Development

The Inventory Divide, and Why it Matters

May 17, 2018 By Rick Jarvis

A Home is an Asset

For those who know me, I’m not about the ‘house of your dreams’ narrative – I am pretty objective in my approach. I want my clients to understand the underlying value of what they are purchasing and not allow emotion to override logic.

Statue of Liberty — America is the land of opportunity, right?

That said, I fully acknowledge there is a powerful emotional aspect to buying a home. Regardless of whether it is your first, third, or even the twentieth home, each connect you to a specific period in your life. Selling a home feels like closing a chapter, and when you buy one, a new chapter begins.

Sticks, Bricks, and a Vehicle for Wealth Creation

In the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry …

Yet despite the emotional attachment, in the simplest sense, a home is nothing more than a stack of sticks and bricks on some dirt that keeps your stuff dry. While we want to attach value to the colors of our walls, the shape of our exterior, and the brand of our appliances, in the grand scheme of things, housing is no different that any other asset whose value goes up or down given economic conditions.

And 2007 through 2011 notwithstanding, owning a home has created more wealth for the masses than any other asset class in history.

This is what has me worried.

No Crash on the Horizon

To begin, I am not worried about another crash. I have lived through two of them (1987 – 1992 and 2007 – 2011), and the current market looks nothing like the last two that crashed.

The current market looks nothing like the last two that crashed …

In both of the prior crashes, the economy was overheated and there was a tremendous oversupply that had been created to try to keep pace with a dizzying demand.

Currently, the economy is solid, employment is high, inflation is still shockingly low, and while the world is never fully at peace, there is relatively little global unrest (at least compared to prior periods) – and inventory is at all time lows.

Is there a correction coming? I think that some are beginning to predict a slight pullback at certain price points in 24 to 36 months. But I firmly believe that a crash is not imminent.

The Housing Divide

A home is quickly becoming an asset that only the wealthy can afford …

No, my worry is as follows — the price of housing is at the precipice of exceeding affordability for the average American, preventing an entire segment of the population from ever having access to home ownership.

[ And this recent article in The Atlantic seems to back the same narrative – especially Section 6 ]

In effect, a home is quickly becoming an asset that only the wealthy can afford, and, over time, will lead to a deepening of the divide between the ‘haves’ and the ‘have nots.’

Take a look at this chart.

Never has the discrepancy been greater, and I think that is a tragedy.

The blue line represents home ownership levels. In other words, what percentage of the population owns their own home.
The green line represents the median price of a new home.

Notice a trend??

Pricing is accelerating despite historically low ownership levels. The obvious implication is that as prices rise, fewer people will be able to buy – and we can see this playing out right before our eyes. Right now, due to a host of factors which we will touch on below, housing prices are increasing at a rate that is pushing ownership beyond the reach of far too many people.

Never has the discrepancy been greater, and I think that is a tragedy.

Time to Build More, Right?

An economist would argue that the problem will solve itself: As prices rise, more producers will be attracted to the market and supply will increase.

But that simply isn’t happening.

Take a look at this chart showing the number of new homes being built:

Again, notice a problem?

Despite the fact that housing is undersupplied and pricing is accelerating, we are still drastically under-supplying a market that desperately needs relief.

The Problem is Systemic

The problem is about price AND location …

Perhaps the underlying problems were already manifesting themselves as early as 2000 and we simply didn’t see it as the rapid price increases were masked by a insanely lax lending standards. But the issues are more than visible now.

Effectively, the problem is about price AND location. We cannot add supply at anything approaching a reasonable cost, and we absolutely cannot do so in areas where the populous wants to buy.

Issue One – Construction Costs are at an all time high

Building costs are through the roof (no pun intended.) Construction material costs have skyrocketed and the construction labor market pool simply isn’t there, causing extreme wage pressure.

When your material costs are up 30% and your labor pool down 50%, costs spike. And I don’t see an quick solution.

Issue Two – Governmental Mandates Mean Higher Costs

The collective increases become substantial – and the end user ends up footing the bill!

Each bill that is passed to make housing better is done so with good intentions – I honestly believe that. No one wants the US to build substandard and inefficient housing – AND no one wants to see another financial crisis, either.

However, each time Congress, the state legislature, or our local board of supervisors adds another layer of regulation, the cost to build a home goes up.

Each increase in the building code or protection baked into the financial markets is done so with the aim of increasing the quality, safety, accessibility, and energy efficiency of our housing stock. But with each mandate comes increased expense. A percentage point here and an increased fee there never seems like a lot on its own, but over time, the collective increases become substantial – and the end user ends up footing the bill!

Issue Three – Demographic Shifts

Demographics show a population that increasingly wants to live in cities. Urban schools are getting more funding, the commutes are shorter, public transportation is expanding its reach, and the entertainment districts are improving. But yet, the city is the hardest place to build houses.

An incredible 20,000 people came to Richmond in 5 years – and we built a mere 854 houses for them

To give you a sense of the problem – per the 2010 census:

The population in the city of Richmond increased 9.3% from 2010 to 2016, or by roughly 20,000 residents.
In the same time frame, MLS tracked 854 new home sales within the City of Richmond.
- Stated differently, 854 new homes / 20,000 new people = 4.2%
For comparison’s sake, Chesterfield built just under 5,000 new homes in the same frame, or closer to 17% of their need.

Somehow, I don’t think 4.2% of the overall need being satisfied by new housing is going to fix the problem.

Issue Four – Gentrification

If you really want to see a mind-blowing statistic, look at these screenshots straight from the Richmond MLS.

The northeast section of the City of Richmond (Highland Park, North Church Hill, Union Hill) is in the midst of one of the most rapid price increases in the history of the city.

Inside of this zone:

This happened to prices in 5 years:

While that benefits some owners, it leaves many others wanting.

The New Normal

It is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure.

Am I saying that everyone should own a home? Hardly. We tried that once (2007) and it didn’t seem to work out very well.

But I do believe that a housing model in which ownership is reserved for only the elite is an equally dangerous model. America is the land of opportunity and when the idea of owning a home becomes an unattainable pipe dream, that is not a good answer either.

Look, it is easy to build another million dollar home on a cul-de-sac in the latest community 10 minutes further out than the last one – but that is not the cure. We have got to solve the need for reasonably affordable / attainable housing in neighborhoods that aren’t 45 minutes from the urban core.

The next generation of potential homeowners deserves the same opportunity as prior generations did to use housing as a fundamental way of building wealth. Everyone wins when our population has the ability to determine their own financial destiny.

Rates are Rising – Here’s What it Means

March 28, 2018 By Rick Jarvis

Jarvis Grandchildren: ‘Grandpa, please tell us a story about the way real estate used to be!’

Grandpa Jarvis: ‘Let me tell you a story about 3.5% 30 year fixed mortgage rates …’

Jarvis Grandchildren: ‘Ooooooooo, 3.5% 30 year fixed mortgage rates?!?’

Grandpa Jarvis: ‘Yep. 3.5%. Some people even got 2.9%.’

Rates are Headed Up – For Good

As I write this in the spring of 2018, the recent job report states that the economy not only added 200,000 jobs, but wages rose at their fastest rate in 8 years.

And just so you realize:

Low unemployment tends to lead to wage increases
Wage increases tend to lead to more disposable income
More disposable income tends to lead to more money to spend
More money to spend tends to lead to inflation
Inflation tends to lead to higher long term mortgage rates

Take a look at the correlation:

As you can see, even as the unemployment rate (the blue line) began to fall in the years following the collapse, wages (red line) didn’t really begin to trend upwards until the latter part of 2015, and even then, only negligibly. The most recent jobs report indicates that wages are starting to rise, a trend that is predicted to continue for some time.

So What Does it Mean for Housing?

Not much … yet. And as a matter of a fact, I am not unhappy to see the rise happening.

Why? Because it means the economy is healthy and people see positive things on the horizon. Trust me, I would rather be in a world with healthy economies and 6 to 7% long term rates than one teetering on the brink of collapse with 3.5% rates.

As we discussed in our 2018 Predictions only a few months back, we predicted a rate rise in 2018 and went into some detail about the implications. Effectively, if we are all making more money, then a slight rise in the cost of borrowing is not something that will cause the market to collapse. And furthermore, as long as credit standards remain reasonable (and consistent) then the risk of a ‘2008, The Sequel’ is quite low.

Home Prices Will Still Rise

Expect housing values to continue to rise, especially urban and affordable, due to a complete, thorough, absolute, and total lack of inventory. As the millennial generation begins to exit their downtown rentals and enter the buying market, affordable urban markets will continue to be starved for inventory.

Expect some of the upper end suburban markets to see slowing price gains due to the fact that homebuilding is finally cranked up again, mitigating some of this inventory shortage.

Think ‘Strategic Finance’

Remember, it is the long term rates that are the ones that have more room to rise. The 3, 5, and 7 year adjustable rate mortgages will still give buyers options a point or two below the long term rates, offsetting any rate increases.

But that said, it is time to get a little more strategic about how you finance your home. Gone are the days of just taking a 30 year mortgage at 3.5% simply because it is a no-brainer to do so. Thinking long and hard about how long you expect to stay in the home will become a key ingredient to making the correct mortgage decision.

But it does feel like we have come to the end of an economic era – the end of the 4% 30 year mortgage. And while I will be a little sad to see it go, it indicates much better times are on the horizon.

RVA Golf

January 3, 2018 By Rick Jarvis

As someone who has been known to spend some time on the fairways and in the bunkers of RVA’s golf scene (doing market research, of course…) I have a good feel for the courses, the clubs and the real estate that many times surrounds them. I have been lucky enough to play every private course in the area enough times (and most of the public ones, as well) that I feel qualified to give the Realtor/golfer perspective (if there is such a thing) on the courses and the relative strengths and weaknesses.

[ Homes for Sale on golf courses can be found here ]

Climate

RVA, from a golf climate standpoint, is on a bit of a cut line that makes it tough to have one turf carry the course through the entire playing season. The majority of courses in Richmond have bent grass greens (few Bermuda greens) and Bermuda fairways. Sometimes, Bermuda fairways are “over-seeded” with rye grass during the early spring to increase playability until the Bermuda comes out of dormancy typically in mid-May. While I have played rounds in both January and February, it is more an exception than the rule … so expect a 9.5 to 10 month playable season.

Several of the upper end (and newer courses) have opted for bent grass fairways (in lieu of the typical Bermuda). This provides a wonderful surface for playing and it can be maintained all year long but at greater expense than the Bermuda based courses. Generally speaking, the courses in Richmond can be managed to be EITEHR at their peak during the cooler spring and fall (bent grass) OR during the summer (Bermuda grass.)

The Courses

Kinloch (Goochland County)

For the most part, Kinloch (Goochland) is considered the best RVA (and arguably, the State) has to offer. It boasts PGA tournament level conditions, world class customer service and one of the best clubhouses in the area. It also boasts a fabulous practice facility and 19 holes (yes, 19) but offers nothing other than golf for its members.

It is one of two courses in Richmond that features the caddy system. Kinloch is a newer course so the design features (Lester George, architect) were more sculpted than many of Richmond’s courses built in the 1950’s to the 1970’s (the era when most of Richmond’s private courses were built.) A few homes border the course, but not many, and they are highly custom.

The neighborhood also features coach homes targeting empty-nesters.

County Club of Virginia (City of Richmond and River Road Corridor in Henrico)

As the name would suggest, is one of the oldest and wealthiest clubs in RVA. It offers three courses, The River Course (which hosts high level State tournaments and is generally considered the best of the three), The Westhampton Course (which was recently renovated) and Tuckahoe Creek.

The Westhampton course abuts the University of Richmond and is visible from Cary Street making it well known throughout the City. CCV’s courses are classically designed and the CCV facilities are quite substantial. CCV boasts exceptional facilities for dining, tennis, fitness or events in addition to 3 courses. There is not any real housing development surrounding these courses (the courses are all older) but there are houses that do border the course and availability varies.

Salisbury (Midlothian) and Hermitage (Goochland)

While these clubs exist on different sides of the River, they are similar in many ways in that they represent mature clubs with substantial facilities that serve more than just the golfing member. Both Salisbury and Hermitage offer more than 18 holes (27 and 36, respectively) and the courses are similar in age and course design (with the exception of the newest 9 at Salisbury) and both have houses that surround the courses (but not on the level of many golf course developments). The clubhouses are similarly scaled and offer all of the typical country club services with dining, tennis, swim and fitness. Hermitage is also known for its racket facilities and hosts numerous tennis tournaments throughout the year.

Both courses were designed in such a way that they have the length to handle the changes in technology that have harmed many older courses and thus can still handle RGA and VSGA tournaments.

The Federal Club (Western Hanover)

Opened in 2008 just as the market turned (down, in case you didn’t get the memo,) The Federal Club opened to great fanfare but whose success was stunted by the plunge of the economy and real estate market, upon which much of its business model was dependent. After being acquired by the lender and subsequently sold to a local family, The Fed is back on track with new members and capital improvements being added at a rapid pace.

The course winds through the upscale Mountain Run neighborhood in Western Hanover county.

Designed by Arnold Palmer’s best architects and shaped by the crew that remade the K Club in Ireland for the Ryder Cup, the course is arguably the best test of golf in Richmond. The Signature Tournament, held each year in May, attracts some of the best players in the State, including many elite collegiate players.

The Federal Club is entirely bent grass and is one of the only courses in RVA to feature bent grass fairways AND greens making it an unique golfing experience.

The Dominion Club (Glen Allen)

Built in the later 1980’s as the centerpiece of the Wyndham Subdivision developed by Snyder-Hunt (now HH Hunt) near 295 and Nuckols Road. Wyndham/TDC did an excellent job of really making the golf course and clubhouse a signature of the development. Anyone who has played the course, knows the striking roofline of the clubhouse and the 9th and 18th greens reflecting off the lake as you turn the corner on Dominion Club Drive.

TDC is a solid golf course. It would be considered a modern course in that there was a large degree of shaping and strategic bunkering and played host to a Nike Tour/Buy.com tournament for many years. The tournament’s signature moment was Notah Begay shooting 59.

The clubhouse is excellent and the pool and tennis facilities are also very strong. TDC also boasts one of the largest memberships in the area despite some recent developer/club issues relating to ownership of the land the course is built upon.

Richmond CC (Goochland/Henrico Border along Paterson Avenue)

Richmond country Club, located along the border of Henrico and Goochland, provides a unique test of golf in that it has narrow tree lined holes that force controlled shots into tight landing areas. It is a full service club with pool, tennis and dining but does not have the same scale of clubhouse as CCV or Hermitage.

The Foundry (Powhatan)

When first opened in the early 1990’s, The Foundry was a unique concept to Richmond in that it was golf only (no tennis or swim), with caddies required, and a level of service that was not found in the RVA golf market. Kinloch now offers the same ‘top end’ service/golf only model. The course is generally in excellent condition and the entry features and clubhouse are some of the most memorable and striking in Richmond.

Even though the course is a little off the beaten path, the Foundry offers a great experience.

Stonehenge (Midlothian) and Brandermill (Midlothian/Chesterfield)

Both courses were built towards the end of the 1970’s and are modeled similarly as clubs that cater to a surrounding neighborhood. Both Stonehenge and Brandermill are larger subdivisions that surround their courses. Brandermill would be considered to be the more hilly and narrow of the two with a higher density of houses that abut the course. Brandermill also borders The Swift Creek Reservoir along several holes giving that section of the course a little extra visual ‘umph.’

Stonehenge has redesigned a few holes since its inception and hosted a Buy.com tournament mid-2000’s. It is the longer of the two courses and while built before course architects moved as much earth as they do today, Stonehenge, still offers many unique holes.

Both clubs offer pretty solid amenity mix with a nice pool complex, tennis and dining facilities.

Willow Oaks (City of Richmond/Forest Hill Avenue)

Visible from the Powwhite Parkway bridge, Willow Oaks is a classically designed golf course with several holes that wind along a very scenic section of the James (don’t pull it left on number 5….) Many a golfer has taken a glance to their right as they cross the bridge on a sunny day and wished that they were in the midst of a round instead of on their way to an appointment. Willow Oaks has hosted the State Open on numerous occasions and its Fall Invitation attracts a quality field from all over the Mid-Atlantic.

The Willow Oaks facilities are excellent (especially the racket facilities) and anyone who has ever attended a wedding or event there invariably ends up on the rear patio overlooking the 9th and 18th greens to watching golfers finish up their 9’s.

Its convenient location make it accessible from much of Richmond.

Lakeside and Hanover (Lakeside area and Ashland)

Lakeside and Hanvoer are considered to be two of the more value oriented courses in the RVA Metro. Built in more tightly constrained areas, the courses rely on sharp doglegs, small and fast greens and narrow fairways to provide the teeth that their lack of length does not. Hanover CC has the superior facilities with a small driving range and larger club house.

Lakeside is accessible from everywhere so it makes it easy to sneak away for a quick 18 without being discovered (unless your boss is on the course, too). Both courses play quickly so a round there is not a full day commitment.

Lakeside renovated their greens and expected to during 2012. Hanover underwent a renovation in 2008 so the course should not be in need of any major upgrade (think ‘assessment’) for the foreseeable future.

Meadowbrook (South Side/Jeff Davis Highway)

Built in the late 1950’s as a club to service the burgeoning industrial presence that DuPont and Philip Morris’ were bringing to the area, Meadowbrook boasts a value oriented course, strong membership and solid test of golf. As with may courses built in the era before technology changed the length required for a championship course, Meadowbrook relies on tight fairways (#2 feels as narrow as a bowling lane) and some of the smallest greens in the area (#18 is the size of my closet) to create an excellent test of golf. With a relatively flat setting, it is also an excellent course to walk.

Upscale Public Courses/Semi Private Courses

The Independence Golf Club, located off Winterfield Road along the Powhatan/Chesterfield border, was originally built to house the Virginia State Golf Association. It recently changed hands to private ownership and switched from cool season grasses to bermuda greens. Independence is built within the Founder’s Bridge neighborhood and along with a championship 18 hole layout, has probably the best practice facilities in the region for a public course.

A 9 hole executive course is also on the Independence property.

Magnolia Green Golf Course is located within the large planned community of (you guessed it) Magnolia Green. The club is currently semi-private.

Chesdin Landing is located within the large planned community of (you guessed it again) Chesdin Landing.

StoneHouse, Vinitarra, Brickshire and Royal New Kent are located east of town in New Kent County and within a few minutes of one another. Three of these courses (Royal New Kent, Stonehouse and Brickshire) are owned by the Traditions group and membership in one allows play at all three. For many in both Richmond and Williamsburg, membership in these courses is a great and affordable option for those who want the benefits of club membership at a lower monthly obligation.

2018 Housing Predictions and the Coming Affordability Crisis

December 22, 2017 By Rick Jarvis

The Next Crisis in Housing, and the 2018 Predictions

Each year, as December comes to a close and the promise of the new year begins, I try to share my thoughts on what the next 12 months will bring. And while I am not an economist, I did stay at a Holiday Inn Express last night … does that count?

(And here are 2017’s predictions, if you care to see how well we did)

I love data and what it can tell you if you look a little bit deeper. Furthermore, when you can add empirical evidence to anecdotal, you get some powerful intel about not only where the market is headed, but why it is headed where it is.

What the next 12 months will bring is important for all of us to know — from renters in Shockoe, to homebuilders in Chesterfield, to land owners in Goochland — in order to place our real estate holdings in the best position possible.

And just so you know, the words we will hear repeatedly in 2018:

Inventory
Interest rates
Affordability
Millennial

Inventory — Richmond, We Still Have a Problem

Unless you have been living under a rock (which also appreciated by about 4.8% last year), you have heard about the inventory crisis. Bidding wars are up, ‘Days on Market’ are down, houses are going for more than their asking prices on a regular basis, and everyone is clamoring for more inventory to help fix the problem.

If this chart doesn’t illustrate the extent of the problem, nothing can. This shows the available housing supply over the last 10 years.

In the aggregate, inventory levels are off by well over half from the heights in 2008 through 2010, and that doesn’t even look at the sub markets individually.

Now lets look at the buyer pool. The chart below tracks the number of houses that go under contract in any given month over the past 10 years (i.e. — absorption of housing)

Do you notice a trend?

The rate of sales, while not up anywhere as much as the inventory is down, it is still up by about 30% from the 2007-2011 period. As a matter of fact, there are actually more houses selling now than there were in 2007 and 2008.

So, just to reiterate:

↑ Absorption is up by about 30%
↓ Inventory is down by 60-70%

Yeah, that pretty much explains the price increases.

While I think we all recognize the inventory issue, unless you look at it critically, the deeper message is lost. What has really been happening is that population is realigning where it wants to live, impacting housing availability differently in individual sub-markets.

The Fall and Rise of the City

In the late 1980’s, Chesterfield, Henrico, and the City of Richmond were all populated equally with just over 200,000 residents each. Only a decade later (by 2000), the City’s population had fallen below 200,000 while both Chesterfield and Henrico had exploded to over 260,000 residents each.

It was an incredible shift.

Where Are the New Urban Houses?

But if you fast forward to today, what do you see? You see a city with a population growing at the same rate as the surrounding counties, if not slightly faster. And while growth of the urban core brings with it many positives, it poses a big problem with what is a fixed supply of housing.

Take a look at the table below — despite the same basic rate of growth in population, the number of new houses being built in the city accounts for anywhere from 4 to 6% of the overall market. When you compare that to 15 to 21% of the sales in Chesterfield being newly constructed homes, you begin to see the extent of the problem.

Year	New Homes in the City	Resale in the City	%	New Homes in Chesterfield	Resale in Chesterfield	%
2012	83	2110	3.9%	550	3588	15.3%
2013	121	2356	5.1%	723	3785	19.1%
2014	113	2370	4.8%	729	3818	19.1%
2015	108	2461	4.4%	828	4467	18.5%
2016	150	2629	5.7%	934	5039	18.5%
2017	154	2672	5.8%	1022	4819	21.2%

All cities, not just Richmond, lack sufficient land to develop housing with any scale. And when the population begins to seek housing in the urban environment, it puts pressure on the fixed stock of available housing. When supply is fixed and demand rising, you get rapid price increases. When supply can be added to offset demand, you might still see prices rise, just not at the same rates.

Richmond’s Affordable Housing

So where is the problem the most acute? In the affordable urban markets, that’s where.

The table below shows the number of sales in excess of $300,000 in the north and eastern quadrants of the city of Richmond, long a bastion of affordable housing. The number of transactions over $300,000 has increased from 15 to 129 in the past 5 years — nearly a 900% increase!!

Compare this to west/central Chesterfield and, while you still see a problem, a 264% increase to be exact, it’s not quite as dramatic. Furthermore, the ability for Chesterfield (or Henrico, or Hanover) to manage their affordability issue is far greater as they still have hundreds of thousands of acres to develop to relieve the pressure.

Primary Year	Number of Sales Above $300,000 in NE Richmond City	Number of Sales Above $300,000 in West Central Chesterfield
2012	15	318
2013	29	379
2014	38	451
2015	56	620
2016	88	812
2017	129	842

The Problem Becomes a Crisis

In my opinion, this lack of urban housing will make 2018 the year Richmond’s affordable housing problem becomes an affordable housing crisis.

So if you are looking for urban housing, especially a more ‘affordable’ home in the city, here are some strategies you should employ to make your efforts as successful as possible:

get started earlier than normal
steer clear of online lenders as sellers — ok, seller’s agents — hate Quicken and USAA. Oh and their rates are the same, if not worse, so don’t believe the hype
expect to be involved in a bidding war
don’t rely solely on last year’s comparable sales to dictate predict pricing
act with urgency

(And if you want to read a reeeeeallly deep dive on affordable housing, you can do so here — The Affordable Housing Post)

Interest Rates

I think we have all been dreading the day when rates will rise. Sorry, but I’m calling it. Rates will rise in 2018 and continue to do so until they return to ‘normal’ levels in the coming 3 to 5 years.

Why? The economy is actually pretty healthy. Tax breaks, North Korea, and bipartisan bickering aside, we are doing pretty well, at least economically. Yes, we have crushing debt that our children’s children’s children will have to deal with, but all in all, employment is solid and the economy is growing at a decent pace.

So what is a ‘normal’ interest rate? I think the new normal remains to be seen as the inputs have all changed, but 6% to 7.5% or so for 30 year mortgages is what I think most industry veterans would consider to be ‘normal.’

Inflation

One of the primary drivers of interest rates (ok, mortgage rates) is inflation and when the market sees that inflation is creeping up, the price of money rises to hedge the loss of buying power over time. Stated differently, when you borrow money, each dollar you repay the bank has lost a little bit of its value. And while dollar today will have a similar value tomorrow, how much buying power is lost 5, 10 or 30 years in the future? You get the picture.

So the more inflation the market expects, the higher rates will rise, and as you can see, the trend line, while still below historical norms, seems to be moving up more than it is moving down.

And when you take the same chart and add historical mortgage rates, you see what is a pretty strong correlation. As inflation expectations rise, the interest rates tend to do the same thing (at least once the housing market stabilized in 2013.)

So if you want to know where the mortgage rates are headed? Keep an eye on the inflation expectation in the market. It will tell you (most) all of what you need to know.

Rising Rates — Good or Bad?

So are rising interest rates a bad thing? Does it matter if that rates are in the 5’s, 6’s, or <gasp!> even in the 7’s if the economy is roaring? If salaries are up, the stock market is at record highs, and profits are everywhere, does a mortgage payment 15 to 20% higher than today really matter?

As you can see, the percentage of our collective incomes that we spend on housing is not nearly as out of whack as it was in the years preceding the bubble — and that makes me feel good.

Do you know what else makes me feel good? The amount of housing debt we currently have outstanding relative to where we were. (And, for what it is worth, I am yet to see a chart that better illustrates the ‘bubble’ and the impact of it’s bursting …)

The bottom line is that we are still well below the debt levels of the bubble, and we are spending less of of our incomes on housing.

And also know that, as rates rise, people will begin to use loan products with built in rate adjustments to offset the increased mortgage payments.

Which leads us to …

Adjustable Rate Mortgages (ARMs) and 2018

Wait, did I just say adjustable rate mortgage?!? Isn’t what that got us in trouble the last time?!? Aren’t those loan products evil, and dangerous?!? Oh no, we are doomed!

Don’t panic …

In 2008, these were the reasons we developed a bubble, not the existence of the adjustable rate mortgage:

Credit score requirements were essentially non-existent
Verification of salary, job history, and liquid assets, all of which should have been confirmed by underwriters and processors, were not
Intentionally fraudulent (think — criminal) underwriting was far too common
Down payment requirements were as low as 0% (or even lower in some cases — do you remember the 125% mortgage?!?)
Many loans were interest only
No rate caps during each adjustment period

So when you allow someone with no liquid assets, a shaky job history, and basically no skin in the game to buy a house with a payment that will not only double in a year, but never pay down the debt, then yeah, you have a big problem.

The ARMs of Today

The adjustable rate loan products today look nothing like the adjustable rate products of 2006-2008. Today’s ARMs have realistic rate caps (meaning how much they can rise is limited), less frequent adjustment periods (every 3 years, 5 years or 7 years), and are underwritten to higher standards for income, debt, job history, and down payment.

So don’t worry, the adjustable rate mortgage that will soon reappear will be strategically used by buyers who are making a bet about how long they will live in a home, and not as bait to lure ill-prepared buyers into a ticking time bomb.

And the chart (below) showing homeowner ship rates in the US would seem to corroborate that statement.

The mortgage practices that created the 2008 bubble seem to not be in practice today.

Home Building

I’m worried about Richmond’s home building industry.

Huntt’s Row was a 8 units upscale town home project in Richmond’s Fan District.

Am I worried it is going to crash? No, not at all. I think you might see a little softening at some of the upper price points, but nothing to worry about.

Am I worried about the land developers? Not really, provided they have enough Xanax to deal with the public process that rezoning and development has become. But headaches aside, creating lots right now is not where the danger is (like it was in 2008.)

Then who am I worried about? I am worried about Richmond’s smaller and mid-sized, LOCAL homebuilders right now. They are in trouble if they don’t understand what is coming at them and adjust their business models.

Subs Rule

So imagine you are a subcontractor — bricklayer, carpenter, plumber, roofer, etc. — and you are bidding a job in Richmond for a local homebuilder. You turn on CNN and see Hurricane Harvey flooding out Houston ($200B in damage), followed immediately by Irma ($67B in damage) cruising up the gulf coast of Florida flooding out houses and ripping off roofs. And then a few short months later, you see that California is completely on fire (and still is as we write this article) with entire communities going up in flames instantaneously.

So what do you do? Do you pack up the van and move to Houston, Tampa, or Santa Barbara to set up shop for the next several years while rebuilding beachfront mansions on the insurance company’s dime? Or do you simply add 20 to 30% to your bid knowing that many of your competitors are already on 64W or 85S to do exactly that.

In 2008, when new homebuilding essentially ceased, much of the homebuilding labor pool disappeared. They retired, got other jobs, or simply left the business altogether. So when you combine an already reduced labor pool with a sharp demand increase in extremely affluent markets (i.e. — California / Florida’s gulf coast) destroyed by recent natural disasters, you can imagine the impact not only on the price of labor, but of materials.

The Big Guys Have Arrived

And if a spike in labor and materials is not reason enough to stress, Richmond now is home to two new regional / national homebuilders who bring efficiencies and economies of scale that can suck all of the margins out of a market.

DR Horton, the nations LARGEST homebuilder, and Schell Brothers (only #74 if you are scoring at home, but still an extremely large regional homebuilder), arrived in 2017. Stanley Martin, #57, arrived in 2015, and lets not forget about NVR / Ryan Homes (#4 overall) that has been building in Richmond for decades.

DR Horton closed 41,000 houses in 2016, if you care to know…

The big guys come with unlimited buying power to take control of the available lot inventory, the ability to build models that contain every imaginable option to wow the public, a sales organization designed to hook the buyers with low prices and then upgrade the heck out of ’em, the promise of volume to suck up all of the labor, and engineered floorpans that can be built at significant cost savings.

AND (and this is a big AND), the national builders build fast. When they get rolling, they can produce housing at an incredible rate. When the music stops (and it will, but I still don’t think it is anytime soon), overproduction will impact both the rate and the length of the housing adjustment. So when they decide the time has come to cut prices and unload inventory, their actions can really hurt the smaller guys whose pockets are not nearly as deep.

Local vs. National

When compared to the smaller and mid-sized builders that have traditionally populated Richmond’s building scene, you can see how the future for our local guys will be far more difficult.

In 2018, I think you will see a fundamental shift in power from the 5 to 50 home per year local builder to a 100 unit-per-quarter type publicly traded builder, especially at the middle and upper price points, whose production machine will change the way Richmond builds (and buys) houses.

So while home pricing might be going up and demand is still rising, building costs are rising even faster and competition from extremely well funded large builders is rising as well. Much like the impact WalMart and Target had on local retail, the arrival of the big builders will drive down margins to levels that will make building a very dangerous endeavor for those who lack the ability to build at greatly reduced costs.

And I am not ok with that, if you care to know. Maybe it is the prideful Richmonder in me, but I don’t like the idea of national homebuilders determining our local stock of homes and the Richmond stalwarts getting squeezed.

So What Does it Mean for the Local Guy?

It means being nimble, opportunistic, and above all else, smart.

Going head to head with Ryan, DR Horton or even local behemoths like Eagle or HH Hunt is a no-win game. The new way will be more of a hit and run model, seek opportunity where others are not looking, operating in markets where it is difficult to find scale (think — infill and urban markets!), and/or establishing a specific stylistic niche that will cause clients to seek you out.

Trying to beat a national volume builder with endless capital is like trying to beat a Las Vegas casino — over time, the casino always wins. Their cost of capital, cost of labor and materials, access to lots, and sales infrastructure give them a 10 to 15% baked in advantage — and those advantages are really hard to compete with day in and day out.

The Commercial BOOM

Most of you probably realize that One South is a mixed-use firm that offers residential sales, commercial sales, and development representation, and thus we can speak about the commercial market a bit as well.

From Richmond BizSense’s commercial market round up a few months back. It was a good week, to say the least.

The commercial market is rolling, in case you haven’t heard.

Without going into too much nitty gritty detail, pricing on the commercial side is pretty insane. Cap Rates (which represent the ratio of income to price) have shifted significantly in the past 24 months – about a 2 to 3 point shift – especially for multi-family opportunities.

When Cap Rates shift from 7% to 5%, a property that used to cost $1,000,000, will now trade closer to $1,400,000. That’s no small change.

From REIS, Inc, a real estate data provider. This chart shows nationwide Multi-Family cap rates over 5 years.

Why the Shift?

The reasons are many but what is driving the market as much as anything is an influx of out of town buyers who have been priced out of the larger metropolitan areas (D.C, NYC, Charlotte) looking for deals in Richmond. Richmond’s improving profile and exploding local scene, as well as the insatiable appetite for apartments mostly driven by VCU, has given larger regional and national players in the multi-family scene reason to stop in and buy up our buildings. And when they look at our relative value, they feel excited to pick up properties here that are fully leased, well built, and extremely well located.

So to Summarize

If you made it this far, thanks.

And while we covered a lot, we didn’t even touch on rising rents, the Bus Rapid Transit that has physically destroyed Broad Street, the condo market, college debt, or tax breaks, either!

I guess we’ll save those topics for another day.

But don’t worry! Despite rising pricing, 2008 redux is not on the horizon. The conditions that existed in 2008 do not, I repeat, DO NOT exist currently. (And if you want to dive in deeper to the differences, you can read this article — The B Word, Bubble — that we wrote last year.)

Can pricing continue to rise unabated?

If demand outpaces supply, then yes it can.

Are we seeing some some softness in the suburban new home markets at upper price points? Maybe. But as a whole, the market is still significantly undersupplied.

Furthermore, there is neither a fix for the supply issue (other than building more homes further and further from the urban core) nor a likelihood that the first time homebuyer will give up and stay a tenant. As a matter of a fact, I actually think the buyer supply will increase as more and more millennials decide to become homeowners and the supply problem will get worse before it gets better.

Will interest rates rising make housing more expensive to own and temper prices?

Perhaps, but when our wallets are fat and our confidence high, then we buy, even if our mortgage payments take a little more of our disposable income. I don’t think we will see prices flatten until we see 2 to 3 points of increase in long term mortgage rates.

So if you are getting ready to buy …

Prepare yourself.

It is a highly competitive market, especially if you are looking at urban markets or for quality affordable housing.

If you are thinking of selling …

Make sure to extract the correct terms from your buyer that will allow you to re-purchase comfortably and without undue stress (just ask us how!)

And if you decide to build a new home …

And you are buying it from one of the large builders in Richmond with a flashy showroom and highly skilled upgraders, beware. They are reeeeeallly good at their job.

I Like Big Lots and I Cannot Lie …

September 11, 2017 By Rick Jarvis

We just moved to 13 acres and I have to admit that I like it even more than I thought I would.

We have two hummingbirds (one yellow and one gray) that visit us every morning for coffee on the porch and a family of deer that regularly checks on us. The total lack of traffic noise makes the birds sound like a symphony and the lack of light from the surrounding development makes the stars look like I am sitting on the Hubble telescope.

stars at night — The lack of ambient light makes the stars pop on a cloudless night.

From the Suburbs to the Country

For the better part of 20 years, we lived in cul-de-sac on a 1/2 acre lot — the classic suburban experience. We raised 3 daughters, bought a dog, finished the basement and the third floor, and filled our garage with too much stuff to ever park a car in it. Our house was about 7 minutes from two grocery stores, 10 minutes from the schools, and 12 minutes to I95. In other words, it was a really easy place to live at a time in our lives when convenience mattered a great deal.

But as we are now transitioning to semi-empty nesters, we decided it was time for a change. We looked at the City and we looked at the country and and guess what? The country won.

Land 101

So if you are thinking that a little more space is what you need, here are some things to think about.

‘Price per Acre’ doesn’t really matter: If you are a land developer, then price per acre matters greatly. Often times, land development contracts will be written such that the usable (or developable) acreage is what drives the price. It makes sense, as more useable land can yield more apartments, houses, retail square footage, etc.

But for a large lot that will only provide a setting for one house, the price per acre is far less meaningful. Don’t let a seller tell you that a 10 acre lot is twice as valuable as a 5 acre lot, when that’s not necessarily the case.

Shape matters, as does the building site: A 20 acre lot whose logical building setting is at the rear of the lot will have a huge driveway expense. Likewise, if the soil necessitates an alternative or special drain field, which then means placing the home in a less than perfect spot, the land is worth less.

Furthermore, a 10 acre parcel that is relatively square can feel far larger than a deeper and more narrow 20 acres. So make sure that you get a good study period to get your builder and/or architect to walk the property and do preliminary siting to get a sense of what the lot really provides and how much it will cost you to do what you want to do.

Contractually, you buy land differently: In most good land contracts, you should be conditioning for a drain field that will allow you to build the size home you want. The soil that comprises your lot will determine a) how large of a home (by bedroom count) your county will allow you to build and b) if you are required to use a conventional or ‘engineered’ septic system.

Land contracts will typically include language the allows the purchaser to ‘study’ the land for a period of time to vet the issues associated with undeveloped land.

And don’t accept old soil study paperwork. Regulations change.

You Finance Land differently, too: Unlike the typical home mortgage where you can get away with a very down payment and have about 20 different mortgage products to choose from, buying land is more cash intensive and the terms are not as friendly.

When you purchase land, you need to not only be thinking about how you plan on financing the lot, but how you plan on financing the construction of your home. The ‘construction-perm’ is generally the most common, but there are other ways, too. Just know that land is a little trickier and takes an experienced loan officer who understands the process.

Wooded or open?

Privacy? Sunsets? Vistas? Woods? You decide …

Open land can provide an amazing visual, but it also means someone has to take care of the open acreage. Private and densely wooded lots can provide a tremendous amount of privacy but they tend to block the sunsets and can be a nuisance during the inevitable hurricanes of the fall or the storms of the summer.

Think through what you really want.

Summary

There are a lot of other factors to consider — zoning (when raw land), neighborhood restrictions (when located in a large lot neighborhood), timber or farming values, wells, water treatment systems and generators, and of course, cable/intenet — so spend some time with a pen and paper, listing out what it is that you really want.

I think it is also important to note that each day, as one more parcel of land is sold, it pushes the next home that much further out. In the past several years, land prices have skyrocketed and finding quality pieces within a reasonable distance to the urban core has become increasingly difficult. If you find something that suits, you should move quickly.

But the value of leaving work, making a few minute longer drive, and turning your car into your long and rolling driveway, knowing that your place of peace is only movements away, is extremely powerful.

Available Building Lots

Curious as to what is available? Check out current lot inventory in City and surrounding counties of Richmond.