A friend (thanks Randy) pointed me to an interesting article published last month by Fortune Magazine that used some interesting data analysis to come to the conclusion that home values in most markets will "fall by double digits over the next five years." 

Lots of questions come to mind rather quickly . . .

Both Richmond and D.C. are specifically studied and referenced to have large drops in home vales --- will this have a ripple effect on the Shenandoah Valley?
It certainly could --- if the changes happen that this article predicts.  According to Fortune's study, Richmond home values will drop by 22.3% over the next five years, and Greater D.C. area home values will drop by 25.1% in the same time frame.  This could translate into a slow down in the upper end of our market, as many buyers come from these two metro areas to relocate or retire to the Central Shenandoah Valley.  (This is already a segment of the market that is over-supplied --- having fewer buyers certainly won't help!)

The analysis seems a bit drastic --- is this really grounded in good math?
The math is fine, but the reasoning might be a bit faulty.  The basic premise of the article is that "...over time the most reliable guide to home values is rents. In most markets people won't lay out much more in monthly costs to own a house or condo than they would to rent a similar property..."  I have to disagree with this assessment --- buyers pay more than they would if they rented because of: principal reduction (part of housing outlay is returned in the future), appreciation (even more financial return for having owned rather than rented), and tax savings (from mortgage interest).  The root argument in the Fortune article is that a correction may have to happen in many markets because home values increased so much more quickly than rental rates.  I don't think that this difference alone is going to drag home values down --- supply and demand will bring about the increase or decrease.

Have home values increased faster than rental rates in Harrisonburg?
Indeed they have!  Here's one example --- five years ago a two-story townhome in Beacon Hill could be bought for $100k or rented for $750/month.  Home prices are 11x annual rental rates.  Today you can buy a similar townhome for $160k or rent it for $875/month.  Home prices are 15x annual rental rates. 

What does this mean for our local home values?
Per Fortune Magazine's math, this means we need to see, and will see over the next five years a 27% correction.  Rental rates will go up some, but home values will fall quite significantly. 

Our home prices will drop by 27%?  Really?
While we may see declines in some price ranges, a drop of 27% over the next five years would be shocking.  I think it is more likely that rental rates will continue to climb to get closer to where they have been proportionate to home values in the past.

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Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com