Today’s new homebuyers are facing two threats when it comes to purchasing their moderately priced home: First, rising interest rates on new homes have made the cost of ownership beyond the reach of many buyers with modest salaries. Second, the falling amount of inventory being brought to market has supported the unprecedented rise in home prices.
In the first case — housing affordability — we have a rise in both housing prices and the cost of borrowing money to buy the house. Among a sample of builders, who all are Home Building Association of Richmond members, the average price — for both single-family homes and townhouses — was $393,366 in June 2020. By June 2022, the average price was $518,384, an increase of 32%.
As for financing the purchase, a buyer with a conventional loan and a 5% down payment, at a 6% interest rate on a 30-year fixed mortgage, will need to make $88,619 annually to qualify for the average new home. This assumes a credit score of 700 or higher, and zero debt obligations such as car payments, student loans or credit card debt. Given Census Bureau data showing the Richmond metro area’s median household income is $71,223, the cost of new construction is unattainable for a large segment of the region’s workforce.
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The second threat to buyer access of moderately priced homes is low inventory. The Federal Reserve is facing a parallel situation to what local governments across the region are experiencing.
The Fed walks a tightrope when it introduces interest rate increases to slow the pace of inflation, while delicately managing the extent of how that impacts the overall economy. If taken too far, the economy plummets into recession. Boards of supervisors across the region must walk just as fine a balance, managing the pace of residential construction without suffocating supply.
In June 2012, local builders were constructing homes in an average of 11 communities. Today’s average is six communities, a 45% reduction in 10 years and a 20% reduction over the past two years. This means the supply of new homes is dwindling, even as Richmond’s population continues to grow.
What enables new construction home inventory, and at what price? Despite broad recognition by local government officials that housing affordability is a challenge, hesitation remains about modernizing local land-use policies to adapt to reality.
Government regulation at all levels accounts for an estimated 23.8% of the final price of a single-family home, or $123,375 on the local average price. This amount is directly attributable to regulation during development and construction.
The cost to the homeowner taking on this additional $123,375 debt, at a 6% interest rate for a 30-year fixed mortgage, equates to a $740 monthly payment. This amounts to an increase of $8,877 each year, or $266,292 over the entire 30-year mortgage period.
Therein this 23.8% price burden lies our local opportunity to manage the rising costs of new homes. Richmond is not immune to housing failures experienced in San Francisco, which has some of the highest U.S. housing costs.
What caused that failure? Local government did not keep pace with the demand for housing. As San Francisco grew and employers continued recruiting for new jobs, only a fraction of homes were permitted to keep up with employment.
Let’s take a look at an example much closer to home. New Kent County, the second fastest-growing locality in the commonwealth, just broke ground on the new AutoZone distribution center.
The Board of Supervisors, against urging from the homebuilding industry, recently aggravated the housing problem by decreasing density allowances in residential development through the revision of its cluster subdivisions to restrict growth. The adopted ordinance changes will effectively produce much higher-priced homes through heavily proffered communities and zoning, right as employment is increasing the need for workforce housing.
To provide moderate pricing, the land parcel size and home density must be proportional to spread the cost of development among the homes. The lower the home density (the fewer the homes), the higher the cost of each home.
New Kent’s new density calculation is one lot per 10 acres. There is an example of this density calculation in Hanover County, which is producing single-family homesites that are as expensive as $250,000 per lot.
Before construction of the home begins, the cost to the buyer already is a quarter-million dollars. You can expect the same result in New Kent under its newly updated ordinance, which effectively shuts down moderately priced housing.
What’s happening in New Kent is symptomatic of what is happening in the region. Where will millennials find a home they can afford? What is the price point for workforce housing and where will it go?
As we watch and applaud economic development wins — AutoZone, Lego, Amazon and more — where do the workers sleep at night? Will we learn from the housing failures of communities like San Francisco, or will we repeat them?
Although modest progress has been made, a comprehensive 2021 report from Virginia’s Joint Legislative Audit and Review Commission confirmed there is much more work to be done. This second threat of housing inventory is within our control.
It is time to course-correct the region’s economic development efforts to include housing in the strategy. If regulation is left unchecked, demand for housing once again will outpace supply, and consequently drive up the cost of homes to the region’s detriment.
Danna Markland is chief executive officer of the Home Building Association of Richmond. Contact her at: DMarkland@hbar.org