New Homes

The Heyday of Housing

April 2, 2019 By Rick Jarvis

Euro-inspired Tudors.
Nouveau interpretations of traditional forms.
The new rise of Modernist architecture.
And, of course, a healthy dose of Richmond-centric designs in our most timeless neighborhoods.

It is the heyday of housing.

It Was the Best of Times …

Never before do I remember such a time.

When first licensed in the early 1990s, homebuilding was shifting. The transition from square brick and clapboard boxes of the 1960s and 1970s to the vinyl-clad ‘Transitionals’ was in full effect.

Open floor plans, two-story family rooms, and the luxury master bath all became the norm, in direct opposition to the boxy and formal residential architecture so prevalent in prior decades.

Oak Park was one of the first communities to embrace a return to classic forms.

Then, for the better part of the next 15 years, we continued to build in this manner –– and we didn’t really deviate.

As a matter of fact, the only noticeable change we made in our construction from the late 1980s until the middle 2000s was to build increasingly larger homes on increasingly smaller lots … until … 2008 … and …. BOOM! And, well, we all remember what happened.

In the post-Great Recession recovery, housing styles changed yet again, and this time, I think we all recognize that the change is a good thing.

The Return to Authenticity in Architecture

Many moons ago, we wrote a blog called ‘A Return to Authenticity.’

The blog (written in 2011) discussed the tendency that during times of distress (and 2008 to 2011 definitely counts as distress), people tend to migrate back to the classic and the timeless. Looking at housing design in the post-recession years, you can see the trend for sure.

Biringer Builders has taken the classic form to a new level with exteriors as well thought out as the interiors. Their interpretation of the American Farmhouse is truly striking.

The re-emergence of Tudor, Craftsman, Four Square, and American Farmhouse styles is evident in almost all new neighborhoods and at all price points. Communities such as Hallsley have taken these designs to a new level with some truly extraordinary homes being constructed, especially in the more recent sections.

The bottom line is that developers (as well as county planners) are finally allowing more diversity in residential design which, in turn, is empowering a new crop of talented builders to flex their creative muscles. The results are far more interesting than the homogenous vinyl-clad and garage forward boxes of the pre-recession world.

Government Mandates and Building Codes

Over the past decade or so, the minimum standard for building homes has increased –– substantially.

Huntt's Row — Framing requirements and fire separation have not only made attached housing safer, but they also have gone a long way to dampen sound transmission between units.

More robust structural requirements, increased efficiencies in mechanical systems, heightened insulation standards, better electrical safety stops, more durable materials –– all of these have led to better built, safer, stronger, more energy efficient and longer lasting homes than their predecessors. And (for the most part) that is a good thing.

But, what happens when you increase mandates and minimum standards? You increase expenses.

All of these escalating requirements have made it increasingly difficult to bring affordable housing to the market. While there is no doubt that the average new home is far superior to the new home of yesteryear, it is also far more expensive to build, and it is raising the threshold for entry into homeownership … but perhaps that is another post for another day.

Infill. Adaptive Re-use. Renovation. Addition.

In addition to the renaissance in suburban new construction, a noticeable transformation in the mature urban areas is in full force as well.

As the city of Richmond continues to reverse the decades-old trend of population decline, the number of people who are moving into the city has never been higher. When demand is increasing and supply is fixed, prices rise –– and never has it been in more evident than in the more affordable sections of Richmond.

North Church Hill, Highland Park, Brookland Park, and Barton Heights have seen median prices increase by as much as 300% in the last decade. Why? It is all about demand.

O Street Project — The O Street project was a great example of adaptive re-use / infill in Church Hill. The homes were priced at a more affordable level than many new infill projects are.

How to best solve the issue? Urban infill/adaptive re-use, full-scale renovation, and addition are how.

Projects such as 7 West, Huntt’s Row, Jefferson Green, the Meridian, and Citizen 6 are examples of adaptive re-use and/or infill.
Numerous homes in urban communities have undergone total renovations in order to revive their contribution to the community.
Many current owners are electing to simply add on to their existing homes in lieu of incurring the cost of moving.

At the end of the day, the housing stock in the urban core is in demand like never before … and the building community has taken notice.

The Luxury Townhome

Another interesting development for Richmond is the emergence of luxury townhomes.

For years, the townhome was considered an affordable alternative to the single-family detached home –– a sort of starter home if you will. Townhomes were definitely not considered an option for the empty-nesting downsizing buyer –– and absolutely not in suburbia.

West Broad Village and GreenGate changed everyone’s opinion.

The upscale and luxury suburban townhome has sold incredibly well when placed in the ‘new urbanist’ mixed-use developments of Western Henrico. The ability to sell one’s 5 bedroom, maintenance intensive, 30-year-old colonial and move into a luxury ‘town’ that is walkable to high-end grocers, green spaces, restaurants, and other supporting retail is appealing to many –– especially when a residential elevator can minimize the annoyance of stairs.

So for many, the new version of ‘Downsizing’ refers more to the downsizing of maintenance responsibilities than downsizing the actual size (and price) of the home.

Expect to continue to see more and more of our housing market dedicated to the construction of upscale and luxury townhomes in areas that had traditionally been the bastion of detached single-family housing.

An Acceptance of Modernism

7 West, Citizen 6, the new modern section being built in Rountrey, South Bank Ridge (coming soon!) and the spectacular modern home being built 5404 New Kent Ave –– all of these are examples of residential architectural design that 10 years ago would have been shunned by a traditional Richmonder.

Modern Richmond book — The Modern Richmond tour has been so successful that it has spawned a book.

No more.

The appreciation for modern architecture has never been higher and the quality of architect who can truly design these types of homes has never been better.

The recognition of and appreciation for the modernist movement has actually led to the immensely popular Modern Richmond tour AND the imminent publication of a book detailing the history of Modern Richmond tours.

What We Didn’t Talk About …

This post could have been far longer.

We didn’t touch on the new technologies that builders are using to not only help them design housing, but to test it, refine it, and engineer out the inefficiencies.

The South Bank Ridge project will offer some of the most spectacular architecture imaginable.

We also didn’t touch on the consumer experience, which has improved by leaps and bounds in the past decade. Every successful builder knows that the internet gives the disgruntled consumer a voice and the ability to punish transgressions unmercifully.

Simply put, the region’s best builders recognize that building a great home isn’t enough anymore, they also need to provide an interactive, participatory, and transparent process to ensure the consumer’s experience is a positive one.

Summary

At the end of the day, we are in a great era for housing. Housing today has better bones, better materials, better equipment, and is better architected than in days past –– there is no debate.

That said, building is not just a job, it is a responsibility to the future of Richmond, and more than ever before, the building community recognizes that fact. I believe that when we look back in 50 years, we will look back with a fondness for the quality, design, and diversity of what was being built today.

iBuying

January 5, 2019 By Rick Jarvis

handshake hello GIF by Laurène Boglio — Our computer would like to purchase your home.

Ever heard of iBuying? If you haven’t, you can say you heard about it here, first, because it is the newest trend in real estate sales and it is on the way to a market near you –– probably.

So what exactly is iBuying? Well, no one definition exists but generally speaking, iBuying is nothing more than a company (or fund) that buys houses from people directly –– at some amount of discount –– for cash, and typically with a quick closing.

iBuying, in effect, replaces the traditional method of an individual owner putting a sign in the yard and selling to an individual purchaser at a market price.

How Does it Work?

2001 a space odyssey GIF — I’m sorry, Dave. I can’t value your home.

In most cases, the owner of a home will go to an iBuyer website, enter information about their home, and wait for the iBuyer to tell them what they would be willing to pay. The iBuyer company will look at its valuation algorithm and make the seller an offer.

Each iBuyer has a slightly different method, but typically, the offer comes with a mandatory site visit from some representative to verify the condition of the property and the features, size, etc. and to make sure that the information given by the seller is accurate.

If everything checks out, the offer can be accepted and closing will occur quickly and for cash.

Yes, it can be that simple.

The Premise (ok, ‘The Catch’)

The catch is this –- the offers come with a discount.

The iBuyer will use an algorithm that establishes likely market value, but then subtracts the cost of commissions, any required repair money, some carrying cost, and a little bit for profit.

But even if the offers are discounted, they are all cash and come with a quick closing.

The thought is that the offer will be close enough to what a typical seller would net on the sale of their home and, thus, the seller take less to avoid the hassle of the selling process –– and to have the certainty of knowing their home is sold.

i want out house GIF by South Park — Sometimes, iBuying makes sense.

In effect, if the seller believes the ‘hassle to discount’ ratio is in their favor, then they should (in theory) accept the offer. If not, then they can sell via the traditional process.

It is a fascinating idea and one that is taking hold in several markets.

The Players

There are several national players who are attempting to scale this business as we speak –– Zillow Offers being the most notable, but there are others. Knock, OfferPad and OpenDoor are making a lot of noise, while Redfin and a few other brokerages have either launched or are launching their own version of an iBuying program.

And aside from the behemoths mentioned above, local franchised versions also exist –– ’We Buy Ugly Houses’ and Homvestors are forms of iBuying as well, although couched in a more of an opportunistic wrapper.

Heck, even some local investors (typically tied to a local brokerage) have established funds to do roughly the same thing.

The Game

Ok, before you go out and rejoice, thinking that you can trick a computer into making you an above-market offer on your 7 bedroom 1 bath Elvis Pressly themed home that is in need of $50,000 of siding and roof repair, that is not how it works.

The national iBuyers have what is called a ‘Buy Box’ to determine which properties qualify to be purchased. Typically, the ‘Buy Box’ will only include properties that their algorithms can value with a high degree of confidence –– and shy away from the ones that they cannot.

iBuyers will also tend to shy away from thin market segments (i.e. luxury housing) where pricing means fewer buyers and longer marketing times.

So the typical Buy Box will include properties that are newer, more homogenous, less expensive, and otherwise easier to peg a value accurately. Properties that are older, historic, have unique features, are expensive, in need of massive repairs, or are otherwise difficult to determine a fair value for will fall outside of the Buy Box and not qualify for an offer.

So don’t get too excited about an iBuyer coming in and taking your problem property off of your hands at a premium –– they won’t.

Uses and Models

iBuying has applications for sure –– mostly for cases where ‘certainty’ is required or where other factors prevent the home from transferring via conventional means.

If you are a contingent buyer trying to upgrade into a hot market segment, it might make sense to use an iBuyer to sell your home so that you can qualify for the next one
If showing your home repeatedly is burdensome, then selling to an iBuyer makes sense
If you are in need of selling quickly to take a new job, or move to another market, iBuying might also make sense

But in cases where the seller can wait, or where bidding wars are likely to occur, an iBuyer really isn’t necessary.

The Real Uses

So do you know why Zillow really wants to have an iBuyer platform? And Redfin? And the others?

Leads.

A seller inquiring about the value of their home is nothing more than a potential seller raising their hand and identifying themselves as a potential client –– and for any brokerage, that has tremendous value.

So even if the offer is rejected, the lead can still be referred to an agent in the iBuyer network for a referral fee.

Kinda brilliant, isn’t it? You bet it is.

Successful?

The iBuying idea is still rather new and thus, the concepts have not been fully developed and the numbers being reported are not vetted.

https://www.slideshare.net/MikeDelPrete/phoenix-ibuyer-report-teaser

Phoenix is one of the primary testing grounds for iBuying.

A recent article claimed that iBuying represented as much as 3% of the accepted offers in markets where they were operating, but that is largely a self-reported number (as well as a self-serving one) so it remains to be seen.

But even if the iBuyer does not buy in a large number of homes, the leads generated are still of great value to the Realtor community. So for iBuying to be successful, it doesn’t have to just monetize the homes they purchase –– it has to monetize the leads it generates.

Richmond and iBuying

The big players aren’t in Richmond in force, but they are somewhat close (Raleigh, NC) and in some parts of Charlotte.

The closest iBuyer markets are in North Carolina, but no markets in the northeast are in operation.

Some locals are playing in the space here locally, but no one of any real scale.

And since Richmond is an old city with aged housing stock, the likelihood that any iBuying platform would identify Richmond as a target-rich market is low. When you look at the map above, you see no iBuyer presence in the older housing markets of the northeast.

But that said, at some point, we will see some version of the iBuying model enter our market.

Questions Abound

So stay tuned, there are still many questions to be answered.

suspicious thinking GIF by SpongeBob SquarePants — Hmmm …

One of the biggest is ‘what will iBuyers do with the homes they buy?’ Some will simply resell them and others will employ a buy and hold strategy. If that happens, will it put even more pressure on inventory?
The other question is how will iBuying impact appraisals? If the nearest and most recent comparable sale was an iBuyer sale at a 10% discount, will that impact the value of the surrounding properties?
What happens when iBuyers compete with one another? Will the competition between iBuyers squeeze the profits out of the model to such a point that they exit the market?
What if an iBuyer ends up with enough inventory that it can act like CarMax and offer trade-in options? Supposedly, that idea is being discussed.
Lastly, if and when the market goes through an adjustment, are iBuyers going to be willing to purchase assets that are declining in value? Just ask developers and builders what happened to their balance sheets in 2008 – 2012 and how much fun it was to hold onto housing when it was going down in value by 10% a year for 3 straight years? Hopefully, that adjustment is nowhere near, but most felt that way in the years leading up to the recession, too.

I don’t think anyone has the answers yet.

Summary

The iBuying idea has merit, but there is a lot still to be determined.

That said, the key point is that there is a lot of money backing these firms so the iBuying model is going to be here until someone figures it out.

Like a hammer or a lawnmower, iBuying is nothing more than a tool and it has its specific uses. Learning how to use the tool properly will come with time and practice for all involved.

Having a choice is never a bad thing for the consumer and iBuying will provide the public options that they didn’t have before.

2019 and the Return to Normalcy

December 30, 2018 By Rick Jarvis

2019 is going to be a transitional year.

In the same way that you might take your foot off of the gas when you see a yellow light in the distance, 2019 will likely be a year where we see some segments of the real estate market lose a bit of their momentum.

‘A Return to Normalcy’ was a phrase used by Warren Harding during his presidential campaign in the 1920’s to define the period of recovery after WWI …

For many, a slower pace will feel extremely odd. All we have known for the past 5+ seasons is rampant price increases and bidding wars. That said, 2019 is likely the year that the frothiest behaviors will subside –– at least in some segments (which we will touch on in a few paragraphs.)

In reality, what we are beginning to see is not a market in decline, but rather <gasp> the leading edge of a normal market.

Disclaimers

First, I need to disclaim a few things.

Nothing in this post is guaranteed to happen tomorrow, or probably even the next day –– most of the observations are longer-term in nature and represent a shift in direction, but not a bootlegger’s u-turn.
Also, recognize that an individual house value behaves differently than a set (or segment) of houses. Colors, condition, architectural style, yard, appliances –– they all matter to individual buyers and sellers and can impact the value of an individual home. But the behaviors being discussed below refer more to how groups of homes behave in the aggregate.
And lastly, any number of unforeseen events could change things –– and fast. Politics, trade wars, real wars, oil prices, and/or natural disasters all have massive impacts on our economy as a whole. And corporate acquisitions, sales, and/or relocations can all have impacts on our region, specifically.

So with that bit of throat clearing, I proudly bring you the ‘What is Going to Happen in 2019’ prediction post (and if you want to see how I did in prior years, you can find 2018’s post here.)

A Return to Comparative Normalcy

What is normal, anyway? Well, we wrote about that very question at the end of 2018. But the takeaway is that ‘what is normal’ is more of a relative question than an absolute one.

via GIPHY

If you asked ‘1993 Rick’ what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell. But when you ask ‘2019 Rick’ the same question, I think, ‘Yeah, 5% rates and 5% appreciation is sure going to be slower than the 4% rates and 10% appreciation of 2016.

The lesson –– it’s all relative.

Does Anyone Remember?

To give you an idea of what a historic version of normal will look like, imagine a market with the following metrics:

6 to 8% mortgage rates (instead of 3.5%)
3 to 4% annual appreciation (instead of 8 to 10%)
45 to 60 day marketing times (instead of 7 to 14 days)
2 to 4% seller discounts (instead of multiple buyers with escalator clauses)

You see, the period from 1990 to 2005 looked a lot different than 2005 to 2018.

If you asked 1993 me what I thought of a 5% interest rates and 5% appreciation, I would have been giddy with the excitement of how many properties we were about to sell…

And, yes, I get it that many of the inputs are different (demographics, population trends, preferences, architecture, inventory, regulation, materials), but the period of 2005 to 2018 was about as unprecedented as one could imagine.

Honestly, I think a little more stability in housing is a good thing. NASDAQ levels of volatility in housing just isn’t healthy for anyone.

Segments Matter

So in our end of the year meeting at One South, we spent a lot of time on the idea of market segments. Segmenting (stated differently) is nothing more than looking at smaller samples of how connected sales behave, and not aggregating all housing into one analysis.

Pro Tip here –– If you ask an agent, ‘How’s the market?’ and they don’t ask a qualifying statement like ‘Which segment?’ or ‘What area are you referring to?’ then you need to find a new source of your information.

In the same way that New York’s housing market behaves differently than Orlando’s, the new construction market in western Chesterfield should behave differently than Bellevue does –– and this will be key in understanding the new market.

Segments and the Impact of Population

For years, the City of Richmond’s population was in decline. Chesterfield and Henrico were experiencing explosive growth, but the City was not.

Around 2000, the City population trend officially reversed.

In the latter 1990’s, you could feel it starting to happen. VCU was gobbling up properties by the handful and many of the long ignored Downtown neighborhoods began to see construction activity and new businesses popping up.

The population of Henrico and Chesterfield now need to compete with the City for residents and can no longer sustain their growth based on the City’s exodus.

When the 1990’s gave way to the 2000’s, the City’s population began to stabilize at just below 200,000 residents. As we now enter 2019, the population of the City is approaching 230,000, and (by most studies I have seen) is projected to continue to grow.

The Impact of Growth

For the last 5 years, extremely tight City inventory levels and incredibly competitive bidding wars (the worst we saw in 2018 was 18 offers on one house near Carytown, no joke!), especially at the lower price points, has been the norm.

What do you get when your supply is fixed and demand increases? Price appreciation, that’s what.

The growth rate within the City has not only equaled the growth rates of the surrounding counties, but might have actually exceeded them. Any agent who works the more urban markets will tell you that the impact of the growth has been dramatic.

So as long as this trend continues, if you own property in the City, you are probably sitting pretty.

The Behavior of Various Segments

Now when we compare pricing for various segments, what we tend to see is the areas where pricing is the most affordable and closer to the urban core have appreciated the most dramatically. Areas that are further out and/or more highly priced are the ones where pricing has gone up at a slower rate.

Now, with all general statements, there are going to be exceptions, but overall, the statement holds true. Take a look below at 5-year appreciation rates in different areas of the Metro.

Appreciation_Rates_ — These figures only include resale properties, not new ones.

As you can see, the appreciation rate differs greatly.

Does that mean that you have made a mistake or are subject to deflation in the coming years if you live in a suburban area with new construction? Not at all. It just means that you shouldn’t expect that your neighborhood will behave the same as the one with a lower price point or on the other side of town.

And the Reasons, Please?

What do Fox Hall, the Deep Run High School District, and Hallsley all have in common? Fairly high prices to begin with and a great deal of new construction nearby.

What do the Museum District, Bon Air, and Church Hill have in common? Relative affordability and great difficulty in building new homes on any sort of scale.

Simply put, we can’t build houses where we need them most AND we can’t build them at the prices that the market can easily afford.

As we have stated many times before, the ability to provide housing is easiest where land is plentiful. So in areas south and west of Route 288, as well as points east in Henrico, where large tracts of undeveloped land are available, it is far easier to create new communities of scale.

Building is Getting Harder

But as any builder will tell you, not only are they being forced to build further away from the urban core, their costs are skyrocketing (both materials and labor) and the mandates placed on them by the counties are increasingly burdensome.

Take a look at the chart showing what has happened to the cost of construction (labor + materials). The builders aren’t lying when they tell you how much their costs have increased.

Furthermore, the arrival of several national builders is going to change the way new homes are sold in Richmond. DR Horton, Schell Brothers, and Stanley Martin each have the financial backing to build more homes in a quarter than most of the local builders could hope build in a year. The big national builders can gobble up lot inventory, they have their own sales force, and have the capital to build new models for each section of the communities in which they sell.

The Return of Strategic Mortgage Decisions

Let’s shift from home prices to borrowing money.

For the better part of a decade, choosing a mortgage product has been pretty much a no-brainer:

What mortgage product do you choose when 30-year fixed rates are at 3.5%? You take the 30-year fixed rate because of the 30-year guarantee.
What mortgage product do you choose when 30-year fixed rates are at 4.5%? You take the 30-year fixed rate because of the 30-year guarantee.
What mortgage product do you choose when 30-year fixed rates are at 5.0%? You probably still take the 30-year fixed rate because of the 30-year guarantee.

But what happens when 30-year fixed rates are at 6.25% but a 5 year adjustable is at 5% and you only plan on being in your home for 5 to 7 years? The question becomes trickier, doesn’t it?

Welcome to the new (ok, old) world of mortgage finance.

In the 1990’s, we saw clients make the fixed vs adjustable mortgage decision all of the time.

But since rates cracked the 5% floor in 2010, taking the risk of an adjustable mortgage seemed unnecessary.

Where are we currently? We enter into 2019 with rates hovering around the 5% mark. And while no one can claim to be a master of perfectly predicting interest rates, the majority of industry experts feel that 30-year rates between 5.3 and 5.8% (or even as high as 6%) by year’s end are a real likelihood.

So as the spring market emerges and the demand for money increases, the shrewd buyers will keep an eye on the mortgage products OTHER than the 30 year fixed rate mortgage to see how large the spread is.

At some point, the spread between fixed and adjustable mortgages may justify selecting shorter term mortgage products –– especially when the expected hold period is less than 10 years.

Cue the ARM (the Adjustable Rate Mortgage)

Wait, did you just say that ARM’s are good?!? I thought that ARM’s were the thing that caused the financial crisis in 2008?!?

Well, if you don’t underwrite an ARM properly, then yeah, an ARM is not a good product. But no mortgage is safe if it isn’t underwritten correctly –– ARM or otherwise.

So let’s not blame the ARM, let’s blame the true culprit –– shoddy underwriting.

The blue is the percentage of loans underwritten in each year since 2001 that were considered Sub Prime. As you can see, the percentage of Sub Prime is far lower than in the years preceding the crash in 2008.

In the financial crisis of 2008, a great deal of focus of was placed on the Sub Prime mortgage industry. And there was no more abused loan product by the Sub Prime industry than the ARM.

Today’s Arms are Actually Underwritten

The difference today is that the ARMs issued by Fannie Mae, Freddie Mac, and FHA are underwritten properly and also contain caps on the adjustments so that extreme swings in interest rates do not dramatically increase the risk of default. The Sub Prime ARM’s were neither underwritten with any rigor, nor were they capped in such a way as to minimize risk. (And in many cases, they were designed to fail, but that is another topic for another day.)

As an example, a 5/5 adjustable with a 2% cap means a mortgage with a fixed rate for 5 years with a maximum adjustment of 2% at then end of year 5, with another 5 years of the new rate before another adjustment. Is that overly risky? Not when applied correctly it isn’t.

What makes an adjustable mortgage product appealing? The rates tend to be lower –– especially the higher that the 30-year fixed rate becomes.

And while the spread between fixed-rate and adjustable rate products is not quite to levels that justify the switch, it might not be too far off in the future.

So if your loan officer suggests you take a look at an ARM, don’t reject the idea simply out your memory of 2008. An ARM, like a screwdriver or a shovel, is simply a tool. When you use a tool appropriately, they tend to work quite well.

Since 1991

So we (Sarah and Rick) have been in real estate –– as agents, brokers, lenders, developers, owners, and rehabbers –– for longer than we would like to admit. And consequently, we have had front-row season tickets to the booms, several busts, and each subsequent recovery.

We have had front-row season tickets to the booms, several busts, and each subsequent recovery…

What does that mean? It means our advice is based on experience that dates back to the early 1990’s.

In 1991, the median sales price of a home in the US was $120,000. It is now $315,600
In January of 1991, 30 year mortgage rates were 9.56%. They are now 4.75%
In 1991, the average rent was $649. It is now $1,450.
In 1991, there was no Zillow and no Trulia. As a matter of a fact, there was not even an online MLS

What else does it mean? It means our team is extremely excited to see times ahead where good decisions will rule the day, and not just momentum.

We love the fact that strategic decisions about mortgage are required, and not just blindly electing a 30-year mortgage, regardless of the situation
We love the fact that the need to make purchase decisions under multi-offer pressure will likely subside
And we love the fact that the data now exists to really help demonstrate the best course of action, and decisions are made based on information, not conjecture

Welcome to 2019, the leading edge of normal.

It’s Okay to Pay More

June 26, 2018 By Rick Jarvis

I know it sounds like it goes against everything in your core. Real estate is negotiable and a good deal means a big discount. Right?

Well, that is not necessarily true any more.

Price is Not Value

The price of anything — a house, a car, a gallon of milk — is the owner’s estimate of what they think their product can command.

But the value is what the market is actually willing to pay.

Ask yourself this: If every house on the market was simply labelled as ‘available’ with no set price, how would you, as a buyer, behave? In this market, that might be the best way to think about it.

Musical Chairs, Sorta …

Do you remember the game of musical chairs — where there is always one more person than there are chairs. Well, instead of ten people and nine chairs, imagine the game with ten people and one chair.

This is what the market has become. It’s a ridiculous comparison, of course, but it applies. Low supply and high demand means prices rise — and right now, the supply of homes has never been lower.

Show Me the Numbers

The fact there is an inventory shortage is pretty well known. The issue is very few understand how extreme it has become.

Check out how much the market has changed:

In May of 2008, there were 11,000 homes on the market and 1,200 under contract (a 9 to 1 ratio.)
By May of 2011, there were 8,800 homes on the market with 1,200 under contract (a 7.3 to 1 ratio)
By May of 2017, the numbers were 3,800 and 2,300. The ratio had fallen to a never before seen 1.65 to 1.
And now in March of 2018, 3,000 and 2,100 is where we stand for a ‘you have got to be kidding me’ ratio of 1.42 to 1.

And when you look at some of the mature urban markets, especially those that are supposedly affordable, those markets have actually inverted with more houses under contract than there are homes available!

Per the chart above, the Museum District and Windsor Farms area has only one house for every three buyers! (April 2018 shows 18 active listings vs. 56 pending sales.)

Competition is fierce, to say the least.

There is No Fix

Here’s the bad news, there really isn’t a fix.

For one, we are not going to build our way out of this problem.

Housing can only be built (in any substantial quantity) in areas where there aren’t already houses. In other words, the only place we can build houses is in the outer suburbs — further and further away from the urban core. And for many, what is quickly becoming a 40 or 50 minute commute simply isn’t an option.

On top of that, the price of home building materials has never been higher and the labor pool has never been smaller, resulting in correspondingly large cost increase in new construction.

Two, owners where houses are few and far between are electing to simply stay put. Why? Because once you sell a home, you have to go buy another one – and why would any seller in their right mind sell their home only to have to go and buy another one in this crazy market? Especially if they have a 3% 30 year mortgage and their equity is rising as rapidly as it is?

The situation we are in is going to be here for quite some time.

The Lesson — Don’t Mistake Tactics for Strategies

The decision to buy or sell is a strategic one. But how you buy or sell is a tactical one.

Paying over asking price does not mean you or your agent is a bad negotiator — nor does waiving inspections, or appraisals, or offering rent-backs (provided you are not putting yourself in financial danger!) All it means is that you are doing what you can to secure an asset that is in demand.
We get it, the inventory crisis is causing some of the most extreme market conditions in history, which is unnerving to navigate. And yes, we fully acknowledge that it takes a time or two to really figure out what you need to do to win.

But just know that the smartest people in any room want to own the most valuable assets available and will do what it takes to secure them. And for the best houses in the best neighborhoods, there is going to be intense competition. You have got to come correct if you want to win the battle.

I know it is difficult to hear, but today’s market doesn’t resemble the markets of the past – even the very recent past. Make sure to adjust yesterday’s strategies to today’s conditions and don’t mistake paying asking price or above with a poor decision.

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.

New Homes

It Was the Best of Times …

The Return to Authenticity in Architecture

Government Mandates and Building Codes

Infill. Adaptive Re-use. Renovation. Addition.

The Luxury Townhome

An Acceptance of Modernism

What We Didn’t Talk About …

Summary

How Does it Work?

The Premise (ok, ‘The Catch’)

The Players

The Game

Uses and Models

The Real Uses

Successful?

Richmond and iBuying

Questions Abound

Summary

Disclaimers

A Return to Comparative Normalcy

Does Anyone Remember?

Segments Matter

Segments and the Impact of Population

The Impact of Growth

The Behavior of Various Segments

And the Reasons, Please?

Building is Getting Harder

The Return of Strategic Mortgage Decisions

Welcome to the new (ok, old) world of mortgage finance.

Cue the ARM (the Adjustable Rate Mortgage)

Today’s Arms are Actually Underwritten

Since 1991

Price is Not Value

Musical Chairs, Sorta …

Show Me the Numbers

There is No Fix

The Lesson — Don’t Mistake Tactics for Strategies

A Home is an Asset

Sticks, Bricks, and a Vehicle for Wealth Creation

No Crash on the Horizon

The Housing Divide

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

Time to Build More, Right?

The Problem is Systemic

Issue One – Construction Costs are at an all time high

Issue Two – Governmental Mandates Mean Higher Costs

Issue Three – Demographic Shifts

Issue Four – Gentrification

The New Normal

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