First Quarter 2008 

The local housing market and local economy are strongly intertwined. This report analyzes recent data on the Richmond area and Central Virginia housing markets and assesses how local and economic factors may affect the performance of the region's housing market in 2008.  Among the main findings of this analysis:

 • Based on past experience, the Richmond metropolitan area has weathered national recessions better than many other regions because of its diversified economy. While a national recession is likely in 2008, the effect of the downturn will be more moderate and Richmond and housing demand will be relatively stable.  

• Home sales were down 31% in the Central Virginia area1 in the first quarter of 2008 compared with the first quarter of 2007. This trend is similar to the patterns seen in the national and state housing markets. 

 • Prices have not dropped in the Central Virginia area as they have in other parts of the state. The average price was virtually unchanged in the first quarter of 2008 compared with the first quarter of 2007. 

 • There is no evidence that the Central Virginia area will experience dramatic price declines in 2008. The ratio of active listings to sales is within normal range. The number of pending listings in the first quarter of 2008 suggests an upsurge in sales over the coming quarter. Foreclosures in the region remain relatively low, especially compared with the Northern Virginia area. 

The Central Virginia area is equivalent to the CVR MLS area. The CVR MLS includes the Richmond Metro and Tri Cities areas, as well as several other central Virginia jurisdictions. Richmond Metro includes Chesterfield, Hanover, and Henrico counties and the city of Richmond. Tri Cities includes Dinwiddie and Prince George counties as well as the cities of Colonial Heights, Hopewell and Petersburg.

Economic Backdrop

Much of the economic news coverage in early 2008 concerns the possibility of a national economic recession. In recent recessions, the Richmond metropolitan area has slowed significantly but has not been affected as much as the rest of the country. 

National Economic Backdrop  

The national increase in GDP was an anemic 0.6 percent in the 4th quarter of 2007, and most national economic signals through the first quarter of 2008 point to the likelihood of a recession in the first half of the year: 

• National job growth has dropped from an annual average of 2.13 million in December 2006 to a rate of 0.48 million in March, a decline in growth of 77 percent. 

• The U.S. Coincident Index (which measures current economic performance) was positive in 2007 and the first two months of 2008, but has moderated in the last few months. However, the Leading Index - which projects the economic performance 6-9 months ahead - has been negative for five consecutive months and eleven of the past 16 months. 

• Oil prices have continued to rise and have been above the $100 mark for several weeks. 

• Housing continues to be a drag on the economy with both new and existing home sales in a negative trend, and information on foreclosures indicating serious problems in several housing markets. 

• Consumer confidence indices and spending are declining and have dropped to levels last seen in the early part of the decade. Consumer spending accounts for two-thirds of the economy.

The definition of recession is two consecutive quarters of decline in the Gross Domestic Product. 

Given the economic trends and measures noted above, it is likely that later in 2008 the data will all be in and a recession will be declared for the first six months of 2008. How will the national recession affect the Richmond economy? 

Richmond Metro Area Economy  

Richmond weathered the most recent recession earlier in this decade very well relative to the national economic downturn. Nationally the unemployment rate peaked in 2003 at 6.4% while Richmond's rate peaked at 4.2%, significantly less than the national rate and not much above normal economic trends. The national economy lost 1.83 million jobs in 2002 and 2003 while the Richmond metro economy lost only 1,000 during that period and then added 16,000 jobs in 2004. Current trends show jobs for the Richmond metro area as moderating but still growing and adding to the economic base of the region. Richmond added 9,600 jobs to its economy in 2006 and 8,100 in 2007. For the first two months of 2008 the economy is growing on an annualized basis of 3,000 new jobs per year. 

Whether or not a national recession is formally declared later this year, the national economy in the first half of 2008 will be sluggish. Recovery and expansion should begin during the second half of the year with traction provided by the Administration's stimulus package that will help consumer spending. The economy will slowly gain momentum in 2009, especially in the second half of the year. Most economists are characterizing the outlook as a shallow recession with slow expansion coming out of the downturn. 

Richmond's varied economic structure is a key factor in its ability to weather the national down cycles. In past recessions, Richmond's broad and diverse manufacturing sector has helped the region perform better than other places. The concentration of state and local government jobs and educational facilities also provides a buffer. Richmond has benefited recently from the movement of information technology and biotechnology companies into the region. These high wage sectors play an important in propping up housing demand across the Richmond metropolitan area. 

Given the partial insulation from recessions that has been experienced historically in Richmond, it is unlikely that the state or regional economy would enter a recession, although economic activity will slow down. Slow growth can be expected until about the middle of 2009 and then the pace will pick up and return to long-term levels. Current proposals by the Bush administration and Congress to aid the housing market at the national level could help the local housing market return to normal levels sooner. 

Housing Market Trends  

The Central Virginia area housing markets face the same uncertainties that are on people's minds across the country-including reduced demand brought about by credit market uncertainties and fears of an impending recession. Fortunately, housing demand in the Richmond area will not suffer as much as it will in other regions that will be harder hit by a recession.

Home sales in the CVR MLS area were down 31% in the first quarter of 2008. This slowdown in home sales in this region continues a trend begun in 2007 and mirrors trends nationally and statewide. During this same period home sales in the state of Virginia were down 26% and sales in Northern Virginia (NVAR) were down 36%. 

Throughout the area, prices were stable in the first quarter of 2008. The average price of a home sold in the CVR MLS area in first quarter 2008 was $264,387, virtually unchanged from the average price first quarter 2007. 

The average price of homes sold in the Richmond Metro area was 1% higher in the first quarter of 2008, while the median price was unchanged. In the Tri Cities area, the average price was 1% lower in first quarter 2008. 

Housing Market Activity in the Central Virginia Area

The strongest part of the Central Virginia regional housing market was homes priced under $300,000. Over 40% of homes sold in the first quarter of 2008 were priced below $200,000 and nearly three quarters sold for under $300,000. It is this segment of the market that will continue to be the strongest as the market adjusts. 

Looking Ahead 

The performance of the regional housing market depends on demand and supply factors. In general, demand for housing will be somewhat lower than normal in 2008 as the region experiences slower than average job growth. However, the key to the recovery of the housing market in the central Virginia area is the supply and prices of homes for sale. 

Four key factors should be considered: 

Months of Inventory  

The National Association of Realtors has stated that six months of inventory is considered "normal" on most markets. In the first quarter of 2008, the ratio of active listings of sales-which can be used as a measure of months of inventory-was 4.3 for the CVR MLS. Having 4.3 months of inventory available for sale in the region indicates that there is not a significant oversupply of housing.

Pending Preview Future Sales  

The number of pending sales in the CVR MLS was down much less than sales in the first quarter of 2008. Pending sales were down 20% in the first quarter of 2008 which implies that when these listings go to closing within a month or two, there will be a less substantial drop in sales at that time. 

Foreclosures  

Foreclosures increase the supply of homes for sale and put downward pressure on prices. While there are some isolated neighborhoods that have experienced a sharp rise in foreclosures, the foreclosure situation is relatively moderate in the Richmond area especially compared to Northern Virginia. At the end of the first quarter of 2008, there were about 925 foreclosed properties on the market in the CVR MLS area. (In comparison, at the same time there were 6,000 foreclosures in Prince William County alone.) 

Typical Spring Uptick?  

Home sales typically pick up in the spring. In the CVR MLS, there were 311 more homes sold in the CVR MLS in March 2008 compared with January 2008. This represents an increase in sales of 45%. While this uptick is not as strong as the January - March increase in 2007 (60%) it does indicate that the general ebb and flow of the market seems to be in order. 

By

Lisa A. Fowler,

PhD Director, Office of Housing Policy Research

George Mason University School of Public Policy

And

John C. McClain, AICP

Senior Fellow, Center for Regional Analysis