of their monthly housing bill.

One reason many sellers stick to their prices is because mortgage rates are so low.  If mortgage rates rise (and there should be no significant movement until mid-2013, according to the Fed's current plan) home prices will continue to fall.  Homebuyers can only afford so much, in a Country, and a Commonwealth, where wages have stagnated for the past decade. 

Stay tuned for Part 4.

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