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Fed’s Fifth District economy expands slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) has expanded slightly since October, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources.

Here’s what the Nov. 30 Beige Book edition revealed about the direction the economy is taking:

Manufacturing activity in the Fifth District slowed mildly as new orders and backlogs declined but shipments stayed flat. Vendor lead times declined, indicating supply chain backlogs were easing.

Travel and tourism increased moderately, and air travel is expected to increase over the holidays. Retail spending increased modestly from October’s report. Residential and commercial real estate market activity slowed.

Respondents in the ports and transportation sector indicated that volumes were beginning to decline, with overall loaded freight shipments down at Fifth District ports. Loaded exports continued down while import volumes were flat or up slightly, led by furniture, sporting goods and heavy equipment.

Dwell times at the ports declined, reducing congestion and lowering storage fees. Spot rates from Asia to East Coast ports decreased 33% from last period but remained above the pre-pandemic rates, according to the Fed.

Trucking firms reported a slight decrease in freight volumes, in line with the normal seasonal slowdown. Industrial customers’ demand remained strong while retail volumes declined. Trucking respondents reported that they weren’t hiring drivers because their existing workforce could manage current volumes.

The cost of new equipment increased substantially, firms reported, and new truck tractors and trailers were still backordered by about a year.

Employment in the Fifth District increased modestly, and many firms reported unfilled positions. The majority said they were increasing wages for new and existing staff by more than they had in previous years. Companies reported difficulty finding skilled workers.

Prices grew robustly, with manufacturers and service sector companies reporting strong year-over-year price growth in both input and customer prices.

Retailers reported modest sales and revenue growth and increasing inventory. Used vehicle sales increased moderately as prices began to drop, but new vehicle sales stayed low due to low inventory levels, rising prices and higher borrowing costs.

Housing demand slowed as buyer traffic and listings declined. Days on the market and inventory increased but remained below normal levels. High interest rates and low inventory led to fewer pending and closed sales, according to respondents. Prices stayed consistent, but sellers reported offering concessions such as temporary rate buydowns or paying closing costs.

New home construction slowed and builders stopped buying new lots because of high building costs and economic uncertainty. New commercial real estate projects slowed due to rising interest rates and higher construction costs, as well as supply chain disruptions and labor shortages.

In the commercial real estate market, the retail, office and industrial sectors had higher vacancy rates this period, although Class A office space activity remained strong as companies sought to entice employees to return to the office.

Demand for commercial and residential loans decreased moderately in the face of rising interest rates. Higher input costs also weakened commercial loan demand. Deposit growth slowed as customers searched elsewhere for higher yields.

Mortgage rates above 7% shock volatile housing market

Charlottesville Realtor Denise Ramey has a client who put in multiple bids for houses over the summer, when the market was booming, but they were all turned down. Now, with mortgage rates topping 7% for the first time in more than 20 years, he’s not sure if he will buy a house at all — or whether he might look outside Virginia to markets where he can get more bang for his buck.

The rate on a 30-year fixed mortgage, which many homebuyers use to take out loans, averaged 7.08% for the week of Oct. 24, sending ripples through an already volatile housing market. It was up from 6.94% the previous week and more than double the average of 3.14% a year ago, according to Freddie Mac’s primary mortgage market survey.

The client, who was shopping for houses listed at above $800,000, represents the typical buyer Ramey works with: people qualified for a mortgage and able to put 15% to 20% down.

“That was a real eye opener for me,” said Ramey, owner of Denise Ramey Real Estate LLC/Long & Foster and the president of Virginia Realtors. “I expected he would be reducing the price range, but I did not anticipate the level of frustration and negativity he expressed today.”

‘Something psychological’

Mortgage rates have been rising swiftly for the past few months, said Lisa Sturtevant, chief economist for Bright MLS, but there’s something psychological that kicked in with rates rising above 7%, she notes.

“It’s higher than anyone in this demographic cohort can remember,” she said.

First-time homebuyers — who tend to be younger with less income — will be impacted the most, she said, by a double whammy of higher prices and higher interest rates. Repeat home buyers, who have benefitted from record growth in housing equity, will be less impacted, Sturtevant adds.

The rise above 7% comes as a shock.

“A few months ago, most places were not forecasting 7%,” said Ryan Price, chief economist for Virginia Realtors.

Big unknowns include whether the Federal Reserve will raise rates again as expected during its Nov. 1-2 meeting and how much inflation grew during October.

Earlier this year, inflation hit a 40-year high, and although the Federal Reserve has raised interest rates to battle the rise, prices have continued to spike.

“In general, if we see inflation come down, the [Federal Reserve] will ease up and settle in at a rate that could hit as high as 8%,” Sturtevant said, adding that it’s likely that rates could settle in between 7% and 7.5%. Double-digit rates are unlikely in her opinion.

Price had a similar view.

“We’re in a pretty volatile stretch of market right now so it’s pretty hard to predict,” he said. “Until we see sustained evidence that inflation is receding, it’s likely that upward pressure on mortgage rates will continue.”

Changes in inventory

In September, 10,172 houses were sold in Virginia, about 3,000 fewer than a year ago, or a 23.1% decrease, according to Virginia

Ryan Price

Realtors. At the end of the month, there were 19,793 active listings, a 2.9% supply drop from a year ago. The median sales price statewide was $365,000, up 4.3% from a year ago.

But the inventory situation is improving, Sturtevant noted, because there are fewer potential buyers making offers. She doesn’t see a “balanced market” happening until next year.

“There may be fewer buyers, so sellers are competing for fewer buyers, but at end of day, sellers will still be in the driver’s seat next year,” she says.

With buyers pushing pause on home searches as rate increases leave them with less purchasing power, “some sellers are [in turn] likely spooked by this cooling demand and more are reluctant to list their property right now,” Price said.

In Virginia, price growth will slow in the Northern Virginia suburbs and Richmond, but regions such as Hampton Roads — coastal markets — and places where people have second homes, are at the biggest risk for declines. “Zoom town markets” — scenic places with high-speed internet access that attracted remote workers, such as the Shenandoah Valley — have had to reset to local incomes instead of appealing to relocating buyers who were willing to pay higher prices. Metro areas are more stable.

Sales activity is slowing down in most places in Virginia, which is not a new trend. It started about a year ago, Price noted, when the market started slowing, but the slowdowns have accelerated in recent months due to increased interest rates.

Where Ramey is, in the Charlottesville area, available housing inventory remains lower. When a property does come on the market in an area people find desirable, such as Western Albemarle County, there will be multiple offers.

Normally, at this time of year, she would have 10 to 15 houses under contract to close in December. But not this year. “We’ve had another great year, but what I’m seeing is, it wasn’t even a slowdown, it was a ‘hit the brakes’,” she said.

“It will be interesting to see what plays out. It really is that crazy of a market right now, where it’s very transitional.”

Sky-high rents

The Navy man sat in Barbara Gatewood Sgueglia’s office in tears.

His rent was being raised from $1,600 to $2,750, and with several children and his wife in school, he just couldn’t swing it, even if the landlord offered to split the difference.

Anything else he could afford would likely be “much less appealing,” says Sgueglia, Hampton Roads Realtors Association board chairman and founder of the Military Relocation Team in Chesapeake.

The sailor’s situation has become all too common in Hampton Roads, she says. The number of available rentals has dropped so low and rents have risen so high that it’s become hard for people to find what they can afford.

Part of the reason is that Hampton Roads, with its large military presence, has a lot of what Sgueglia calls “accidental landlords.” These are military families who bought a starter home several years ago and rented it out to build equity when they got reassigned. Now they’re moving back — and the area’s real estate market is so tight, it’s hard to find a new place for themselves.

“They’ve had to move back into their [old] homes and the renter has to move out,” Sgueglia says. “That takes another rental off the market.” The Hampton Roads market had 606 newly listed rental properties during August, according to raw data from the Real Estate Information Network Inc. (REIN) — a steep decline from three years ago, when 1,142 apartments were newly listed.

Other investors may have pulled out because of problems they encountered during the pandemic and sold their properties at the height of the real estate market, she says.

Meanwhile more people are looking to rent, says J. Van Rose, president of Rose & Womble Realty Co. in Virginia Beach.

“One of the reasons the housing market was so blisteringly hot was with interest rates as low as they were, you could buy almost a $400,000 house with a 3% interest rate and it would be cheaper than going into an apartment by a long shot,” he says. “Now that interest rate has gone up, it’s closed that gap.”

The situation for renters in Hampton Roads is almost dire, says Jeremy Caleb Johnson, an agent and associate broker with Long & Foster/Christie’s International Real Estate in Virginia Beach.

The rule of thumb for rent in most parts of the area had averaged about $1 per square foot of property, meaning an 1,100-square-foot townhome or condo would rent for $1,100 unless there was something remarkable about it, he says. The average rate is now about $1.25 to $1.30 per square foot in what for many renters has become what he termed “an ultra competitive market.” The average monthly rent for the region was $1,800 as of Sept. 1, up nearly $200 from the same period last year.

“We see multiple applications for a property in many, many instances,” says Johnson, board chairman-elect of the Hampton Roads Realtors Association. “We see people offering above the advertised rent.”

Robert McNab, director of the Dragas Center for Economic Analysis and Policy at Old Dominion University’s Strome College of Business, says Hampton Roads is playing catch-up when it comes to rental rates. Prior to the pandemic, they increased slower than the national average. Now they’re accelerating faster.

“Of course, those increases in housing values and rental prices are outstripping gains in wages and salaries,” he says. “That places extraordinary stress on families in Hampton Roads, especially for military families that may be moving to the region and their basic allowance for housing has not kept pace with the rental price appreciation in the region.”

The challenge for Hampton Roads is to diversify its economy, which is highly dependent on Department of Defense spending, McNab says. It accounts for approximately $4 out of every $10 of economic activity in the region.

“Private sector job growth has lagged behind that of other metro areas in Virginia and the nation, so the broad challenge going forward is how to create more robust private sector growth that is not connected to the federal government,” he says. “This is something that’s obviously not going to happen overnight. It’s going to take a concerted effort.”

Sgueglia’s Navy serviceman and his family were ultimately able to remain in their rental property, after they negotiated a $2,200 monthly payment from the landlord, a decrease from $2,750.

“We ended up settling,” she says. “He’s staying. The owner isn’t thrilled, but the owner is a [former] serviceman himself, so he understands.”

Read about home sales trends in Hampton Roads, including stats and local tax rates.

A welcome respite

While the spring was red-hot for the residential real estate market, conditions are expected to cool off in the fall.

“The market is definitely stabilizing,” says Liz Moore, board president of Real Estate Information Network Inc., the multiple listing service (MLS) for the Hampton Roads region. “We had such a frenzied market during the pandemic.”

She cautions, though, that it’s hard to predict what will happen next because the market has been so crazy.

Earlier this year, housing inventory was so low, nearly every listing had multiple offers on it, creating an ultra-competitive market for buyers.

A steadier market, which is a good possibility for this fall, is good and bad for buyers. Rising interest rates are pulling some buyers out, and would-be first-time homebuyers could be affected more than other potential buyers. But that means a more balanced supply-and-demand equation.

“It was so competitive for the last two years that buyers didn’t have much of a chance in a multiple-offer situation,” Moore says. “Now that there’s not quite such an intense frenzy of competition, buyers don’t have to pay such wild prices.”

In July 2021, the median sales price for a home in the region was $300,000 — and a year later, the median cost rose about 7.5% to $322,500, according to REIN data. And that’s up from the median price of $275,000 from July 2020. Still, Moore is seeing some cooling on the higher end of the market, where homes listed for $750,000 or more are staying on the market longer than they had in recent years.

“I think there is good news on the horizon,” Moore says. “As the inventory inches up, that will be a welcome respite for these buyers.”

A slow shift

Jeremy Caleb Johnson is advising clients preapproved for a mortgage loan at the beginning of 2022 to adjust expectations.

The price of houses they may have looked at just months ago likely not only went up significantly, but the low interest rates available then have also risen dramatically.

“What you may have been able to afford in January of this year, you can’t afford that now,” says Johnson, an agent and associate broker with Long & Foster/Christie’s International Real Estate in Virginia Beach. “We all have places that we would prefer, neighborhoods and parts of the city that we would prefer to live in, but we may not be able to do that now.”

Tight inventory across Hampton Roads caused the median sales price (MSP) for a home to rise from $300,000 last year to $322,500 in July, according to a market summary from Real Estate Information Network Inc. (REIN), the multiple listing service that covers the region from Williamsburg east through Virginia Beach and south across the North Carolina border.

“A house in Virginia Beach is going to be a little more expensive than a house in Chesapeake,” says Johnson, chairman-elect of the Hampton Roads Realtors Association. “A house in Portsmouth is going to be less expensive than a house in Chesapeake. Buyers may have to find a little bit of flexibility in their budget to say, ‘OK, I really want to be in Chesapeake, but maybe Portsmouth is OK because I can afford to be in this city, or this part of the city as opposed to that part of the city.’”

There are signs that the market is starting to soften due to higher prices and mortgage rates. There were 2,777 pending sales in July, down 19.3% year-over-year and 9.66% month-over-month. Settled sales during that month totaled 2,909, a 23.4% decline year-over-year and down 12.38% month-over-month. Median days on the market were 12 in July, up from nine in June, according to REIN.

“Unlike the 2021 buyer frenzy that we had, we have a more cautious buyer who is very concerned that they may be overpaying for a property,” says J. Van Rose, president of Rose & Womble Realty Co. in Virginia Beach. “They’re still out there. They’re still looking. But instead of getting 15 to 20 offers, we might get two to three, and they’re not well over the list price.”

Rose says he’s also starting to see contracts that include home inspections, closing-costs assistance and other contingencies that might have been waived when the market was hotter.

While buyers are gaining some bargaining power, they have fewer properties to choose from. There were 4,129 active listings in July, down 10.65% year-over-year and up only slightly — 0.36% — month-over-month, according to REIN.

Rose says one group that is struggling to find property they can afford are active-duty military members, who make up a significant portion of Hampton Roads’ population. They may have been able to combine their housing allowance with a Veterans Affairs (VA) loan to buy the house they wanted when interest rates were low but can’t afford it now that rates are much higher.

Hampton Roads’ housing market is less affordable than it used to be, says Virginia Realtors Chief Economist Ryan Price. Just three years ago, the region’s MSP was $258,950, which buyers with a gross household income of about $61,000 could afford, assuming a typical housing cost burden of 30% of their income.

Today, a buyer would need a gross income of $84,900 to afford a house at the current median price, but regional median income was $68,454, according to the 2020 census. Although the regional median income has likely gone up some since then, it is definitely still below $84,900, Price says.

Rising mortgage rates haven’t made the situation easier. Tidewater Mortgage Bankers Association President Mike Grunwald says buyers panicked earlier this year as mortgage rates began climbing faster than he’d ever seen in his 13-year career. Pre-approvals had to be reevaluated and some clients became discouraged.

Rates, which had climbed as high as 6%, were varying “between 5% and 6%” as of August, “depending on the type of loan program and a buyer’s income and credit rating,” he says. The Federal Reserve Bank, responding to inflation, raised benchmark interest rates four times as of early September, with another hike expected later in the month.

“There aren’t a lot of [refinances] going on, unless it’s for a divorce or they’re cashing out,” says Grunwald, a senior loan
officer at Southern Trust Mortgage in Virginia Beach.

Speaking in August, Grunwald said he thought mortgage rates had probably peaked for the foreseeable future, adding that there were indications that the federal government could provide incentives for builders to construct more affordable housing or offer tax credits to sellers. There’s also been talk of a new 40-year mortgage to help lower payments.

“There’s got to be some kind of responsible action to what’s going on,” Grunwald says. “The middle class has to have some place to live.”

Read here about Hampton Roads’ rental market.

July NoVa home sales drop 29% from 2021

As price growth slowed and inventory increased slightly, Northern Virginia housing sales dropped 28.8% in July compared with last year, according to a Northern Virginia Association of Realtors report published Friday.

“More options are available to homebuyers now that the market is calming. It remains a seller’s market, but the feeding frenzy has subsided somewhat,” NVAR President-Elect Heather Embrey, a Realtor with Better Homes and Gardens Real Estate Premier, said in a statement. “Well-maintained, updated properties that are priced correctly are still in very high demand.”

The median price for a home sold in Northern Virginia last month was $650,000, up 1.6% from July 2021, but lower than June’s median of $684,500. In July 2019, the median price was $542,750.

Houses spent an average of 15 days on the market, the same average as last year. In June, homes sold in 12 days on average.

The total sold volume in July was $1.37 billion, down 23.7% compared with July 2021. The number of active listings last month was also down from July 2021, dropping from 2,533 to 2,477 listings. In July 2019, the number of active listings was 2,635.

NVAR reports home sales activity for Fairfax and Arlington counties, the cities of Alexandria, Fairfax and Falls Church, and the towns of Vienna, Herndon and Clifton.

Hampton Roads’ July active house listings down

Hampton Roads’ active residential listings in July continued to lag behind monthly totals for the past four years, according to Real Estate Information Network Inc. data published in August.

Active listings have dropped steadily every July since 2014. At the end of July, there were 4,129 homes actively listed in the region. In 2021, that number was 4,621; in 2020, 5,576; in 2019, 9,052; and in 2018, 10,057. This July’s listings are down 10.65% year-over-year.

Pending sales totaled 2,777, down 19.3% from July 2021 and 9.66% month-over-month. The region had 2,909 settled sales, down 23.4% from July last year and 12.38% from last month.

“Right now, there’s some lingering uncertainty in the real estate market,” REIN Board President Liz Moore of Liz Moore and Associates LLC said in a statement. “Interest rates on home loans are up and down a bit, and the record inflation we’re experiencing is still impacting families.”

Homeowners likely aren’t selling because they know that they’ll then need to turn around and buy a home, Moore said.

The median sales price of homes for the month was $322,500, up 7.5% from $300,000 last year but down from $325,750 in June.

Homes’ median days on the market was 12, an increase of 33.3% from June. New construction sales totaled 237, down almost 28% from the 329 sales in July 2021.

Va. housing market sees sharp drop in sales

The housing market is cooling off, compared to a year ago.

Home sales in Virginia dropped by nearly 19% in June, compared to sales in June 2021, the sharpest drop in the housing market since the beginning of the pandemic, Virginia Realtors reported Friday.

In June, 13,324 homes were sold in Virginia, which is 3,208 fewer sales than the same time last year. At the end of June, there were 19,375 active listings, nearly 200 more than this time last year. It’s the first time inventory has expanded in Virginia’s market in more than seven years, according to Virginia Realtors.

Activity was up about 2% in June, compared to May, which is lower than typical May to June jumps, the report said.

“The slowdown we’re seeing in sales is due to more buyers pressing ‘pause’ on their home search,” Virginia Realtors President Denise Ramey said in a statement. “The lack of inventory paired with the rise in interest rates have created a more challenging environment for home buyers.”

The slowdown is widespread across Virginia, and about three-quarters of local markets have had fewer sales so far in 2022 compared to 2021. The largest declines are in the Shenandoah Valley, coastal communities, Northern Neck and the Eastern Shore, as well as suburban areas of Richmond and parts of Northern Virginia, according to the report.

However, the largest supply growth is the Shenandoah Valley, outer suburban communities in Northern Virginia and the New River Valley.

There are fewer new listings on the market compared to last year, an 11.5% decline. For 10 months straight, the number of new listings has declined when compared to the prior year. But the number of active listings has increased slightly, about 1% over a year ago. Between May and June, active listings swelled by 2,500, a 14.8% increase.

The median home price in Virginia is $397.315, nearly 7% higher than in the same time period last year. The median price is about $25,000 higher than a year ago. But when comparing median home price month-to-month, it has gone down about 1% since May.

It’s still a competitive market for buyers, with pressure remaining to pay higher than the asking price. The average sold-to-list price ratio was 102.4% in June, lower than last month but higher than in June 2021. Homes sold for more than $800,000 have been selling for 2.9% above the list price on average, and homes in the $600,001 to $800,000 range went for 2.8% above the list price on average. However, the list price is not as high as it was in the past few months, which Virginia Realtors says signals easing pressure on home prices.

The number of days a house is on the market is still competitive, with 18 days as the average, three days faster than June 2021. Higher-priced homes sold the fastest, but they sold quickly across all price points.

The wildcard in looking at the housing market is inflation, with mortgage rates rising.

Pulaski sees housing future in 3D

Like communities around Virginia, the town of Pulaski faces housing demand far outpacing supply.

“We don’t have enough housing in our area,” says Town Manager Darlene Burcham. “So many of the people who work in our area don’t live in the community.”

One way Pulaski hopes to grow inventory is by working with Iowa-based home builder Alquist 3D to construct houses using 3D-printing technology. Alquist is building two houses on Pierce Avenue, the first of 200 it plans to build in Virginia over the next five years.

Burcham hopes these will be the first two of many in town. She’s talked with executives about other possible parcels.

Using 3D printing for exteriors can shave weeks off a standard construction schedule, reduce jobsite waste and cut building costs by 15%, according to Alquist. The process also allows builders to be less reliant on the volatile lumber market.

Completion depends on how quickly Alquist can purchase hot commodities like windows and doors. “We have the same supply chain issue that every other home builder has,” says Alquist founder and CEO Zachary Mannheimer.

Obtaining concrete to build the homes’ exterior walls won’t be a problem, he says, because Alquist uses a proprietary construction “ink.”

One house in Pulaski will be a model, and the other will be sold in the $200,000 range, Mannheimer estimates. The two houses will be single-story, 1,300-square-foot homes with three bedrooms and two baths.

Alquist’s path to Pulaski began when Mannheimer connected with Andrew McCoy, director of the Virginia Center for Housing Research at Virginia Tech.

Alquist and VCHR built a test home in Richmond with a $500,000 grant from Virginia Housing. They printed external walls last summer, but a few things need to be completed before it is sold.

While talking with housing officials who worked on the test home and another in Williamsburg, Mannheimer heard about several rural communities, including Pulaski, seeking to increase housing supply.

Initially, Alquist planned to build 200 homes
in Southwest Virginia, but plans evolved once word got out. Now, Mannheimer says, as many as half the homes will be in the region, which fits Alquist’s mission to provide housing in economically distressed and underserved areas.

“Smaller communities [are] where we believe the future of innovation lies,” Mannheimer says. “These towns have been overlooked for decades. They have lots of needs, and they have lots of opportunity.”

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Tag: residential real estate