Title: Addressing Current Market Challenges
1Addressing Current Market Challenges
- Virginia Association of Realtors
- Legislative Conference
- February 12, 2009
2Four factors continue to undermine market recovery
- Large inventories of unsold homes
- Falling home prices
- Curtailment of mortgage credit
- Lack of consumer confidence
3Inventory Factors
4Foreclosures 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
5The Good News Foreclosure inventories in NoVA
are falling
Source RealtyTrac
6Steep price drops are bringing REO investors into
the market
Source MRIS
7The Bad News Inventories remain high, and are
rising down state
Source RealtyTrac
8The cycle in downstate markets trails NoVA by 12
months
Source VAR
9The 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
10Home Price Factors
11There 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
12In 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
13In markets with lesser declines, affordability
remains an issue
Source VAR, CAAR Census Bureau
14The 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
15Public 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
16Now, 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
17Mortgage Credit andBuyer Confidence Factors
18In 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
19Prince William Co. is illustrative of unfettered
market forces
Source MRIS
20Prince 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
21The 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
22VHDA 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
23VHDA 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
24VHDA 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
25Realtors, homebuildersand lenders facefour
mutual challenges
26We 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
27We 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
28We 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
29We 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