Matt’s Thoughts on the Charlottesville Lending Market

I’ve worked with Matt Hodges for years and recommend him unreservedly. He knows way more than I’ll ever know, or care to know, about the lending side of real estate, so I asked him for some thoughts about the current Charlottesville lending world.

Matt and I usually do an hour of radio every year; too. Here we are in February this year. If you have questions, Matt can be reached here.

My history is 22 plus years in mortgage lending here in central Virginia.   I know times have been odd before, I just can’t remember the supply/demand imbalance so skewed towards sellers.  So, start with the obvious – COVID-19, low interest rates and supply chain disruptions.   Continue on to more subtle influences like migration and repatriation.   And, finally, pinch the renters.

I know supply chain disruptions were a symptom of COVID-19, but it deserves it’s own line item. When lumber prices jump 100% in a year, that forces new construction pricing up, or worse, slows new starts, which typically deliver in 6-9 months. That missing inventory option pushes pressure on existing housing stock. And, that’s just one input.  Copper, steel, drywall all have climbed, pushing new construction costs up. Now, shift from material disruption to human capital. With unemployment benefits plus the additional enhanced benefits not ending until September 4th, we have workers who are disincentivized to work.  It’s not just they are making more on unemployment – some are, some aren’t, but they are missing child care, many through public schooling, while their children stay home. This disruption is both monetary and structural.

Returning to COVID.   Early on, sellers didn’t want to allow people in their houses for showings. This scary new disease was over running hospital capacity and people were dying in unfathomable numbers. And, potential sellers didn’t list their houses.

  • What would they do next if it sold?
  • Was their job secure?
  • What about reduction in hours, forced across many employers?
  • What about the government’s program of forbearance, 12 months out now, that many borrowers are still on?   Yes, there are home owners who haven’t paid their mortgage for 12 months – imagine that cash flow and what you can do with it.
  • Groceries, sure.
  • Home improvement projects, yep, lots of them.
  • GameStop, hell yeah!
  • Crypto, why not, that “store of value” won’t crash.
  • And $600 and $600 stimulus checks are found money for some.

Low interest rates played a part. Let’s say that we hadn’t been in a declining rate market for the last number of years. Let’s say that the average rate was 4.5%. Now all of sudden, the Fed starts buying $5BB daily of mortgage backed securities. Rates dump to 3%. Now, you have a consideration – refinance OR buy (and conveniently also sell). But, if you are already in the 3s, then selling isn’t as attractive.  So, the Fed’s actions might have spurred buyers, but not sellers.

What’s hurt central Virginia even more?

According to one report, we are the 12th highest influx of out-of-towners into the Commonwealth out of the 51 states (DC is a pretend state).

Where are they coming from?  NoVa, yep.   But, more importantly, at 49 and 51, New York and California.   Why?  Those two states have high costs to live, but now a lot of jobs are completely transportable using whichever technology you wish – say Zoom.  Further, their employers aren’t adjusting downward for COLA in Virginia, and thus, they can afford Virginia easily. In fact, they push pricing up due to their willingness to accept higher pricing and monthly payment and because they crowd the demand pool.  A smaller pool of buyers is also repatriating from Europe, Africa and Asia.  Why Charlottesville?  Simply put, very high quality of life.

Now, owners of investment properties are looking at a higher benefit of selling now, despite capital gains – or perhaps defensively prior to capital gains tax rate changes rumored in Washington – compared to continuing to rent.   I have spoken with numerous renters who don’t necessarily want to get into the buying world, but are being forced out of their lease ending this summer.   While this provides more inventory, it also floods the market with additional buyers.

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