A year ago, there weren’t enough hours in the day for real estate agents to show houses to those who wanted a personal visit, even as the prices of homes in Virginia soared 42% in five years to the 11th highest in the country. Buyers were lined up, anxious to buy and often engaged in bidding wars. “It wasn’t unusual to put a home on the market and get 35 offers,” says Shana Bloom of Bloom Real Estate.
The push to purchase drove up prices, but higher prices did little to quell demand. “2020 was a record sales year. 2021 was another record year,” says Laura Lafayette, CEO of the Richmond Association of Realtors and the Central Virginia Regional Multiple Listing Service.
That changed last summer when the Federal Reserve began raising interest rates. Mortgage rates more than doubled, sending the local real estate market into a plunge worthy of a King’s Dominion roller coaster. “That was the slowest I’ve seen in my 17-year career,” says Jason Burke of the Burke Realty Group of Long & Foster. “If homeowners are looking at interest rates that were 2.5[%] to 3.5[%] last year and now are 6[%] to 7%, why are they going to move?”
“Historically, 6[%] to 6.5% isn’t a bad interest rate,” says Lafayette. “It’s just, after 3[%] to 3.5%, it feels high. A lot of it is psychology.”
Although rates ticked up another quarter of a percentage point in May, the Federal Reserve indicated that it could be the last increase for the year. And perhaps it’s psychology, perhaps it’s old-fashioned optimism, but as spring ushers in prime real estate season, phones are ringing again in local real estate offices — although, says Bloom, “It’s certainly a different market than last year.”
Good News?
There’s no question it’s still a seller’s market. In March, there were 1,051 new listings of single-family homes in the Richmond metro area, which includes Chesterfield, Hanover and Henrico counties and the city of Richmond — down 26% from March 2022. “Buyer demand continues to outstrip supply. Right now, we have less than a month’s supply,” says Lafayette. A balanced market — where supply meets demand — is five to six months’ supply of homes for sale. “I don’t ever see that happening in this area. We would be lucky to get a three- or four-month supply,” she says.
That said, the market has “decelerated since last July and August,” according to Bloom. “Property is continuing to appreciate, but at a more normal rate. The prices started to taper a bit, but it is still a great time for the seller.”
This year, though, there’s better news for buyers, as well. In 2022-23, the median house price climbed only 3.6%, not the dizzying 11% that marked the 2021-22 real estate season, according to the Central Virginia Regional MLS report. In addition, the percentage sellers got for their homes dropped 3.8% to nearly 100% of the listing, which indicates fewer bidding wars. Houses are staying on the market a little longer, 27 days as opposed to last year’s 16, giving buyers more time to see what’s available.
“Richmond is in very good shape with good employment numbers,” says Vernon McClure, president of Main Street Homes, the second-largest home builder in the Richmond area. “Our market, even though prices are still up so much, has been really good. Prices for houses around Richmond are not bad if you look at real estate to the north of us, or even across the country.”
The Squeeze
While the regional real estate market is starting to normalize, there is still a significant squeeze on low- to mid-price housing. In Richmond, the median home price is $365,000, according to Central Virginia Regional MLS, and the average sales price is $414,225. “That’s really impacting those looking for affordable housing,” Bloom says.
One rule of thumb advises that a household should spend no more than 41% of its income on debt, including the mortgage. With interest rates at 6.5%, online mortgage calculators suggest a salary of $112,000 would be needed to afford a $365,000 home. According to the U.S. Bureau of Labor Statistics, the mean hourly wage in the Richmond region is about $27, or $54,000 per year.
In the usual real estate cycle, young adults purchase a starter home, move to a family home when they have children and then downsize later in life. However, the cycle has been disrupted, creating a dearth of houses priced under $300,000. "If I have a 3% mortgage on my $300,000 home and I want to upgrade, I’m now looking at a $600,000 or $700,000 home and a 6[%] or 7% mortgage rate. That has a lot of people holding steady where they are,” says Mark Cipolletti of Keller Williams Richmond West.
Adding to the problem are empty nesters who aren’t leaving their nests, because a smaller house or a unit in a 55+ community can be as expensive as the family home they would be selling. In Britlyn, a 55+ community in Glen Allen built in the last five years, the least expensive unit is $520,000. Even communities that started at lower price points have appreciated beyond many budgets. “In Cross Ridge (a 55-plus community in Glen Allen), a unit going for $350,000 five years ago is now $500,000,” Burke says.
One Solution
Condominiums or townhouses may be a solution for some. They seem to be springing up all over the metro area and, in fact, new listings are up more than 77%, with 1.4 months’ supply of inventory available. At $337,482, the average price of a condo or townhouse is both lower and growing more slowly (0.1%) than that of a single-family home.
“We have had the best start of the season ever,” McClure says. “I think we are going to continue to see denser development. There is a real demand for smaller homes. People are having fewer kids and having them later in life.”
But, he adds: “Affordability is a real challenge right now. We are building more townhouses, and they are priced in the $370,000 to $500,000 market. It’s crazy that that’s now affordable housing, but such is the way things are.”
McClure says his company, Main Street Homes, is offering loan options like buydowns, where the seller pays to reduce the interest rate for a prospective buyer. “We pay between $10,000 to $14,000 to buy down about three quarters of a percentage point on a loan. It can be a big help to new homebuyers,” he says.
Building the Market
Lack of inventory has been a chronic problem for the Richmond area. “We have underbuilt for so long,” Lafayette says. But, she cautions, “we are not going to build our way out of this.”
When the housing market crashed in 2008, building halted. In Richmond, several developers who had purchased swaths of land simply didn’t build. “A lot of these had the zoning approval but the economics didn’t pan out from 2008 to 2012,” McClure says. In addition, “a lot of developers left the marketplace and haven’t come back,” Bloom says.
Then COVID-19 hit, supply chain problems ensued and the cost of building soared. “During the third quarter of 2021 into 2022, construction materials got so high that builders had to charge more,” says Thomas Tyler, director of Integra Realty Resources. Lumber prices have come down since then, Bloom says, “but there are a lot of other things in the supply chain that are still impacting building.”
Even when materials are available, building takes time. “It takes three to four years from a land purchase to lots on the ground,” McClure says. “Everything is taking a lot longer to do. It’s hard to get the zoning done, particularly in an election year. No one wants controversy.”
Finding large tracts of land suitable for building single-family homes is pushing development farther out from Richmond. “There hasn’t been enough raw land, particularly in the suburban areas, for developers to develop what they could have,’” Tyler says. “Developers are running out of land in western Henrico and Chesterfield. New Kent is a lot more active.”
The good news, Tyler says, is that a number of properties purchased prior to the COVID-19 pandemic are either under development or ready to open. Many of them “are townhouses or condos, or include multifamily developments in the project.”
Tyler speculates that home home prices may start to drop. “It feels like the prices are at a point now that there is going to be some resistance to further increases.”
To those still on the fence about buying, McClure says, “If you want to buy a house with inflation the way it is, buy now. Interest rates will come down, and you can refinance.”
