Big Picture's Ugly, but Local Housing Market Offers Good Buys

Type_webhead_here Many years ago, as a freshman at the College of William and Mary determined to receive a well-rounded, liberal arts education, I dutifully enrolled in economics classes -- both macro and micro. As a religion major who was far more interested in the works of Karl Barth than the thoughts of John Maynard Keynes, I often wondered if and when macro and micro economics -- and specifically the difference between the two -- would ever be of use to me. Well, the time has come.

Because when it comes to the economy -- specifically the housing market -- the difference between the big picture nationally and the micro perspective locally has never been more distinct. Commentators and prognosticators alike talk of crisis. In crises there are challenges, no doubt; but opportunities abound as well, especially for home buyers in the Richmond metro area.

Nationally, the median home price was down 9.3 percent in 2008. In the past year, some areas of the country -- such as Las Vegas, Detroit, Miami, and San Diego -- saw house values plummet by double digits. But the Richmond region fared much better, experiencing a dip of only 3 percent in the average sale price -- the first year of negative price appreciation since 1982.

And while news coverage of the foreclosure crisis -- especially the stories of personal loss and families in peril -- gives us all pause, the fact is that while the U.S foreclosure rate stood at 1.84 percent at the end of the third quarter 2008, the rate for the Richmond region was 1.03 percent, putting us not only well below the national average but also ranking us at 73 on the list of the 100 largest metro areas in the country.

While the national numbers cannot be easily dismissed, they must be put in perspective. We do not live in Nevada, Ohio, Florida, or California. We live in Virginia; most of us call the Richmond metropolitan region home. And in the Richmond area, the fact of the matter is that a wide variety of houses are available for purchase in all price ranges, at good prices, and local lenders are ready, willing, and able to make home loans.

When analyzing housing markets, it is important to recognize not only the difference between the national and local performance and outlook; in addition, homeowners and homebuyers must examine their own "micro" economic situation as well.

For example, there has been a great deal of talk in the past several months about individuals being "upside-down" on their mortgage, meaning they owe more on their home than the house is worth. No doubt that is true for some homeowners in this country; but that is absolutely not the case for the overwhelming majority of homeowners in metro Richmond.

According to the latest Census data, the typical Richmond-area homeowners stay in their home for a period of nine years. From 1999-2008, the average annual compound rate of home price appreciation was 7.1 percent, which translates into a cumulative appreciation of 85.9 percent for the past nine years. Considering the rates of return on other investments in a typical portfolio, the rate of return from homeownership is cause in and of itself for good cheer.

Based on a 7.1 percent annual rate of return, homeowners who purchased a house in 1999 for $175,000 now own a home valued at approximately $325,000. If these homeowners chose to put their house on the market today, they would have not only the considerable equity gained from the sale of their house working for them, they would also be the beneficiary of exceedingly low interest rates.

Last week's interest rate on a conventional loan was 5.25 percent, compared with the 2007 rate of 6.375 percent. Assuming the current interest rate and a 5 percent down payment, on the average-priced Richmond-area home of $264,500, today's buyer would have a monthly mortgage of $1,387, compared with the 2007 monthly payment of $1,568 -- a savings of almost $200 per month.

Substantial price appreciation for the past several years, low interest rates, plentiful inventory, and, for first-time homebuyers who qualify, an $8,000 tax credit -- all these reasons make it an excellent time to be in the homebuying market.

Sure, this advice of "buy now" can be ignored as the bias of an admitted proponent of the real estate industry. But a year or two from now, when the macro economic picture is much improved and micro economic conditions will no longer favor buyers as strongly as they do now, I suspect those who chose not to buy during this time of unprecedented opportunity will kick themselves and wonder what more they could have possibly wanted from the market.

Laura Lafayette is CEO of the Richmond Association of Realtors. Contact her at llafayette@RARealtors.com.