Virginia Real Estate Index: Falling prices lead boost in real estate sentiment

Sentiment concerning the Virginia real estate market remains strong in the Commonwealth with the Virginia Current Conditions Index hitting a record high. Prices continue to decline, although inventories are drying up, suggesting prices are likely to increase in the near future.

Market remains strong across the Commonwealth, record high sentiment

Overall sentiments about the condition of the Virginia real estate market remain strong, and opinions about the current market are at an all-time high. The Virginia Real Estate Index started in the third quarter of 2013. The first quarter overall Current Conditions index value is 38.7, over eight points above the index average and the highest value on record.

This index value means that 38 percentage point more respondents feel optimistic than pessimistic about the market today, up almost eight points since last quarter. Figure 1 shows the real estate indexes for the Commonwealth. Sixty-two percent of Virginians believe that the condition of the real estate market has improved since last year, while 12 percent believe that it has worsened. Additionally, 51 percent believe that conditions will improve over the next year and 17 percent believe that the market will decline.

Sale prices and other real estate market outcomes depend upon a variety of factors influencing buyers and sellers. Several positive items are likely playing a role. The Virginia labor market remains strong as does regional production. The December 2016 seasonally adjusted unemployment rate in the Commonwealth is 4.1 percent, which is below the current national rate of 4.8 percent. State gross domestic product is up 2.3 percent (annualized rate.) Overall prices for goods and services remain low since the recent economic recession and consumer sentiment in the Commonwealth remains high.

Housing prices fell over the past six months, as is typical. A cyclicality exists for housing prices in response to inventories and overall interest. The winter months are not an active time in the Virginia real estate markets, but markets are likely to pick-up as we turn to the warmer months.

In January, statewide inventories were down 3,241 from a year prior (7.3% drop), 2,635 from July 2016 (5.9% drop), and below the 15-year median value. The average list price was $1,100 higher than a year prior, a 0.4% increase, which is $20,000 higher than the market’s nominal 15-year median value, but $23,000 below the July 2016 value. The dwindling supply of homes relative to demand will likely push up prices in the coming months.

Real estate markets face potential push backs. Some respondents anticipate rising mortgage rates, an added cost of buying a home. On March 7, zillow.com reported an average mortgage rate of 3.97 percent in the Commonwealth for a 30-year fixed rate mortgage with at least 20 percent down and a credit score of at least 740.

Seller optimism about the coming year is strong and reversed a 12-month decline. Twenty-eight percentage point more respondents believe that the coming year will be a good time to sell a home than those who don’t, which is up more than 10 points since last quarter. Low mortgage rates are the primary reason given for selling optimism (21 percent), followed by higher income (19 percent), prices (16 percent) and falling inventories (8 percent).

Current optimism remains strong and relatively unchanged since the summer months. Twenty-one percentage point more respondents believe now is a good time to buy a home than believe it is not. That optimism drops into 2017 as buyer optimism about the coming year is almost equal to that of buyer pessimism.

The leading source of optimism amongst buyers is rising income. Twenty-five percent of those who believe the coming year will be a good time to buy attribute their sentiments to increased income. Other reasons include lower rates (16 percent) and prices (15 percent). For those who believe the coming year will not be a good time to buy a home, 34 percent cite rising interest rates as the primary cause, while 27 percent reference rising prices.

Regional Strength, Particularly Central and Northern Virginia

Compared with last year, each region of Virginia reported more optimism than pessimism about the real estate market. This is particularly true in Central and Northern Virginia where optimists outnumber pessimists by 51 and 45 percentage-points, respectively.

Higher prices are the likely cause of market optimism, particularly in Richmond, Charlottesville and Washington D.C., where January median list prices are higher than the long term average for those areas. Amongst those locations, all but Washington, D.C., show falling inventories, putting upward pressure on prices.

Looking to the coming year market optimism remains strong in most regions. In Central Virginia 58 percent of respondents anticipate improvements in the real estate market. Looking at both sides of the market, the optimism near the nation’s capital is driven by sellers as over 38 said they are positive about the coming year. Comparatively, more buyers expressed concern about the coming months. Rising prices are the likely driver in this divide between buyers and sellers.

Interviewing for The Roanoke College Poll was conducted by The Institute for Policy and Opinion Research at Roanoke College in Salem, Va. between February 12 and February 18, 2017.

A copy of the questions and all toplines may be found here.