A shortage of single-family homes is casting doubt on Virginia’s future growth

A shortage of available homes in Virginia is pushing up prices and slowing sales, raising the risk of long-term affordability challenges that could slow the state’s growth.

The data, presented Wednesday to lawmakers on the Virginia Housing Commission, reflect trends that are likely to have a major impact on some of the state’s biggest metropolitan areas, according to the Virginia REALTORS association and other housing experts. While statewide home sales have slowed amid rising interest rates, limited inventory means that prices haven’t dropped to match the decline in demand.

High prices — and price increases — are worst in Northern Virginia, where home costs rose more between 2000 and 2019 than any other metropolitan area on the East Coast, according to Hamilton Lombard, a demographer with the Weldon Cooper Center at the University of Virginia. In 2019, for instance, both Arlington and Fairfax had higher median home prices than any individual East Coast county other than Martha’s Vineyard and Nantucket, according to the U.S. Census Bureau’s five-year American Community Survey.

But rising prices aren’t isolated to the state’s biggest urban areas. Andrew Clark, vice president of government affairs for the Home Builders Association of Virginia, told lawmakers that parts of southern Virginia — including the Southside region and southwestern corner of the state — also saw a 32 percent increase in home costs over the last year. The jump followed a steady climb in regional prices over the last four years, a worrying trend in an area where the median household income typically falls below $65,000 a year.

“That supply-demand imbalance is really at the core of what’s driving up prices,” Clark said. “The issues were there prior, but I think the last couple years have just really made it more clear that we need to do something to increase supply.”

There are already signs that Virginia’s home affordability crunch has broad consequences on both an individual and statewide level. For homebuyers, market competition is showing little signs of abating, driving many to pause their search. 

Those pressures have been building for years, particularly since the start of the COVID-19 pandemic, when falling interest rates drove record home sales. Ryan Price, chief economist for Virginia REALTORS, said home prices rose three times faster statewide in 2020 and 2021 compared to the previous five years, largely driven by rock-bottom mortgage rates and soaring demand.

The flurry of market activity strained already limited home inventory, which has only recently shown signs of shifting. While Price said the number of available homes across Virginia was essentially cut in half over the first two years of the pandemic, inventory only dropped 5.6 percent in May compared to the same period in 2021— the “mildest decrease” the state has seen in three years.

Still, roughly half of all available homes sold in a week or less, and nearly a quarter sold within three days. With competition still high and interest rates rising, a growing number of Virginians are dropping out of the home buying market entirely, according to a recent survey of realtors. 

“We are still seeing price growth,” Price said. “But we expect it to start to slow down as more people are unfortunately getting priced out of the market.”

As scarcity and high prices remain a concern across the state, they’re widening disparities in home ownership. Federal statistics show that Black Virginians are far less likely than other groups to own their own homes or get a mortgage loan approved, particularly compared to White families. But those racial disparities are compounding, according to U.S. Census Bureau data, and Price said home ownership gaps along racial and economic lines are worse than they’ve been in decades.

Lower-income Virginians are also disproportionately impacted by an increasingly unaffordable market. Between May 2017 and May 2022, median home prices across the state increased by roughly 40 percent, jumping from $286,000 to $401,000, according to data from Virginia REALTORS. As a result, average mortgage payments have also risen from $1,300 a month in May 2017 to $2,238 in May of this year, increasing the estimated income needed to afford a home (the analysis was based on a 30-year fixed mortgage rate, Price said).

As of May, the association estimated that buyers would need a yearly salary of nearly $96,000 to afford a home in Virginia. But the state’s median household income has been declining since 2018, according to census data. While figures for 2021 and 2022 are still preliminary, it’s possible that the sharp rise in home prices over the last few years could push median costs higher than median incomes.

“This is concerning,” Price said. “I think affordability is going to be a major headwind in a lot of our housing markets.”

“We’re also seeing very strong rent growth,” he added. “And a lot of it is because of this right here. Buyers are getting priced out of ownership, so they’re forced to rent for longer than maybe they wanted to, which is putting upward pressure on rents, as well.”

Those creeping housing costs could also become a big problem for policymakers if affordability and inventory don’t improve. In CNBC’s 2022 ranking of the country’s top states for business — an oft-cited metric by both Democrats and Republicans —  Virginia dropped from first to third place. But in the category of “Economy,” a measure that includes the health of the residential real estate market, the state was ranked 20th in the country, with an overall grade of C+.

Lombard pointed to signs that housing challenges are also affecting broader economic development. State lawmakers cheered when Boeing and Raytheon announced plans to move their headquarters to Northern Virginia, but the relocation of both companies isn’t expected to result in many new jobs. Both firms announced they would allow many workers to telecommute rather than relocate to an expensive housing market.

The last several years have also brought major demographic changes to some of the state’s biggest metropolitan areas. During the 2010s, the majority of Virginia counties lost population to migration, particularly in Northern Virginia, which is seeing a significant loss of young families. According to Lombard’s analysis of IRS data, areas including Raleigh and Charlotte in North Carolina have been top destinations for residents leaving the state, a trend likely influenced — at least in part — by single family home prices that are at least 50 percent lower than in Fairfax County, Alexandria and Arlington.

Projections still estimate that Virginia’s population is expected to grow by roughly 13 percent over the next 20 years. But Lombard said those estimates are based on nearly decade-old population trends, which have shifted dramatically over the last few years as more Virginians move out of state — or relocate from urban centers to more rural areas. 

And with a significant pipeline of millennial and Gen Z first-time homebuyers, housing will likely play a major role in the future development of the state. Just over 27 percent of Virginia’s total population is made up of 20 to 39-year-olds, according to U.S. Census data. While many are still renting, Hamilton said surveys still show a strong preference for home ownership and more space, borne out by the rise in demand for rural exurbs just outside existing cities and suburbs.

So while new rental construction could help lower housing costs on the whole, it’s unlikely to quell continued demand for affordable single-family homes. Without those, it’s possible that a growing number of Virginia residents will simply find new places to live, especially with telework offering more flexibility to white-collar employees.

“You really want to grow with the market,” Hamilton said. “So if we say we don’t want any new single-family housing at all, the problem we run into is that people will just move to Raleigh. And that’s exactly what we’re seeing.”