Housing Market Update

Charlottesville Area Association of Realtors October 26, 2011

Virginia Housing Development Authority

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 appear to be re-stabilizing at a 13-year low.

Virginia Existing Home Sales
4-Quarter Rolling Average

40,000 35,000 30,000

3rd Qtr 2005

- 47%
25,000
2nd Qtr 2008

Federal Home Buyer Tax Credit

2nd Qtr 2011

20,000 15,000
-1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 10 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 11 11 -1 -3

Calendar Year Quarter

Source: Virginia Association of Realtors (VAR)

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Both the Northern Tier and Downstate markets are searching for a new bottom.
Virginia Existing Home Sales
4-Quarter Rolling Average

25,000
2nd Qtr 2005 4th Qtr 2005
Federal Home Buyer Tax Credit

20,000

Downstate Regions
15,000 - 49% 10,000

- 46%

2nd Qtr 2011

Northern Tier
1st Qtr 2008

5,000
-1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 -1 -3 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07

-1

-3

-1

-3

-1

-3

-1

08

08

09

09

10

10

11

Calendar Year Quarter

Source: Virginia Association of Realtors (VAR)

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11

-3

Home sales trends in Charlottesville are closely tracking other downstate regions.
Existing Home Sales
(4 quarter rolling averages) 800 16,000

700 All Downstate Regions 600 Charlottesville Metro Area 500

14,000

12,000

10,000

400

8,000

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2

Q 3

Q 4

Q 1

Q 2 20

07

08

08

08

08

09

09

09

09

10

10

10

10

11

11 20

20

20

20

20

20

20

20

20

20

20

20

20

20

Source: Virginia Association of Realtors (VAR)

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20

11

Q 3

Area home prices are tracking statewide changes, and have not yet found a bottom.
Annual Change in FHFA Existing Home Price Index
25% 20%

Virginia
15% 10%

Charlottesville Metro Area

5% 0% -5% -10%
20 00 -2 20 00 -4 20 01 -2 20 01 -4 20 02 -2 20 02 -4 20 03 -2 20 03 -4 20 04 -2 20 04 -4 20 05 -2 20 05 -4 20 06 -2 20 06 -4 20 07 -2 20 07 -4 20 08 -2 20 08 -4 20 09 -2 20 09 -4 20 10 -2 20 10 -4 20 11 -2
Calendar Year Quarter

Source: Federal Housing Finance Agency (FHFA)

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1. Housing Market Overview

Constraints on Demand

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The Feds efforts to keep mortgage rates at historic lows have not revived the market.
Average Mortgage Interest Rate
30-year Fixed-Rate Loans

10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0%

n Ja -94 n Ja -95 n Ja -96 n Ja -97 n Ja -98
Since Dec '08 4.79 Jun '02 - Dec '08 6.07% Oct '93 - Jun '02 7.60%

9 0 1 2 3 4 5 6 7 8 9 0 1 n-9 a n-0 a n-0 a n-0 a n-0 a n-0 a n-0 a n-0 a n-0 a n-0 a n-0 a n-1 a n-1 Ja J J J J J J J J J J J J

Source: Federal Housing Finance Agency (FHFA)

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Elevated unemployment remains a substantial drag on housing demand.

Unemployment Rate
8.0

6.0

Virginia
Jan '10 4.0

6.6 Charlottsville Metro Area

Aug '11

5.5
2.0 May '07

2.1
0.0

-0 5

-0 6

-0 7

-0 8

-0 9

-1 0

1 b1 Ju

b0

n0

b0

n0

b0

n0

b0

n0

b1

n1

O ct

O ct

O ct

O ct

O ct

Fe

Fe

Fe

Fe

Fe

O ct

Source: Virginia Employment Commission

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Fe

Ju

Ju

Ju

Ju

Ju

n1

Real personal income has fallen, and likely remains below pre-recession levels.
Annual Change in Charlottesville Metro Area Inflation-adjusted Per Capita Personal Income
5.2% 3.9% 2.8% 2.3% 1.4% 0.7% -1.3%

3.7%

-1.6%
2003 2004 2005 2006 2007 2008

-1.7%
2009

2000

2001

2002

10

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

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

Sources: CoreLogic, a real estate data and analytics company

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Student loan debt is unsustainably high, and is a barrier to first-time home purchase.
The Class of 2011 is the most indebted ever.
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.

Avg. Debt =

$22,900
Average student loan debt, adjusted for inflation, is up 8% from 2010, and has risen more than 47% over the past decade.
Sources: National Center for Education Statistics and Mark Kantrowitz of Fastweb.com and FinAid.org

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2. Mortgage Market Issues

Resolution of foreclosures and distressed inventory

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The Good News:

Charlottesvilles foreclosure rate remains relatively low compared to Virginias rate and especially to the rate in the outer part of the Northern Tier Region.
Trustee Sales and Lender Repossessions
August 2011 Northern Tier -- Outer Greater Richmond Hampton Rds-Chesapeake Bay VIRGINIA VIRGINIA Northern Tier -- Inner (PD 8) Charlottesville-Central Valley Charlottesville-Central Valley Roanoke-Blacksburg-Lynchburg Southern Tier
0.00% 0.10% 0.20% 0.30% 0.40%

Northern Tier
Inner Outer

0.50%

Share of Homes with a Mortgage

Source: RealtyTrac and Census Bureau

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Charlottesvilles inventory of distressed properties is relatively low and falling.

Inventory of Lender-owned Homes
Culpeper County Washington-ArlingtonAlexandria MSA (VA part) VIRGINIA Virginia

Richmond MSA

Sep 2010
Charlottesville MSA Charlottesville MSA Staunton-Waynesboro Micropolitan Area

Sep 2011

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Share of Homes with a Mortgage

Source: RealtyTrac and Census Bureau

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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 nations 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.
Ratio of U.S. Household Mortgage Debt to Gross Domestic Product (GDP)
80% 70% 60% 50% 40% 30% 20%
80 85 90 95 00 05 19 19 19 19 20 20 20 10
48% Housing Boom 74%

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

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High debt was enabled by rising prices. Now, falling prices put many underwater.
80% 70% 60% 50% 40% 30% 20%
75 80 85 90 95 00 05 19 19 19 19 19 20 20 20 10
Rise in "underwater" borrowers

150

Ratio of U.S. Household Mortgage Debt to GDP 125

100 FFHA Inflation-Adjusted U.S. Housing Price Index (1980 = 100) 75

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)

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High debt levels became unsustainable once home prices fell following the boom.
80% 70% 60% 50% 40% 30% 20%
80 85 90 95 00 05 19 19 19 19 20 20 20 10

6% 5% 4% Ratio of U.S. Household Mortgage Debt to GDP 3%

Housing Boom

2% 1% 0%

U.S. Serious Delinquency Rate

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)

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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 purchasersespecially first-time buyersto 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

VHDAs is supporting Charlottevilles 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 classesfor 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.
They reflect a lack of political consensus on fundamental issues. Many are beyond the scope of direct industry influence. 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.

2. The obstacles to recovery are considerable.

3. The Charlottesville area faces challenges.

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