Housing Market Update

Virginia Housing Development Authority

Housing Market UpdateHousing Market Update

Charlottesville Area Association of RealtorsOctober 26, 2011

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Presentation Outline

1. Housing market overview– Where we are– Constraints on demand

2. Mortgage market issues– Resolution of foreclosures and distressed inventory– Management of new lending risks

3. Addressing obstacles– Leveling the playing field– Rebuilding confidence– Helping first-time buyers

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1. Housing Market Overview

Where We Are

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Existing home sales in Virginia appearto be re-stabilizing at a 13-year low.

Source: Virginia Association of Realtors (VAR)

Virginia Existing Home Sales4-Quarter Rolling Average

15,000

20,000

25,000

30,000

35,000

40,000

Calendar Year Quarter

3rd Qtr 2005

2nd Qtr 2008

- 47%

2nd Qtr 2011

Federal

Home

Buyer

Tax

Credit

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Both the Northern Tier and Downstatemarkets are searching for a new bottom.


Virginia Existing Home Sales4-Quarter Rolling Average

5,000

10,000

15,000

20,000

25,000


2nd Qtr 2005

1st Qtr 2008

2nd Qtr 2011

- 49%

4th Qtr 2005

Northern Tier

Downstate Regions - 46%

Federal

Home

Buyer

Tax

Credit

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Home sales trends in Charlottesville areclosely tracking other downstate regions.


Existing Home Sales(4 quarter rolling averages)

400

500

600

700

800

8,000

10,000

12,000

14,000

16,000

CharlottesvilleMetro Area

All Downstate Regions

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Area home prices are tracking statewide changes, and have not yet found a bottom.

Source: Federal Housing Finance Agency (FHFA)

Annual Change in FHFA Existing Home Price Index

-10%

-5%

0%

5%

10%

15%

20%

25%

2000

-2

2000

-4

2001

-2

2001

-4

2002

-2

2002

-4

2003

-2

2003

-4

2004

-2

2004

-4

2005

-2

2005

-4

2006

-2

2006

-4

2007

-2

2007

-4

2008

-2

2008

-4

2009

-2

2009

-4

2010

-2

2010

-4

2011

-2


Charlottesville Metro Area

Virginia

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1. Housing Market Overview

Constraints on Demand

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The Fed’s efforts to keep mortgage rates at historic lows have not revived the market.

Source: Federal Housing Finance Agency (FHFA)

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Oct '93 - Jun '02 7.60%

Jun '02 - Dec '08 6.07%

Since Dec '08 4.79

Average Mortgage Interest Rate30-year Fixed-Rate Loans

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Elevated unemployment remains asubstantial drag on housing demand.

Source: Virginia Employment Commission

Unemployment Rate

0.0

2.0

4.0

6.0

8.0

Virginia

Charlottsville Metro Area

May '07

2.1

Aug '11

5.5

Jan '10

6.6

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Real personal income has fallen, andlikely remains below pre-recession levels.

Sources: U.S. Bureau of Economic Analysis (per capital personal income) and U.S. Bureau of Labor Statistics (CPI)

Annual Change in Charlottesville Metro Area Inflation-adjusted Per Capita Personal Income

3.7%

0.7%

-1.3%

1.4%

3.9%

2.3%

5.2%

2.8%

-1.6% -1.7%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Homeowners with negative equity remain a substantial barrier to existing home sales.

Sources: CoreLogic, a real estate data and analytics company

Estimated Share of Virginia Home Mortgages with Negative Equity

24.3% 23.6% 22.7% 22.1% 23.4% 23.1% 23.3%

2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2

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Student loan debt is unsustainably high,and is a barrier to first-time home purchase.

• Student debt can carry interest rates as high as subprime mortgages, and is hard to shed even through bankruptcy.

• The Collegiate Employment Research Institute estimates that in 2011, the average salary for new bachelor degree holders is $36,866, down 21% from $46,500 in 2009.

• The Charlottesville market is especially vulnerable in light of its dependence on higher education and its large number of recent graduates.Sources: National Center for Education Statistics

and Mark Kantrowitz of Fastweb.com and FinAid.org

Average student loan debt, adjusted for inflation, is up 8% from 2010, and has risen more than 47% over the past decade.

$22,900

Avg. Debt =

The Class of 2011 is the most indebted ever.

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2. Mortgage Market Issues

Resolution of foreclosures and distressed inventory

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Source: RealtyTrac and Census Bureau

The Good News:Charlottesville’s foreclosure rate remainsrelatively low compared to Virginia’s rate and especially to the rate in the outerpart of the Northern Tier Region.

Northern Tier

Inner

Outer

Trustee Sales and Lender RepossessionsAugust 2011

0.00% 0.10% 0.20% 0.30% 0.40% 0.50%

Southern Tier

Roanoke-Blacksburg-Lynchburg

Charlottesville-Central Valley

Northern Tier -- Inner (PD 8)

VIRGINIA

Hampton Rds-Chesapeake Bay

Greater Richmond

Northern Tier -- Outer

Share of Homes with a Mortgage

VIRGINIA

Charlottesville-Central Valley

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Charlottesville’s inventory of distressed properties is relatively low and falling.

Source: RealtyTrac and Census Bureau

Inventory of Lender-owned Homes

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Staunton-WaynesboroMicropolitan Area

Charlottesville MSA

Richmond MSA

Virginia

Washington-Arlington-Alexandria MSA (VA part)

Culpeper County

Share of Homes with a Mortgage

Sep 2010

Sep 2011Charlottesville MSA

VIRGINIA

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The Bad News: Mortgage lending is driven by macro conditions well beyond Charlottesville.

• Nationally, and in Virginia at large, the foreclosure problem is far from over.

• Lender resources are focused mainly on managing substantial and growing portfolio losses and resolving the extremely large “shadow” inventory of distressed properties.

• Federal policy and regulatory oversight of Fannie Mae, Freddie Mac and the FHA have been heavily focused on “back-ward looking attempts to address the consequences of past errors”* rather than helping to stabilize the nation’s housing market.(*Lawrence Summers, Wall Street Journal, October 23, 2011)

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During the boom, household mortgage debt sky-rocketed, and is still at an historic high.

Sources: Federal Reserve Flow of Funds Account Report (mortgage debt) and Bureau of Economic Analysis (GDP)

Ratio of U.S. Household Mortgage Debtto Gross Domestic Product (GDP)

20%

30%

40%

50%

60%

70%

80%

Housing Boom

48%

74%

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High debt was enabled by rising prices. Now, falling prices put many “underwater.”

Sources: Federal Reserve Flow of Funds Account Report (household debt), Bureau of Economic Analysis (GDP), Federal Housing Finance Agency (price index), and Bureau of Labor Statistics (CPI)

20%

30%

40%

50%

60%

70%

80%

75

100

125

150

Ratio of U.S. Household Mortgage Debt to GDP

FFHA Inflation-Adjusted U.S. Housing Price Index

(1980 = 100)

Rise in"underwater" borrowers

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High debt levels became unsustainable once home prices fell following the boom.

Sources: Federal Reserve Flow of Funds Account Report (household debt), Bureau of Economic Analysis (GDP), Federal Housing Finance Agency (price index), and Bureau of Labor Statistics (CPI)

20%

30%

40%

50%

60%

70%

80%

0%

1%

2%

3%

4%

5%

6%

Ratio of U.S. Household Mortgage Debt to GDP

U.S. Serious Delinquency Rate

Housing Boom

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High levels of mortgage debt must be reduced in order to revive the market.

Nonetheless, there is no near-term resolution to the substantial inventory of distressed loans.

– There is no consensus on how to allocate the cost of considerable unrealized losses between borrowers, investors and taxpayers.

– Any federal action to force principal write downs would carry significant legal property rights implications.

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The Administration is attempting to help those who are current, but “underwater.

• The Administration is again reforming the Home Affordable Refinance Program (HARP) in order to make it more workable for owners seeking to reduce their mortgage costs.

• The newly announced revisions expand eligibility and reduce numerous disincentives for lender participation.

• If it is successful, then the plan will:– Stimulate consumer spending– Enable faster pay down of existing mortgages– Support economic growth which will benefit the housing

market

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In the short term, promotion of refinance may undercut new loan originations.

• The plan will not stimulate home sales.– It will not reduce the number of “under water” homeowners.– New mortgage originations could actually suffer if lenders

become overwhelmed by refinance demand.

• Federal support of low GSE interest costs continues to have a significant downside.

– It impedes the revival of the private mortgage-backed securities market thereby perpetuating federal dependency.

– It undercuts the ability of state housing finance agencies to fund first-time homebuyer programs, which are now the main source of needed down payment assistance.

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2. Mortgage Market Issues

Management of New Lending Risks

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Regulatory policy is overemphasizing the importance of LTVs relative to other risks.

• During the boom, it was the layering of risk:– substantial loosening of debt ratios– undocumented income– use of “teaser” qualifying rates– loose HELOC lending

that led to skyrocketing defaults once falling prices made it infeasible to refinance unaffordable debt.

• Nevertheless, federal regulatory and program reforms continue to prioritize reducing allowable loan-to-value (LTV) ratios, despite the inability of current purchasers—especially first-time buyers—to afford a sizable down payment.

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Historic experience with higher LTV lending shows the risks are manageable.

• Following the Great Depression, the federal FHA and VA loan programs enabled a whole generation of young households to become successful homeowners with only a limited down payment.

• Today, state housing finance agencies continue to successfully manage high LTV lending programs with loan performance records that regularly exceed those of the conventional mortgage industry.

• Nonetheless, the continued ability of state housing finance agencies to address first-time homebuyer needs is jeopardized by unintended consequences of broader federal policy.

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3. Addressing Obstacles

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Leveling the Playing Field• Current federal interest rate and regulatory policy is

creating an unlevel playing field and is contributing to increased concentration of mortgage lending among the largest national lenders.

• Interest rate policy is making it extremely difficult for portfolio lenders such as state housing finance agencies to actively contribute to market recovery.

• These are lenders that, by and large, did not participate in the poor lending practices that characterized the peak of the housing boom.

• They know their markets and are able to prudently and effectively bring first-time buyers into the market.

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Rebuilding Confidence

• The market is at its nadir and pessimism reins. In this environment, industry partners must work together to re-instill the confidence of buyers.

• A new analysis of data from the Michigan Survey of Consumers by the Federal Reserve Bank of Boston, finds that younger households are showing especially low levels of confidence about homeownership.

• Continuing industry support for homebuyer education programs and K-12 financial literacy classes are critical to building healthy demand among young buyers.

• Likewise, resolving the student loan crisis is a needed long-term step to ensure the confidence and ability of young households to take on mortgage debt.

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Helping First-time Buyers

VHDA’s is supporting Charlotteville’s housing market by:– Continuation of high LTV lending

Our “FHA Plus” program provides an FHA-insured 1st mortgage with a VHDA piggy-back 2nd mortgage for down payment and closing cost assistance. Both loans have 30-year terms and the carry the same interest rate.

– New increased eligibility limits to serve widening need

Sales price: $325,000 Income: $87,400 (1-2 people) / $101,200 (3 or more people)– Requiring homebuyer education of all borrowers

VHDA supports statewide access to free homebuyer education— including on-line classes—for any interested participant.

– Providing in-house servicing for all loans

VHDA is committed to sustaining long-term homeownership through pro-active loss mitigation practices.

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Summary of Key Points

1. The worst of the housing decline is behind us. Nevertheless:

• The market is still struggling to find a firm bottom.• A significant recovery is not imminent.

2. The obstacles to recovery are considerable.• They reflect a lack of political consensus on

fundamental issues.• Many are beyond the scope of direct industry

influence.

3. The Charlottesville area faces challenges.• There are barriers to bringing first-time buyers back

into the market.• VHDA is taking actions to bolster the market and

support a sustainable recovery.

Documents

Housing Market Update