Since the first article is now a bit outdated and we’re currently in the works of purchasing a home for our own child headed to VCU, we think now is the perfect time to take a deeper look at the concept.
First, lets look at some pricing statistics for the past several years.
For the City of Richmond as a whole, pricing has gone up by over $63,000 in 5 years. For the areas immediately surrounding VCU, the number is a mere $55,000. Depending on which statistic you choose to measure, the annualized rate of appreciation is anywhere from 4.7% to a high of 7.8%.
Per our rental managers, the average cost of rent is anywhere from $600-700 per bedroom in a standard house.
If they rent a 1 bedroom studio apartment, the number rises closer to $1,100-1,200.
Comparable sales suggest pricing to be roughly $300,000 to $350,000
2219 Parkwood Avenue (pictured) sold in 2 days.
The 3 bedroom/2 bath home was 1872 SF and priced at $325,000
It is roughly 12 blocks from the Monroe Park Campus
So using the scenario above, you could:
Purchase the home for $325,000 and sell it 4 years later for:
$380,000, given only a 4% annual appreciation rate (+$55k)
$395,000, given a 5% annual appreciation rate (+$70k)
$410,000, given a 6% annual appreciation rate (+$85k)
Instead of paying $7,200 in rooming costs to VCU, you received $1,300 in rent per month from two roommates
Paid down your mortgage balance by roughly $20,000
(As a small disclaimer: The past does not guarantee what the future will look like and the type of loan you choose and interest rate you receive will impact how quickly you pay down the mortgage balance.)
Though there are some navigable hurdles, you can co-sign for your child and use a Maximum FHA loan that requires a very low down payment. There are also loan programs for non-owner occupied co-borrowers for less than 20% down. And finally, there are investor loans that allow you to purchase without requiring 20% down.
So all that said, you have options and not all of them require substantial amounts of cash.
So depending on what loan type you choose, we can help you find an originator who knows the market for investor and co-borrower loans.
But Aren’t Prices Going to Stop Rising?
Maybe if we solve the inventory problem or everyone decides to leave the city.
To solve the inventory issue, all we have to do is figure out how to build another, say, 3,000 or so houses per year around VCU (which if you aren’t detecting my sarcasm, is near impossible). Take a look at the chart below to get a sense of how incredible the inventory issue is in the City of Richmond.
And take a look at what the population of Richmond is doing:
So what we have is a really unique scenario: The rapid rise in prices is not due exclusively to a overabundance of risky buyers (a la 2008), but from a constrained supply of housing, especially in the urban neighborhoods, and a growth in population at a rate not seen in 50+ years.
Affordable and urban are the two safest and most recession proof segments of the market, by far.
So What is Available?
As much safety as the supply crunch offers, it does pose a buying challenge, and that is precisely why you need a good agent to help you.
Generally speaking, buying a home in an affordable urban segment requires immediate action when a target arises and a few contractual additions that will increase the likelihood of it being accepted (we can chat in more details about how we structure competitive contracts and how we tend to win more than we lose – we don’t want to publish all of our tricks for the world to see!)
Here is a list of the neighborhoods that surround the VCU campus and currently available housing:
Imagine sending your child to college, and then offering them a home as a gift to get their life started, or selling the home and paying off half or more of their college costs. Yes, there is risk in purchasing a home – stuff breaks, prices do sometimes go down, roommates might break a lease – but with all of the potential upside, the risks are minimal.
We are in the process right now of doing so ourselves… What could be a better endorsement than that??
In late 2016, I got a call from an agent who wanted to show a loft we had for sale in Manchester.
The Decatur Condos, an Architectural Digest level renovation of a century old warehouse, was – and still is – one of my favorite properties I ever represented. I was always happy to show it and tell its amazing story.
The agent and client showed up at the appointed hour and we toured the property. The client was relocating from out of town and wanted an upscale, urban loft. Knowing the property and the Manchester neighborhood as well as I did, I was able to shed a lot of light on both the development trends and the Downtown condo market, especially in the districts where the small supply of upscale lofts existed.
The tour went well and we left with, ‘Ok, cool. Let me know what questions you have.’
I followed up several times with the agent over the course of the next several weeks, all to no avail, and eventually figured that they had found something else.
About a month later, I got a call from the client who had toured.
She was impressed by our knowledge of the loft condo market and wanted to engage us as her representative. She was coming back to town soon and wanted us to set up some tours.
We were obviously happy to oblige, but the supply of upscale loft condos is relatively small. Finding the perfect industrial condo loft was going to be a challenge.
And this is where the story gets fun.
Knowing the Market
One of the first projects One South represented in the Downtown revitalization movement was a project called the Emrick Flats. Located near Broad Street in the Jackson Ward neighborhood, Emrick was one the first authentic industrial flats in Richmond. The concrete structure, highlighted by soaring ceiling heights, walls of windows, and private roof decks was located in the heart of Jackson Ward’s revitalized Arts District.
When Emrick was brought to the market in 2007, we were chosen to represent the developer in the sale of the units. As its listing agent, it was my job to sell not just the project’s units, but the lifestyle, neighborhood, and budding potential of Richmond’s Downtown. It remains one of the best and most fulfilling projects I have worked on in my time as an agent.
The Perfect Fit
Knowing the project as well as I did, I also knew which owners might be willing to sell, despite not actually being on the market.
One of the best units in the building was situated in the southern tip and was one of a handful of spaces with rooftop access. Furthermore, the owners had purchased the adjacent unit and combined the spaces in an extremely well done contemporary renovation.
The most important detail? The owners had just had their first child, indicating that they might be willing to make the move.
A call was made.
A price as established.
The client toured.
A contract was written.
A settlement occurred shortly thereafter.
It was perfect.
The Value of the Right Agent
In most cases, the value that is added to a transaction by an agent is less about finding a property and more about navigating the process and knowing what to do when issues arise. The available stock of properties is published on a thousand different real estate websites for the world to see, so clients tend to be as integral to finding the properties they buy as the agents do.
But when the perfect property is not for sale and the agent can make it appear, then their contribution to the process becomes almost priceless.
In this case, a combination of detailed market knowledge, a deep personal network and simply paying attention to our clients’ unique circumstances made all the difference. We were obviously thrilled for everyone that we could put this together.
At the end of the day, the agent you choose matters greatly, regardless of what Zillow and Trulia might have you believe. Despite all of their information, the online search sites simply don’t know what a true professional agent knows.
We were glad to be able to put our inside knowledge to work for our client.
It was the latter part of 2011 when we got a call from a couple living in New Hampshire. They had a child who was coming to Richmond to attend VCU and they wanted to purchase a small home or condo (no maintenance is a good thing for a college student).
They were betting that the market was at its bottom (which it probably was) and they were looking for upside.
One of the questions they was asked was, ‘If you were in our shoes, what would you do?’
It is one of my favorite questions.
What Drives the Market?
I have a personal theory that, as an agent, my primary job is to help clients understand the factors that drive the market. Clients who understand why values are what they are make confident and empowered decisions.
Larger market conditions — interest rates, employment, taxes — are all largely held constant and are beyond anyone’s control. Market values in the aggregate ebb and flow due to factors well beyond any individual’s ability to impact them. But if you make a good decision about your specific property, when the market rises, the value of your home rises more quickly. Conversely, when the overall market falls, your home’s value does not fall as quickly.
By focusing on hyper-local market conditions like nearby development, incentives, supply, and demand we help our clients acquire properties that are more likely to outperform the market, regardless of the direction it is moving.
All of these factors are easily recognizable to the trained eye. And while they can vary wildly from neighborhood to neighborhood and project to project, the key is understanding how these are likely to impact values moving forward.
Looking for Clues
Maybe it is our experience in project representation and development, but seeing upside in specific condo projects is relatively easy.
Keeping an eye on development, historic designation, the city’s Enterprise Zones, or zoning changes in a specific area is critical in spotting opportunity.
So when you see a) a condo project who recently regained its ‘warrantability’ (which is the industry term meaning ‘available for conventional finance’) or b) a project in a district experiencing intense development, it is a great buying opportunity.
Case Study — The Summit Lofts
In the mid 2000’s, the partners at Monument Construction, bought a small warehouse and converted it into 14 loft-styled 2 bedroom condos. The units were a good size — roughly 1,300 to 1,400 SF — and were nicely appointed. When they sold initially, most sold in excess of $200,000.
The neighborhood, Scotts Addition, had just been named a ‘historic neighborhood’ by the Department of Historic Resources, meaning that many incentives were now available to developers that made projects far more feasible. The historic designation is the number one accelerant for new development and once an area becomes designated, it is in very short order that a transformation begins.
Then 2008 happened.
Prices fell substantially in the Summit Lofts as several units were foreclosed upon and others became rental properties.
The condo lending rules changed substantially in the years following 2008’s crash. When conventional mortgage financing is no longer available, alternative forms of financing are required that are far less attractive (i.e. — higher rates, shorter terms, higher down payments). This suppresses values.
The Summit Lofts values suffered from both a lack of conventional financing and the loss of development momentum in Scotts Addition — but the fact remained that it was a nice property with good floor plans, nice finishes, and a soon-to-be phenomenal location. In other words, temporary factors had depressed values int he project and, once removed, values were likely to rise more quickly than the market as a whole.
So when our clients were looking for a place for their son, we talked about Summit and why it was a good bet. The development momentum was beginning again and the mortgage financing rules were being relaxed — meaning Summit Lofts now qualified for conventional mortgages.
Our clients made a purchase in April of 2012 and held the property until their child graduated in the summer of 2015.
The condo was purchased for $143,000 in April of 2012 and sold for $169,000 in September of 2015. Its value increased by 18.2% (7.8% annually) during the time it was owned by our client. Not too shabby.
The condo market overall in Richmond had a median sales price of $175,000 in the second quarter of 2012 and a median sales price of $189,000 in the third quarter of 2015. The market rose 7.6% (3.2% annually) during the same time.
And as you can see, their return on their investment was nearly 250% better than the overall market.
Why? Because they understood why the pricing was lower than it should have been and why it was likely to rise more quickly than the rest of the market.
We can tell many more stories about how we have helped clients acquire properties with upside as well as helped them avoid properties whose fundamentals are poor and values are likely to stay depressed.
Condos can be tricky animals and you need to understand the additional factors that underpin their market. As city markets tend to shift more rapidly as well, understanding how incentives can help drive values is also critical in making good decisions.
When you can spot fundamental changes in the inputs that drive values (financing, incentives, nearby development), you can find opportunities to out-earn the market.
I’m beginning to hear people whisper the dreaded ‘B Word’ again …
Trust me, I was front row center in 2008. I lived it — and I do not want to live through that period of time ever again. When the market collapsed in the summer of 2008, it was like someone just threw a switch and everything stopped. Phone calls and showings went to nil. Loans got denied with no real explanation. And the worst part was that no one really knew what to do.
For the better part of two years, I felt like I had to apologize to panicked sellers who, much like myself, understood neither the reason it had all happened nor when it would all end.
And it was not until well after the fact that the reason the real estate machine stopped became evident.
When the Bubble Popped
In retrospect, we were all unknowingly playing a giant game of musical chairs. But instead of removing one chair each time the music stopped, someone removed all of the chairs at once — leaving everyone to fight for a place that no longer existed.
The banks had stopped making loans entirely and the market seized up like a Maserati that had lost its oil. It doesn’t matter what asset you own, when no one wants to buy it, it has no value.
Depending on the type and location of your home, the majority of our marketplace lost between 20 and 40% of their housing value. And no one was immune — first time homebuyers, new homes, luxury homes, condos — they all suffered similar fates.
Is There Another Price Bubble?
So when I hear the word ‘bubble’ being tossed around today, I cringe a bit as the circumstances that led to the hyper-appreciation of 2005-2008 are nothing like the ones that are causing the rapid rise of the values currently.
But since most people tend to focus on price, lets begin there.
Yes, pricing is up substantially from the bottom in 2011.
Yes, pricing has spiked each spring.
Yes, it feels a bit like 2007.
And no one is feeling the pinch of the spike more than the first time buyer, but that is a different article for a different day.
Falling from a high of approximately $260,000 to just above $200,000 in 2011, the average house price in the Richmond region lost 23% of its value, although not each type was affected similarly.
— Newly built properties with every imaginable upgrade, especially ones located 30 minutes or more from the urban core, were most impacted.
— Reasonable housing in established neighborhoods underpinned by the best public schools were impacted less.
— Quality urban housing near public transportation and walkable amenities — and where new inventory is difficult to add — was impacted the least.
So where are we now? When you look at the sub-markets individually, a clearer picture emerges.
— Markets in high demand where inventory is constrained (i.e. — urban areas) have actually surpassed values from 2008.
— Suburban markets that are 30 minutes or less to the urban core are almost back to the 2008 valuations.
— Markets outside of the 30 minute commute are still off from 2008 highs.
The takeaway here is that each market is more localized than ever before and even segments within very short geographic distances from one another will likely behave quite differently. Buyers and sellers need to be careful when trying to apply anecdotal evidence from one market to another without understanding the underlying inputs.
If you expect Midlothian to behave like the Museum District, or Crozier to behave like Church Hill, then you are probably in for a bit of a surprise.
Lending and Homeownership
So lets talk about the state of the mortgage market right now.
Between Dodd-Frank, the collapse of the mortgage insurance industry, and the realization that housing values don’t always go up, the mortgage industry of today looks little like it did in 2008.
Adjustable Rate Mortgages
According to the Federal Reserve Bank of NY, adjustable rate mortgages were nearly 40% (38.5% to be specific) of the mortgage market in 2005. By 2015, that percentage had fallen to just over 5%.
Effectively, 95% of homeowners today will have the same mortgage payment in 2, 5 and 10 years (or more) versus 40% of the market that a mortgage payment that doubled in a 2 to 3 year span before the bubble.
Mortgage vs Income
And check this out: As a country, we now spend far less of our collective incomes on housing, at least in comparison to the period before bubble popped.
So fewer people own houses and they’re using less of their disposable income to do so. That feels healthy to me.
Furthermore, look at how few homeowners there are now compared to 2008.
Homeownership peaked just before the crash and fell to levels not seen since the 1960’s. This implies to me that those who own housing are more qualified to do so and those who do not have the credit, income, or equity to own are electing to remain renters.
And finally, how does equity in housing look? Much better than only a few years ago.
Beginning in the middle to late 1990’s, we increased the buyer pool by not only decreasing the credit standards required to qualify for a mortgage, but the equity required to make the down payment. We then artificially dropped the monthly payments to allow those with lower incomes to qualify by giving buyers adjustable rate mortgages where rates sometimes doubled only a few years into the loan.
The system was doing a phenomenal job of artificially creating more buyers — unfortunately, the buyers being created were the riskiest type and the ones least able to withstand a market adjustment. And while more buyers equals more demand and more demand equals higher prices, when the music stops, buyers on the fringe go away. When a highly leveraged market adjusts, really bad things happen.
So until lending standards allow for the marginally qualified buyer with little to no down payment to enter the market in droves, the likelihood of a 2008-eque bubble remains extremely low. And currently, the buyer credit profile demanded by Fannie Mae, Freddie Mac, and FHA remains far more strict than the loan products so prevalent in the pre-bubble days of 2005-2008.
If you talk to any industry professional about the market, the word ‘inventory’ will be used repeatedly and usually in conjunction with words like ‘crisis’ or ‘lack of’ or ‘we need more.’
See the chart below to get the full impact:
Since 2008, the supply of houses has dropped from roughly 10,000 to just over 3,000.
That is insane.
And when you look at the markets individually, you get an even more pronounced effect:
The Fan District and Jackson Ward had over 300 active properties in February of 2008. There were 30 in February of 2017.
Is ‘insane – er’ a word?!?
The bottom line is that the difference between the pricing increases heading into 2004-2008 and those in 2014-2017 is much more about a constrained supply than an abundance of marginally qualified buyers showing up with highly leveraged adjustable rate loans.
So how do we solve the inventory problem? By building more housing, of course. All we need to do is get those builders to crank it back up and start building like 2006 again. If we can get the inventory levels back in line with say, 2000 or so, then everything should be fine, right?
Not so fast. Look at this:
I don’t know about you, but this doesn’t appear to be a market that is supplying too much housing to itself, does it?
Why are we not building more? Is it builder confidence? Material price increases? Building codes? Banking? I’m unsure, but housing starts don’t appear to be adjusting to keep pace with demand and are still below historical norms by a significant amount.
At least in the near term, the tight supply conditions are not going to be solved by new construction.
So No Bubble?
I’ll go ahead and say it — No, this is not a bubble. As a matter of a fact, we are still in the throes of recovery.
Are we going to have continued years of 5-7% or more appreciation in the market? No, I do not believe we are. Interest rates are beginning to rise and housing prices in many markets are already causing affordability issues. So no, do not expect to see prices continuing to rise unfettered for the next several years.
We have anywhere from 60-90% less inventory than we did in 2008
Pricing is only now approaching 2008 levels
Homeownership is still at 50 year historic lows
Housing starts are down significantly
And the dangerous adjustable rate mortgage is a very small part of the market.
It is not 2008 all over again.
Yes, if you entered the market in 2012, then all you have seen is rapid appreciation. But in reality, what we have all been experiencing is adjustment back to trend. And yes, if you are a renter trying to enter the market, it feels extremely frustrating to see multiple offers on the houses you want to buy and contract prices being bid well above the asking prices. But just because there are bidding wars — just as in 2006 – 2008 — does not mean it is a bubble.
So What Could Cause Another Bubble?
Could something else derail the housing market? Absolutely.
Rising interest rates are the obvious threat, but so is the potential dismantling of Fannie Mae and Freddie Mac. And we should not discount our friends at the Federal Reserve, either. They totally missed on the last one and are probably hyper-sensitive to finding a new one. If they decide that they think there is a bubble and begin to take steps to stave it off, they could probably cause the very adjustment they fear.
And then there is Wall Street. Left to its own devices, it could figure out a way to game the system again. But at least for now, I don’t see their fingerprints on predatory lending like I did a decade ago.
And if it isn’t the Fed or Wall Street, it could be our elected officials in Washington DC. While Wall Street takes a lion’s share of the blame for 2008, DC deserves as much, if not more, for putting it all in motion. May argue the real roots of the crash begin in the early 1990’s with the rewriting of the Community Reinvestment Act. Is the CRA a direct cause or more of an unintended consequence? Probably a bit of both.
Regardless, as 2008 so powerfully demonstrated, the nation’s lending practices are the primary driver of housing values. Both government, at all levels, and Wall Street are inexorably intertwined with housing. If rates spike to 10% or suddenly the 30 year mortgage is no more, then yes, prices will adjust and it will be painful. But the severity of any adjustment will be tempered by the fact that inventory is low and credit standards are far more in line with historical norms.
Lets Tap the Brakes on the ‘B Word’
So before we start dropping the ‘B Word’ on the housing market, lets make sure we pull back the curtain and look at the cause for the recent price increases. Those who predict doom are all eventually correct.
Here is what to watch for:
When you begin to see a bevy of new ‘Mortgage Insurance’ companies enter the market, make a note.
When you begin to see 1 year adjustable rate mortgages being used, especially for first time homebuyers, start paying closer attention.
When you begin to see the ‘interest only’ mortgage product being offered for long term purchases, get nervous.
When you begin to see loan products that offer 100% or more leverage, get really nervous.
When you see homeownership levels approach 70%, you might want to put some cash under your mattress.
And when you see the 125% loan product make it back into the lending lexicon, hunker down as it is going to be a long winter.
For now, we are safe, at least in comparison to 2008. Something else might get us but just know that none of the root causes that almost killed us all in 2008 exist currently.
I think that deep down inside, each Realtor is part frustrated architect and part frustrated photographer (ok, this Realtor is) and thus my obsession with extremely well done photography. Nothing quite lends itself to powerful photography quite like people, nature and architecture.
Being lucky enough to work in a city with architecture dating back centuries, unique shots are everywhere. And being lucky enough to work with some really talented artists (yes they are artists) only makes our job easier.
I am Kendall C. Kendall, Client Care Coordinator for the team. I am a licensed Realtor and it is my job to answer questions and schedule showings for the properties shown on our sites. Here's our call policy.
With over a decade of mortgage industry experience, Chris knows what it takes to provide the very best service for each of his clients and truly believes in forming lasting relationships with his customers.
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