update on market challenges

Virginia Housing Development Authority

Update on Market Challenges

Charlottesville Area Association of RealtorsAugust 6, 2009

2

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Four inter-related factorscontinue to hold back recovery in the Charlottesville area market:

1. Home prices

2. Foreclosures

3. Mortgage credit

4. Consumer confidence

3


Home Prices

4


Area home sales have fallen to a decade low, but may be near bottom

Source: VAR

Existing Home SalesCharlottesville Area

300

600

900

1,200

1,500

624

622

1,173

- 47%Four-Quarter

Rolling Average

5


Charlottesville and other markets are trailing NoVA by 12 months

Index based on four-quarter rolling average

Source: VAR

Existing Home Sales Index

25

100

175

03-1

03-2

03-3

03-4

04-1

04-2

04-3

04-4

05-1

05-2

05-3

05-4

06-1

06-2

06-3

06-4

07-1

07-2

07-3

07-4

08-1

08-2

08-3

08-4

09-1

09-2

Ind

ex

(1

st

Qtr

20

03

= 1

00

)

Northern Tier Greater Hampton Rds Greater Richmond

Charlottesville-Central Valley Roanoke-Blacksburg-Lynchburg

Northern Tier Peak 2nd Qtr 2005

Other Markets Peak 2nd Qtr 2006

12 mos.

36 mos.Northern Tier Peak to Trough

36 mos. ?Trough

6


Price changes generally lag behind changes in sales volume

Source: MRIS

Example: Prince William Market Area

$0

$100,000

$200,000

$300,000

$400,000

$500,000

Dec-9

8

Jun-

99

Dec-9

9

Jun-

00

Dec-0

0

Jun-

01

Dec-0

1

Jun-

02

Dec-0

2

Jun-

03

Dec-0

3

Jun-

04

Dec-0

4

Jun-

05

Dec-0

5

Jun-

06

Dec-0

6

Jun-

07

Dec-0

7

Jun-

08

Dec-0

8

Jun-

09

Me

dia

n E

xis

tin

g H

om

e P

ric

e

0

300

600

900

1,200

1,500

Ex

istin

g H

om

e S

ale

s(12-m

on

th ro

lling

average)

25 months

Home Sales

Home Prices

14 months

7


Unsold inventory must first decline in order to put a floor under prices

Example: NVAR Market Area(Arlington-Alexandria-Falls Church-Fairfax)

-30%

-15%

0%

15%

30%

45%

Dec-98

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

-10

-5

0

5

10

15Mos. Unsold

Inventory

Annual Changein Median Price

Source: MRIS

8


Needed inventory reductionsare occurring in different ways

Source: MRIS

Prince William AreaRising sales and falling listings

have played equal parts in reducing the unsold inventory

250

500

750

1,000

1,250

1,500

1,750

2,000

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

New Listings

Existing Home Sales

Fairfax, Arlington & Alexandria Sales volume remains weak,

with inventory reduction mostly due to steeply falling listings

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

New Listings

Existing Home Sales

9


Affordability has been a main factor in how the inventory corrects

• In Prince William, the sharp rebound in sales is due to the return of affordability to historic norms.

• However, in Alexandria, Arlington and Fairfax, affordability is still hampering sales to first-time buyers.

Source: MRIS and Census Bureau

Ratio of Median Home Price toMedian Household Income

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Pr. William

Spotsylvania

Stafford

Loudoun

Fairfax

Arlington

Alexandria

Pre-Boom:April 2000

Peak of Boom:May 2006

Post Boom:June 2009

Loudoun

Stafford

Spotsylvania

Historic affordability threshold

10


Downstate, prices remain above historic norms in many markets

In particular, the Charlottesville, Hampton Roads and Richmond markets remain overpriced relative to historic levels of affordability.

Source: VAR & Census Bureau

Ratio of Median Home Price toMedian Household Income

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Danville

Lynchburg

Roanoke

Richmond

Hampton Rds

Charlottesville

Pre-Boom: April 2000

Peak of Boom:June 2007

Post Boom: 2nd Quarter2009

Charlottesville

Historic affordability threshold

11


Charlottesville price adjustments lag adjacent Northern VA markets

Source: CAAR, VAR and MRIS

Median Existing Home Price by MLS Area

$100,000

$200,000

$300,000

$400,000

99-4

00-2

00-4

01-2

01-4

02-2

02-4

03-2

03-4

04-2

04-4

05-2

05-4

06-2

06-4

07-2

07-4

08-2

08-4

09-2

Charlottesville

Prince William

Greater Piedmont

Fredericksburg

12


Charlottesville will more likely follow the NVAR market than Pr. William• The Charlottesville area’s 13-month inventory of

unsold homes remains very high.

• In order for sales to increase significantly as they have in Prince William, prices must fall further to expand affordability.

• However, the area has little inventory of distressed bank-owned homes to drive down prices.

• Therefore, listings will likely continue to contract and prices fall at a moderate rate until a more normal supply/demand balance is achieved.

13


Foreclosures

14


Loan defaults continue to rise,and are at an historic level

Share of Virginia Loans Seriously Delinquent(Loans 90+ Days Delinquent including Loans in Foreclosure Processing)

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1980

-1

1981

-1

1982

-1

1983

-1

1984

-1

1985

-1

1986

-1

1987

-1

1988

-1

1989

-1

1990

-1

1991

-1

1992

-1

1993

-1

1994

-1

1995

-1

1996

-1

1997

-1

1998

-1

1999

-1

2000

-1

2001

-1

2002

-1

2003

-1

2004

-1

2005

-1

2006

-1

2007

-1

2008

-1

2009

-1

Calendar Year Quarter

Source: Mortgage Bankers Association (MBA)

15


Problem loans, falling prices and unemployment will keep defaults high

• The foreclosure crisis began with unprecedented defaults on weakly underwritten sub-prime and “alt-A” low documentation loans.

• Declining markets and rising inventories of foreclosed homes continue to depress home values, and those price declines are putting a very large share of mortgages “under water.”

• Now, unemployment is also driving increasing numbers of homeowners into default, especially those who are underwater and cannot sell.

16


At the start of 2008, foreclosureswere heavily concentrated in NoVA

Source: RealtyTrac

Foreclosure ActivityJanuary through April 2008

Number of homes lenders sold

at auction or took ownership of

Less than 25

25-100

101-200

201-400

Greater than 400

CAAR

17


In 2009, foreclosures are impactinga widening number of local markets

Source: RealtyTrac

Foreclosure ActivityJanuary through April 2009

Number of homes lenders sold

at auction or took ownership of

Less than 25

25-100

101-200

201-400

Greater than 400

CAAR

18


So far, the Charlottesville area has experienced a low foreclosure rate

Source: RealtyTrac and Census Bureau

0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Kingsport-Bristol MSA (VA pt.)

Lynchburg MSA

Charlottesville MSA

Blacksburg-Christiansburg-Radford MSA

Harrisonburg MSA

Roanoke MSA

Danville MSA

Richmond MSA

VA Beach-Norfolk-Newport News MSA (VA pt.)

Winchester MSA (VA pt.)

Washington-Arlington-Alexandria MSA (VA pt.)

Share of Homes with a Mortgage

Bank-owned Homes

Trustee Sales

Charlottesville has relatively few homes going to trustee sale, and little

build-up of foreclosed inventoryCharlottesville MSA

19


Unemployment has risen sharply, but is lower than in other markets

Source: Virginia Employment Commission

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Washington, DC (VA pt)

Charlottesville

Harrisonburg

Hampton Roads (VA pt)

Roanoke

Lynchburg

Richmond

Winchester (VA pt)

Kingsport-Bristol (VA pt)

Blacksburg

Danville

Jun 2009 Jun 2008

Unemployment Rates for Virginia's Metropolitan Areas

Charlottesville

20


The Charlottesville area also has a low share of sub-prime mortgages

Source: 1st American CoreLogic and Census Bureau

Sub-prime Share of Mortgage Loans

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%


Harrisonburg MSA

Charlottesville MSA



Lynchburg MSA

Danville MSA

Roanoke MSA

Richmond MSA



Charlottesville MSA

21


The region’s share of alt-A loans is higher and poses future risks

Source: 1st American CoreLogic and Census Bureau

Alt-A Share of Mortgage Loans

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%



Danville MSA

Harrisonburg MSA

Roanoke MSA

Lynchburg MSA

Richmond MSA

Charlottesville MSA




Charlottesville MSA

22


The wave of sub-prime resets is over,but other loan types are now at risk

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

23


Mortgage Credit

24


In the short run, the return tosound 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.

25


The mortgage market remainshighly reliant on federal intervention

• The private mortgage-backed securities market remains dysfunctional, with access to affordable capital dominated by governmental entities (the GSE’s and Ginnie Mae).

• Non-conforming / non-government loans—especially jumbo mortgages—still pay premium prices.

• The federal government continues to stimulate the market with historically low rates and tax credits.

• However, the stimulus is off-set by continued tightening of underwriting standards to keep a lid on escalating loan losses by the GSEs and FHA.

26


First-time buyers still struggleto enter the market

• Affordability remains a barrier due to tightened lending standards.

• Young households are especially impacted by unemployment and under-employment—this is off-setting the stimulus impact of the federal home purchase tax credit.

• In Northern Virginia, unemployment remains low and affordability has increased, but 1st-time buyers are having trouble competing against investors with cash.

27


VHDA is helping to make the federaltax credit work for first-time buyers

• The federal stimulus home purchase tax credit does not address the critical need of first-time buyers for the up-front cash needed at closing.

• VHDA has created a “Homebuyer Tax Credit Plus” program to address that need.

– VHDA provides a second mortgage on FHA loans for down payment and closing costs at 0% interest with no payments for the first12 months.

– The borrower can either repay the loan from the proceeds of their federal tax credit, or else choose to have the loan amortized over 30-years at the same interest rate as the first mortgage.

28


As with other stimulus measures, the federal tax credit remains a challenge

• Efforts to “monetize” the credit—such as VHDA’s “Homebuyer Tax Credit Plus” loans—require specialized Truth in Lending.

• This has weakened lenders’ willingness to participate since the tax credit sunsets at the end of November.

• A large share of VHDA lenders are now on board—nonetheless, in July, the $8.7 million in Tax Credit Plus reservations was just over 10% of VHDA’s total monthly loan production.

29


Consumer Confidence

30


There has been a dramatic shift in demand from the peak of the boom

Source: VEC and Census Bureau

Projected Change in Adult Population by Age, 2005-2020Charlottesville-Central Valley

209

4,266

7,169

2,573

267

-3,233

-516

4,809

10,217 10,285

8,687

3,726

1,811

4,521

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+

Age Group

Young Renters &1st-Time Homebuyers

Middle AgeTrade-up Homebuyers

Empty Nester & YoungerYounger Homeowners

Older Seniorswith Special Needs

31


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

• Renewed affordability creates opportunity for first-time buyers to 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

32


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 carried out a statewide marketing campaign to increase awareness of, and participation in, homebuyer education—the result was a 120% increase in class participation.

33


There is more to do to re-instill the confidence of first-time buyers

• 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 traditional core values of homeownership:

Security of tenure Stability in housing costs arising from

long-term, fixed rate financing Pride of ownership and control of one’s

living environment

34


What is the near-termmarket outlook?

35


Charlottesville’s market will likely continue to correct into 2010

• Home sales are still declining, but may be nearing bottom.

• The price correction is still ongoing, and will likely continue until inventories are reduced—prices must fall further to reflect the significant shift in demand.

• The impact of loan defaults will depend on how much unemployment rises and the magnitude of further price declines.

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