Why the Chesapeake Real Estate Market is at a Fragile Crossroad
“Home sweet home” has a much nicer ring to it than “investment sweet investment.” Yet, for most home owners, our homes are our largest financial investments. As home owners, we have a responsibility to understand what we can do to protect the value of our homes.
Real estate markets cycle up and down based on a wide variety of factors. Many of these variables are out of our control and are a direct reflection of what is happening in our larger economy.
However, it is important to note that the decisions of our elected officials also have a direct impact on our housing market, and it is in our personal best interest, as their constituents, to encourage them to make decisions that will protect our biggest assets, our homes.
The Hampton Roads Real Estate Market is a Military Market
The Hampton Roads economy is particularly dependent upon federal funding for our military, which in turn is a critical factor in our local housing market. In fact, we have the “largest concentration of military personnel outside of the Pentagon, with more than 86,000 active-duty military personnel here representing every branch in the Armed Forces” according to the numbers from Virginia Beach Department of Economic Development. From a regional statistical standpoint, Chesapeake, along with the other cities of the Hampton Road area, are considered part of the Virginia Beach Market Study Area (MSA).
Lowest Down Payments in the Nation
Our housing market has the lowest average down payment in the nation when buying a house according to a recent study by Realtor.com. This is primarily due to the large population of both active duty and retired military personnel, who thanks to their dedicated service, are entitled to utilize a mortgage loan from the U.S. Department of Veterans Affairs, commonly called a VA Loan.
You can purchase a home with no down payment using a VA loan, and a study from the National Association of Realtors estimate that 90% VA buyers utilize the zero down payment option. In our area, there are also a high number of Federal Housing Administration FHA mortgages, which are government-backed home loans that require as little as 3.5% of a down payment.
This creates a unique market situation since it actually cost less out of pocket money for our military members to purchase a home, than it does to rent one. Renting a home or an apartment typically requires first month’s rent, a security deposit and other up front costs. However, utilizing a VA loan, you can literally get your keys for your new home with ZERO out of pocket costs and still will not need to make your first mortgage payment until the following month.
A VA loan also comes with a funding fee, which can be rolled into the cost of the loan. The funding fee is based off the sales price of the home, and when using the no down payment option the funding fee rate is 2.15 % the first time you use your VA loan. This means on a $350,000 home the funding fee would be $7,525. If this was not the first home that you have purchased using a VA loan, then the funding fee rate would increase to 3.3%, and instead would be to $11,550 on the same $350,000 house.
This often creates a negativity equity situation, where a homeowner owes more than what the house is worth initially. While the VA loan is an amazing benefit to those who have served our country, and one that my family has personally utilized, the large number of homeowners with a lack of equity does create a high level of risk for our overall real estate market, especially since our military members need to move frequently.
The Cost of Selling Your Home
Military families are very familiar with the acronym PCS, which refers to Permanent Change of Station (PCS) orders. It means that it is time for them to uproot and move again, and very often this means selling their home. The constant turnover in the housing market makes the Hampton Roads area an excellent location for those in the real estate industry, including real estate agents, mortgage brokers, builders, and appraisers.
Many homeowners are shocked when they find themselves exploring the role of a becoming a home seller. They quickly realize that the home seller actually pays all the real estate fees and also is typically expected to provide the buyer closing cost assistance. While this is an enjoyable benefit when purchasing a home in this area, it can cost on average 9% to 10% of your home’s value to sell it. Since this is a common place in our market, these costs are factored into the appraised value of your home.
The large population of negative equity home owners, coupled with the frequent turnover, actually puts our area at high risk to potentially experience large volumes of short sales and foreclosures if there is a shift in the market. Our real estate market has experienced this turmoil in the not so distant past and we are still recovering. A new market shift is now currently underway, and can be seen in the increasing mortgage rates.
Interest Rate Increases Leading to Housing Price Decreases
When mortgage rates increase, then home prices typically decrease. This is due to the fact that the rate increase directly impacts a buyer’s purchasing power. Idealistically, these rate increases are done in slow steady stages, allowing the market to adjust and prevent drastic price swings.
An example of the interest rate impact, can be seen using the example of a buyer that is qualified for a maximum home purchase of $380,000. If the interest rate climbed a half of a percent from 3.875% to 4.375%, assuming all other factors remained constant, then buyer would actual lose $17,000 in purchasing power and then only be qualified for $363,000. If the rate jumped an entire percent, that same buyer would only be qualified for $345,000 and would have lost $35,000 in buying power.
Our mortgage interest rates have climbed over 15% from one year ago. In June 2017, we had interest rates as low as 3.88% and one year later we have interest rates around 4.54%. Most analysts anticipate additional interest rate increases into 2019.
We are Making Critical Development Mistakes in Chesapeake
Many of the factors mentioned above, which effect our housing market are beyond our control. However, at a local level, our elected officials are currently making decisions that will greatly impact the housing market within Chesapeake.
We are using inaccurate criteria as a guidelines to make future development decisions. This includes our Level of Service Policy and the Dominion Corridor study.
When Chesapeake city council members look at rezoning a piece of land to approve a future development, they look to our Level of Service (LOS) policy as a guide. Our LOS policy attempts to estimate the amount of traffic and uses a mathematical formula to estimate the potential number of students based off the type of housing that will be offered.
However, our LOS policy does not factor in all projects that are currently approved. Approved projects can sit dormant for an undefined period of time and are left out of projected numbers. Developments are only counted as part of the LOS once a site plan is approved by the city. This is the equivalent of looking at the minimum payment on a high balance credit card and thinking that we are within our budget. We are essentially ignoring “pending charges”, which would be the equivalent to projects that are already approved (but without finalized site plans), and ignoring our “credit limit” or max capacity for schools and roads.
For example, Chesapeake city council approved a development called Cardinal Meadows on Shillelagh Rd in March of 2017. This 247 unit condominium project is theoretically only projected to add 111 new students according to the city’s formula. However, these 111 students are not counted in the LOS numbers for the upcoming project called Shillelagh Commons. As a side note, Shillelagh Commons was denied by city council in 2015 when the plans had only 196 units, but it now has 420 units.
Shillelagh Commons is just a stone throw away from Cardinal Meadows and Grassfield High School and will be up for a vote in front of Chesapeake city council on June 17, 2018. Shillelagh Commons is projected to be 240 multifamily apartments and 185 townhome units for a total of 420 units. According to Chesapeake’s mysterious mathematical formula, the 420 multifamily units of Shillelagh Commons are only projected to add 76 students to our school system. To put this in perspective, this is the equivalent of suggesting that only 38 units at Shillelagh commons will have two school aged children, and the other 382 multifamily units will not have any students.
The city will also need to adjust their estimated LOS numbers once they receive the actual student enrollment numbers from the recently completed homes in neighborhoods like Cumberland Farms, Dominion Meadows and the Summerwood. Also all of Bryan’s Cove 600+ units, which are now being built are also slated for Grassfield High School, and are not all included in the projected numbers. The bottom line is that our project LOS numbers are missing so many students that the city should consider issuing an amber alert to find these missing children!
Ignoring the future students from Cardinal Meadows and factoring in only these low ball numbers still pushes schools to max capacity. It pushes Great Bridge Middle School to 112.5%, Grassfield High School to 98.5%, and Cedar Road Elementary to 97.3%. None of these numbers factors in the numerous other projects coming up for approval like the 793 units at Springton at Grassfield, which is a Dragas community that they want to build near Grassfield High School.
If Shillelagh Commons is approved, but does not have a site plan, then it won’t be included in those projected LOS numbers making their numbers completely inaccurate and directly causing school overcrowding. Perhaps our city’s LOS planners could benefit from a math class or two at any one of our highly coveted Chesapeake Schools… if they can find a seat in the classroom.
Note: The applicant on the Shillelagh Commons development is John Bishard, who generously sponsored the campaigns of Mayor Rick West, Susan Vitale, Matt Hamel in the recent elections. He has also previously also sponsored the campaign of Robert Ike, Jr.
We are over saturating the market by approving too many new construction projects.
Too many new construction options saturate the market. It effects both builder profitability and home owner’s resale values. Over saturation of the market causes builders to lower their prices in order to compete with each other. Of course, this can also lead to developers asking to reduce the proffer amounts they agreed to pay the city of Chesapeake, which further reduces the city’s source of revenue.
We can then end up with new construction that ends up selling for less than the resale homes adjacent neighborhoods, which also drags down housing prices causing existing home owners loose their equity. A similar situation happened in Berkshire Estates, which saw a drastic loss in home value when Viridian Reserve, Hanbury Woods and Hanbury Manor were built, and then to make matters worse, we rezoned the school districts for those neighborhoods.
In my professional opinion, one of the most reckless and dangerous ways we are harming our real estate market is by REZONING NEW CONSTRUCTION NEIGHBORHOODS shortly after they are completed.
The negative equity situation described above is even more problematic when all grouped in one location like a new construction neighborhood. The homes in those neighborhoods sell at a certain price point, in part due to the school district that they are assigned to. Buyers simply will pay more to be in certain school districts, and it helps a builder’s profitability if they can advertise and sell homes that are within these preferred school districts.
However, when we rezone new construction neighborhoods, we are literally taking an entire neighborhood that has either negative or little equity and then slashing their home values further. The price differential between certain school districts can sometimes be as much as $25,000 to $35,000 dollars. This can take over a decade to recover from. This is the reason that we should not rezone new construction neighborhoods until they have solid established equity. If we can not properly plan for this, then the city is being irresponsible and reckless in it’s development.
We Keep Repeating the Same Mistakes
This scenario happened when the Olde Mill Run neighborhood was rezoned several times in a short period of time from the Deep Creek school district to Grassfield school district and then back to Deep Creek again in 2007 and 2009. While other neighborhoods have stabilized from the economic crash, we are still seeing short sales and foreclosures in Olde Mill Run in 2018. They are quality built homes on nice large lots, but buyers are paying premium to be in the Grassfield High School District as Newsweek listed it as one of the top 500 schools in the nation.
Currently 38 out of 200 homes in Olde Mill Run have become short sales or foreclosures and that number is still climbing. It will continue to climb as we are now building Sherborne Manor adjacent to it and further undercutting their pricing. Yet, our elected officials in Chesapeake have not learned from these past mistakes, and continue to repeat them. The school board voted in October of 2017 to approve the rezoning of three new construction neighborhoods of Viridian Reserve, Hanbury Manor and Hanbury Woods.
While many military members will try to rent their house if relocated, however others do not have the luxury of time to wait for our market to recover from our city’s poor planning, especially if it takes over a decade to recover their initial values. We are creating a domino situation and impacting an entire neighborhoods, which in turn impacts our overall housing market. The recovery time becomes prolonged as we continue to saturate the market with more new construction.
The impact of rezoning is not as severe in existing neighborhoods with varying levels of established equity, but we need to carefully study the impact on our neighborhoods before we simply rezone them. Our city needs to design and implement a long range plan for development. We simply can not continue to repeat the same mistakes over and over again without severe consequences to our economy.
People often think that more development and more houses directly equals more tax dollars for the city, however, new development actually ends up costing the city the money. While real estate taxes are the largest sources of our city’s income, “the revenue collected does not come near to covering the costs of maintaining the infrastructure” according to “The Growth Ponzi Scheme” article at StrongTowns.org.
As a city, Chesapeake is at a disadvantage because it does not benefit from the other incoming tax revenue streams, like the tourism industry or numerous large corporations, in the way that Virginia Beach does. In fact, it is almost the opposite situation as our city tax dollars rapidly flow in an outward direction since the Chesapeake School Board and the City of Chesapeake are both among the top fifteen employers in the area.
I am often asked if I am “against all growth and development in Chesapeake.” I am not. I make my living as a real estate agent. I am also a licensed appraiser, and I see the patterns and the problems we are not only creating, but repeating with lack of proper planning, and it was the primary reason that I ran for Mayor of Chesapeake.
I believe in responsible growth because I want to protect my own property value and the property values of other existing home owners in Chesapeake. We simply can’t approve all developments even if we believe that they fit the city’s big picture plans. Limiting our growth also helps builder profitability. Even if we “slow our roll”, the builders still have plenty of projects in the works to build. We literally have thousands of undeveloped houses in the pipeline already. Limiting our growth has consequences too… it can actually cause our property values to rise!
WE NEED YOU!
We need voices to tell our elected officials these concerns. Common sense has many of us concerned about school over crowding, traffic and flooding issues all caused by over-development. The truth of the matter is that this impacts us all because even if you are not military or planning on moving, the value of your neighbor’s house has a direct impact on the value of your house.
Please consider attending the city council meeting on Tuesday July 17th at 6:30 PM Chesapeake City hall to voice your concerns about Shillelagh Commons. You can call ahead and register to speak at 757-382-6151 or fill out a speaking card when you arrive. If you can’t attend the meeting feel free to copy and paste the email to Chesapeake city council at
Dear City Council Members-
We urge you to vote NO on the 420 units at Shillelagh Commons PLN-REZ-2016-019. We are deeply concerned about the manner in which our city is approving developments. Our LOS policies do not paint an accurate picture and are causing severe overcrowding in our schools and major traffic issues. We believe that 420 multifamily units will bring more than 76 students to our schools. The decisions you make regarding development impact ALL of our property values and we urge you to consider these factors and protect Chesapeake citizens.