Holding its breath
Virginia feels the pain from the mortgage mess, but the state’s median home prices continue to rise
- December 1, 2007
by Doug Childers
Homebuilder Louis Genuario Jr. saw the warning signs early. By summer 2005, he picked up on one of the first hints that America’s booming residential housing market was starting to wobble like some shaky house of cards.
“Sale prices started appreciating at a slower rate,” he says. “The figures were evident, but you still had to build out projects.”
So the principal of Alexandria-based Genuario Cos. — which operates Wakefield Homes LLC, Genuario Properties Inc. and the Genuario Construction Co. — prepared for a slowdown. In early 2006, he pruned the company’s staff from 22 to 12 employees. That year he built half as many homes as the 20 constructed in 2004. In 2007, Genuario built even fewer, six homes, but with a more expensive price tag. The average selling price was $1.5 million, up from $1.3 million in 2006. “This is classic economics,” says Genuario. “This is the market correcting itself.”
Genuario is one of the lucky ones; he expects to break even this year. “No more than that,” he says. “Simply put, our cash flow has been meager, so we’ve been living off lines of credit and money we put in the bank off previous years’ profits.” For now, new developments are on hold, and Genuario will wait and see what happens to the market before he finalizes plans for 2008.
At a time when foreclosures are soaring and some mortgage lenders have gone out of business, plenty of homebuilders would gladly trade places with Genuario. And homeowners in other states can’t help but look at their counterparts in Virginia with envy, because home prices here continue to outperform the nation’s. That’s one piece of encouraging news in what has been a bruising year for the housing industry.
Northern Virginia is by no means the only region seeing a slowdown in home building and related businesses. As the country continues to suffer from the worst housing sales slump in 16 years and the credit crunch that followed, developers across Virginia are waiting to exhale. Subprime mortgages, made to high-risk borrowers with little, poor or spotty credit histories, have fueled record-setting foreclosures and billion-dollar losses. Consequently, the mortgage and financial services industries are slashing jobs.
By year end, LandAmerica Financial Group, a Henrico County-based service provider for real estate transactions, plans to cut 2,100 jobs nationwide. The company has not said how the cuts will affect 800 positions in the Richmond area. Another 150 people in Richmond will lose their jobs when Bank of America closes its mortgage wholesale business by the end of this month. Capital One Financial Corp. in McLean shut its mortgage subsidiary last summer, letting 36 people go. Saxon Capital Inc., which services and originates sub-prime loans, laid off about 200 employees in October when it closed its western Henrico County headquarters operations.
October also saw two projects in Virginia slide into lending limbo. Major construction on the 34-story Granby Tower, a luxury condominium project in downtown Norfolk, stopped in September when the developer’s financing fell through. Jason Dodd, vice president of marketing for Marathon Development Corp., says site work continues and that a new lender has been lined up. The project is a go, he says, although Dodd would not disclose the new lender’s identity, because “we have not closed yet.”
Meanwhile in Roanoke, a 127-room hotel going up at Riverside Center ran into financing problems as well. Warner Dalhouse, a Roanoke-area banker and project investor, says Telemark Hotel Group out of Wisconsin is trying to secure financing so work on Cambria Suites can resume.
Still, compared with states such as Florida, Nevada and California — which experienced huge building booms and busts — Virginia is holding up well. For instance, the median price for a Virginia home was higher in September than for the same time in 2006, a stark contrast to what’s happening nationally. In September, the national median existing-home price for all housing types dropped 4.2 percent to $211,700, while it rose by 5.53 percent in Virginia to $229,000. In fact, the Virginia Association of Realtors reports that a Virginia home purchased in 2002 at the median price of $144,480 appreciated 58 percent in the past five years.
On the commercial side, many projects are going up. And the state’s No. 1 ranking as a place to do business continues to draw corporate expansions such as the recent decision of Volkswagen of America Inc. to relocate its U.S. headquarters to an office park in Herndon.
David H. Downs, a real estate professor at Virginia Commonwealth University and director of the school’s Kornblau Institute, refers to the subprime mortgage mess as “the slap heard round the world. … It will be felt in the U.S. and the commonwealth of Virginia. Since Virginia is blessed with a diverse economy, statewide we can hold up pretty well. But we’re far from knowing how long this slap will reverberate.”
Like other states, Virginia is seeing an uptick in foreclosure filings. In the third quarter, it placed 21st among the 50 states, according to RealtyTrac, an online marketplace for foreclosure properties based in Irvine, Calif. Compared with the number of filings in the third quarter of 2006, Virginia’s rate shot up dramatically — by 489 percent. “Virginia has one of the highest year-over-year increases in the past months. It’s catching up with some of the other states,” says Daren Blomquist, a spokesman for RealtyTrac.
During the third quarter, 7,718 foreclosure actions were filed on 5,640 Virginia properties, or about one filing for every 411 households. That compared to a national figure of one filing for every 196 households. Doug Duncan, a senior vice president and chief economist for the Washington-based Mortgage Bankers Association, says Virginia doesn’t have a huge share of subprime loans. However, “it does have enough that we expect to see rises in the delinquencies of those loans, especially those with adjustable rates and where home prices are falling. There really are no issues with fixed-rate loans of any type.”
Still, Gov. Timothy M. Kaine isn’t taking any chances. Last month, he formed the Virginia Foreclosure Task Force to bring mortgage industry representatives and housing advocates together to recommend policies that will minimize the impact foreclosures could have on Virginians as mortgage rates adjust.
Leading the commonwealth in foreclosure rates in the third quarter was Manassas, with one foreclosure filing for every 72 households. Not far behind came the counties of Prince William, with one for every 82 households, and Loudoun, with one for every 87 households.
In many cases, the story in Virginia seems to be playing out in the same fashion as Genuario’s script. Some businesses are taking a hit, but others are paring down and surviving rather than folding up shop. Yet, that doesn’t mean that losses don’t sting.
Mike Toalson, executive vice president of the Home Builders Association of Virginia, noted a 38 percent drop in the number of new homes being built in the past two years. “In 2005, at the height of the boom, we were producing 49,000 single-family, detached houses across the state,” he says. “In 2006 the number slumped to 37,000. This year, the level of new houses forecast to be produced across the state is 30,000.”
Rich Napier, president of Richmond-based Napier Signature Homes and president of the Home Builders Association of Virginia, has felt the pinch. His company, which builds custom homes priced from $1.2 million to $2.5 million as well as spec homes for around $1 million, built seven homes in 2006, about an average number. In 2007, Napier has built only five. He also has two spec houses on the market. “If I sold the spec houses and finish up another one, I’d have one of my better years,” says Napier. “But the market doesn’t look good for them to sell. We’ll do well with the five.”
Plus, he’s worried about next year. “I’ve only signed two contracts to build in 2008.”
While there are pockets where commercial construction has slowed such as the Dulles corridor in Northern Virginia, overall commercial construction in Virginia remains healthy, says Steven Vermillion, chief executive officer of the Associated General Contractors of Virginia. Construction employment in Virginia in August was 252,300, which is not only 2 percent higher than last year, but Vermillion believes it is an all-time high for the state. “While much of what you read about the impact of the credit crunch on construction is negative, this is definitely not the case for commercial construction,” he adds.
Projects recently breaking ground include the 360-acre One Loudoun, a 3-million-square-foot mixed-used project in Loudoun County, and a 1.3 million-square-foot industrial park in Suffolk. One key driver for the commercial real estate market is federal, state and local government agencies. “A good portion of commercial construction is with government entities for projects like schools, highways and sewage treatment plants, which aren’t as susceptible to credit issues as residential construction,” says Vermillion.
Looking ahead to 2008, builders like Genuario are cautiously optimistic. Underwriting is stricter today, and appraisers are taking a closer look at properties and house values, says Genuario. But for buyers with good credit ratings, “money is out there.” His company is preparing to build two speculative homes. “We see spec homes selling in communities that are close-in to the District,” says Genuario. Proof, perhaps, that builders haven’t run out of hope or money.
Despite such optimism, the interest rates on about 2 million adjustable-rate mortgages will reset to higher rates during the next two years, a development that could push more buyers into foreclosure. That’s a “bah humbug” the market can’t ignore.