Addressing Current

Market Challenges
Charlottesville Area Association of Realtors
Economic Summit
March 26, 2009

Virginia Housing Development Authority

 Four inter-related factors
continue to hold back recovery

1. Foreclosures
2. Home prices
3. Mortgage credit
4. Consumer confidence

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 Foreclosures

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 Foreclosures continue to
impact inventory and prices
• Rising foreclosure inventories undermine
prices and cause non-distressed sellers to
exit the market
• As foreclosure inventories grow, this can
become a self-perpetuating cycle
– Declining values put more homeowners “under
water,” which exacerbates foreclosures
– The rising share of distressed sales then
accelerates price declines
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The wave of subprime resets is over,
but other loan types are now at risk

Source: Credit Suisse, IMF Global Financial Stability Report, September 2007

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 Problem loans and unemployment
will keep defaults high for some time
• The huge wave of defaults due to payment
resets on subprime loans is now waning.
• However, a second wave of payment resets on
“option payment ARMs” and “alt-A” loans will
begin in late 2009 and extend through 2011.
• This second wave of potential defaults will
coincide with the likely impact of rising
unemployment on borrowers’ ability to repay.

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 At the start of 2008, foreclosures
were heavily concentrated in NoVA

Foreclosures
Number of homes lenders sold
at auction or took ownership of January 2008
Less than 5
6 - 20
21 - 50
51 - 110
Greater than 110

Source: RealtyTrac

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 In 2009, foreclosures are impacting
a widening number of local
markets
Foreclosures
Number of homes lenders sold
at auction or took ownership of January 2009
Less than 5
6 - 20
21 - 50
51 - 110
Greater than 110

Source: RealtyTrac

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 The market cycle downstate is
trailing NoVA by 12 months
Existing Home Sales Index
1st Quarter 2000 = 100
200
NorthernTierPeak= Other Markets Peak=
2ndQtr2005 2ndQtr 2006
Index (00-1 = 100)

150

100

50
00-1 01-1 02-1 03-1 04-1 05-1 06-1 07-1 08-1
Calendar Year Quarter
Northern Tier Greater Hampton Rds Greater Richmond Balance of State

Source: VAR
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 For downstate markets, 2009 may
feel like 2008 did in NoVA
• Home sales in NoVA bottomed out in early 2008, and
have since been rising due to “fire sales” of
distressed properties
• However, prices continued to steadily fall throughout
2008, and only now appear to be at or near bottom
• Downstate markets are hoping that sales are now—
or soon will be—bottoming out
• Downstate markets did not begin to see a sustained
drop in prices until late 2008, and will not see prices
stabilize until sales increase and inventories are
reduced
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 Home Prices

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 There is growing generational
conflict over home values
• Future home purchase demand will be heavily
driven by “Gen-Y” first-time buyers who lack the
purchasing power of their Baby Boom parents
• Gen-Y needs home prices to fall in order to
afford home purchase with their limited savings,
high debt ratios, and new tighter credit standards
• In contrast, the Baby Boom needs home values
to remain high in order to support retirement
savings and the ability to continue extracting
home equity to support current consumption
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 In NoVA, price trends favor Gen-Y
Ratio of Median Home Price to
Median Household Income
The large
Arlington
inventory of
Alexandria
foreclosed homes
Fairfax
has resulted in
Pre-Boom:
Loudoun April 2000
“fire sales” that
are driving prices
Spotsylvania Peak of Boom:
May 2006

Stafford Post Boom:

February 2009 back to historic
Pr. William
affordability levels
Historic affordability
threshold

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Source: MRIS and Census Bureau

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 Downstate, prices remain above
historic norms in many markets
Ratio of Median Home Price to
Median Household Income
In particular, the
Charlottesville
Charlottesville,
Hampton Roads
Hampton Rds

and Richmond
markets remain
Richmond

Pre-Boom:

overpriced relative
Roanoke April 2000

Peak of Boom:
Lynchburg June 2007
to historic levels of
Post Boom:
Danville 4th Quarter 2008
affordability
Historic affordability
threshold

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Source: VAR, CAAR & Census Bureau

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 The inflation in home prices
triggered the current crisis
• During the boom, historic demand for “trade-up”
homes by Baby Boomers drove the market
• Baby Boomers were initially able to afford large
houses due to rising incomes, falling interest rates
and growth in the equity in their current home
• These factors contributed to the steep inflation in
home prices during the early part of this decade
• However, affordability can only be stretched so far,
and the hyper-inflation in home prices led to lax
lending that finally brought the boom to an end
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 Public policies supported
home price inflation
• At the local level, land use policies actively
promoted large home construction while
inhibiting denser, more affordable development
• At the federal and state levels, the needs of less
affluent, first-time buyers who lacked equity
were met through low interest rates and loosely
regulated mortgage products that supported
price-to-income ratios well above historic norms

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 Now, the props for inflated
home values are gone
• Demographic demand for large homes has peaked
and will decline substantially over the coming decade
• The over-purchase of housing is no longer supported
through easy access to mortgage credit
• In the short-term, the Fed is aggressively reducing
mortgage interest rates
• But, in the longer term, interest rates must return to
sustainable levels
• Therefore, sooner or later, prices will have to readjust
to historic affordability levels

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 Mortgage Credit

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 In the short-run, the return to
sound lending practices is painful
• Everyone agrees that sound lending
practices must be restored
• However, the near-term pain associated
with the removal of easy credit is severe
• Today’s policy dilemma is how to
reinvigorate the market without putting in
place a new set of distortions that will lead
to future market problems
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 VHDA offers first-time buyers
affordable and sustainable credit
ForeclosureRateat End of Quarter • VHDA does not make
3.0% subprime, ARM, option
payment or limited
2.5%
document mortgages
U.S.
2.0% • VHDA services its loans
in-house, and works
1.5%
hard to keep borrowers
in their homes
1.0%
Virginia
• The strong performance
0.5%
of VHDA’s portfolio has
VHDA enabled the Authority to
0.0%
continue serving the
-3

-1

-3

-3

-1

-1

-1
-1

-1

-3

-3

-3
03

04
03

04

05

05

06

06

07

07

08

08

needs of first-time
20

20
20

20

20

20

20

20

20

20

20

20

Calender Year Quarter

buyers
Source: Mortgage Bankers Association and VHDA
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 VHDA is serving first-time buyers
in spite of market challenges
• VHDA continues to finance down payment and
closing costs through its “FHA Plus” program
to enable first-time buyers with limited savings
to afford home purchase
• VHDA loan programs remain active in all state
housing markets in order to ensure an
ongoing flow of affordable mortgage capital

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 Consumer Confidence

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 The hope for fuller market recovery
lies with first-time homebuyers
• The return of affordability creates the opportunity for
first-time buyers to again enter the market
• However, if they are to do so in significant numbers,
then they must be given renewed confidence that:
– Credit is available under terms and conditions that provide
long-term sustained affordability
– Home purchase still provides tangible benefits
– The risks of homeownership are manageable

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 VHDA is building homebuyers’
knowledge and confidence
• VHDA requires all of its borrowers to participate in
free homeownership education—either through
face-to-face classes or on-line courses
• Homeownership education classes are offered
statewide and in a variety of languages
• This spring, VHDA will launch a media campaign to
promote free homebuyer education classes and to
re-instill the confidence of first-time buyers

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 Realtors, homebuilders
and lenders face
four mutual challenges

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 1. We must re-instill the confidence
of first-time homebuyers
• The industry must work together to motivate
qualified potential buyers in the face of uncertain
employment and declining home prices
• This requires a common focus on the core values of
homeownership that derive from the traditional idea
of “one’s home as one’s castle” rather than the
recent notion of housing as an investment tool—
– Security of tenure
– Stability in housing costs arising from long-term,
fixed rate financing
– Pride of ownership and control of one’s living
environment
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 1. We must avoid unintended
stimulus consequences
• The current crisis resulted from excessive market
stimulation
• Loose lending from 2004 to 2007 was a short-term
expedient to maintain high home sales and loan
volume following the peak of the trade-up and
refinance booms earlier in the decade
• The industry must avoid new stimulus measures
that will wreak further market damage when the
props are later removed

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 1. We must manage the return of
prices to sustainable levels
• The housing industry cannot achieve full
recovery until prices return to historic norms
• However, a rapid drop in prices is itself
destabilizing to the market
• Our challenge is to avoid a price “crash” without
unduly subsidizing artificially high prices

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 1. We must build consensus on
sustainable means for meeting
future housing needs
• Pent-up demand is growing—the longer and deeper
the recession, the greater pent-up demand will be
• We lack the right mix of housing types in the right
locations to address future demand—The uncertain
long-term ownership of distressed properties further
complicates the balance of supply and demand
• The housing industry needs to find a new consensus
with government on the regulatory structure and
subsidy support needed to sustain a thriving post-
recession housing sector
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