Addressing Current Market Challenges

1
Addressing Current Market Challenges

• Virginia Association of Realtors
• Legislative Conference
• February 12, 2009

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Four factors continue to undermine market recovery

• Large inventories of unsold homes
• Falling home prices
• Curtailment of mortgage credit
• Lack of consumer confidence

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Inventory Factors
4
Foreclosures continue to negatively impact
inventories

• 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 Good News Foreclosure inventories in NoVA
are falling
Source RealtyTrac
6
Steep price drops are bringing REO investors into
the market
Source MRIS
7
The Bad News Inventories remain high, and are
rising down state
Source RealtyTrac
8
The cycle in downstate markets trails NoVA by 12
months
Source VAR
9
The inventory of unsold new homes also remains a
problem

• The unsold new home inventory is mainly larger
  trade-up homes
• The trade-up market peaked earlier this decade,
  and is no longer supported by increases in middle
  aged households
• Demand is further weakened by the inability of
  would-be trade-up buyers to sell their current
  homes at prices they will accept
• Purchase of trade-up homes by marginal buyers is
  no longer supported through loose lending
  practices

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Home Price Factors
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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

• The large inventory of foreclosed homes has
  resulted in fire sales that are driving prices
  back to historic affordability levels

Source VAR and Census Bureau
13
In markets with lesser declines, affordability
remains an issue
Source VAR, CAAR Census Bureau
14
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 supportedhome 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 cheap mortgage
  credit
• Therefore, prices will have to readjust to
  historic affordability levels

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Mortgage Credit andBuyer Confidence Factors
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In the short-run, the return to sound lending
practices will be painful

• Everyone agrees that sound lending practices must
  be restored
• However, the near-term pain associated with the
  removal of easy credit is severe
• Todays 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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Prince William Co. is illustrative of unfettered
market forces
Source MRIS
20
Prince William County has felt the full impact of
the market correction

• The County faces a severe shortfall in revenues
• Recent home buyers are deeply under water with
  little chance of recouping their equity loss in
  the foreseeable future
• Once mainly homeowner neighborhoods are
  transitioning to heavily absentee ownership and
  renter occupancy
• Lenders, facing substantial losses from
  foreclosures and asset write-downs, must tighten
  access to credit

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The hope for fuller market recovery lies with
first-time homebuyers

• The return of affordability in the Northern
  Virginia market 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 offers first-time buyers affordable and
sustainable credit

• VHDA does not make subprime, ARM, option payment
  or limited document mortgages
• VHDA services its loans in-house, and works hard
  to keep borrowers in their homes
• The strong performance of VHDAs portfolio has
  enabled the Authority to continue serving the
  needs of first-time buyers

Source Mortgage Bankers Association and VHDA
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VHDA is serving first-time buyersin 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
• VHDA will be partnering with the VA Dept. of
  Housing Community Development to assist
  first-time buyers in purchasing foreclosed homes
  through the federal Neighborhood Stabilization
  Program

24
VHDA is building homebuyers knowledge and
confidence

• VHDA requires all of its borrowers to participate
  in free homeownership educationeither through
  face-to-face classes or on-line courses
• Homeownership education classes are offered
  statewide and in a variety of languages
• VHDA is partnering with housing counselors in
  NoVA to air 30-minute public access TV talk show
  programs on homebuyer education issues
• 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, homebuildersand lenders facefour
mutual challenges
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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 ones home as ones 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 ones living
  environment

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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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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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We must build consensus on sustainable means for
meeting future housing needs

• Pent-up demand is growingthe 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 demandThe
  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