The Condo Market in Richmond - Much lower inventory, but financing can be tricky. FHA eases restrictions on approval process

When will condos rebound?
February 1, 2010 by Al Harris
Bigger isn’t always better.

That’s proving true in several senses for condo developers around Richmond.

Take the case of the Hamlet Cleaners conversion project on Stafford Avenue in the Fan.

Chris Johnson of Monument Construction converted a defunct dry cleaners into 16 units priced between $119,000 and $209,000. Since finishing construction in August, he has sold 11 of the units.

That’s probably the envy of the local condo industry.
At the much more ambitious Miller and Rhoads condos downtown, Taylor Steele, an agent for Virginia Realty & Relocation, said they’ve closed on seven units out of 133 since coming online in the spring. But interest is high, he said, with 10 to 20 showings a day on the weekends.

One obstacle facing the Miller and Rhoads project is that it cannot get lending approval from the Federal Housing Authority, and without that buyers have a much harder time getting financing.

It has become much harder for first-time homebuyers to qualify for conventional mortgages to buy a condo unit. FHA-approved loans have taken a bigger share of the market, because borrowers only have to put 3.5 percent down. (The agency recently began requiring 10 percent down for buyers with a credit score below 580).

To receive an FHA loan to buy a condo, the building had to be at least 50 percent owner occupied. As more buyers began to rely on these loans, it has made selling much harder, especially for large projects like Rocketts Landing and Miller & Rhoads, which were conceived when credit was easier to get.

In December, FHA lowered the occupancy requirement to 30 percent to make it easier for buildings to qualify.

For some it is easier than others. Hamlet Cleaners needed to sell only six. Miller and Rhoads would have to sell 40. And even then there are FHA lending restrictions on projects attached to commercial space that they will have to overcome.

The developer at Miller & Rhoads has worked out a special loan program with C&F Mortgage Corporation, Village Bank and Franklin Federal Savings Bank to offer fixed-rate loans for 50 percent to 80 percent of the purchase price. And the developer, New Orleans-based HIR Properties, is proving second mortgages for 15 percent of the price.

Bigger condo projects typically sell units at various price points. Those on the lower end seem to be selling better. And prices for the lower units are holding steady while more expensive ones require price cuts to sell. Prices have fallen as much as 20 percent from mid-2008, according to several agents.

But future price cuts are less likely, agents and developers say, because supply is starting to fall. According to the Multiple Listing Service, this time last year there were 400 condos listed in area 10 (which primarily includes most of Downtown, the Fan and the Museum District.) Now there are 151 condos for sale.

“We have more than halved the inventory available at the beginning of last year,” said Rick Jarvis, a Realtor for One South Realty who represents several condo properties in Richmond.

“Right now, depending on absorption, we may only have a three- to six-month supply,” he said.

Jarvis and other agents say the combination of lower inventory and continued demand means that prices might have bottomed out.

But there are other factors at play: Rising unemployment and increasing foreclosures could spell trouble.

Ian Coates, operations manage for First Colonial Appraisals, said that what the industry refers to as “looming shadow inventory” could pose a problem.

That is “people sitting on the fence thinking it’s not a good time to sell and they’ll wait until spring. When everyone comes out of the woodwork to sell, there will be a lot of supply, possibly having an impact on prices,” said Coates.

The shadow inventory includes possible foreclosures. An unexpected surge in supply could keep developers from wanting to build new condos.

Building has come to halt as developers retreat to the sidelines and try to sell the units they have on the market. Most of the multifamily construction projects around Richmond are for apartments.

Johnson, of Monument Construction, said he will wait until about half of the remaining 33 units he has available are sold before planning any new projects. He said he started last year with 96 units completed or under development.

Although the supply of new condos is shrinking, Johnson isn’t expecting a boom right away. He expects new development to occur in a piecemeal fashion. For one thing, he said, it takes about 12 months lead time to get a project underway

Bill Chapman, who has overseen the development of several condo projects in Richmond, said that because of the FHA pickle, banks are less excited to lend to new construction projects.

“I think you have a hard time finding a bank lending on a condominium project because they have a hard time achieving those presales [for FHA financing],” said Chapman.

Chapman said he plans on closing in the next month on a former cold storage building in Shockoe Bottom and building 14 apartment units.

“If the market is improving right now and inventory was reduced by 250 units last year, we’ll be looking at better times soon.”