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Addressing Current Market Challenges

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The hope for fuller market recovery lies with first-time homebuyers ... VHDA offers first-time buyers affordable and sustainable credit ... – PowerPoint PPT presentation

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Title: Addressing Current Market Challenges


1
Addressing Current Market Challenges
  • Virginia Association of Realtors
  • Legislative Conference
  • February 12, 2009

2
Four factors continue to undermine market recovery
  • Large inventories of unsold homes
  • Falling home prices
  • Curtailment of mortgage credit
  • Lack of consumer confidence

3
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

5
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

10
Home Price Factors
11
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

12
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

15
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

16
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

17
Mortgage Credit andBuyer Confidence Factors
18
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

19
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

21
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

22
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
23
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

25
Realtors, homebuildersand lenders facefour
mutual challenges
26
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

27
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

28
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

29
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
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