Review of Northern Virginia Market Conditions and Trends

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Aubrey Quinn
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1 Review of Northern Virginia Market Conditions and Trends Prepared for Northern Virginia Area Association of Realtors November 12, 2011 Virginia Housing Development Authority

2 Northern Virginia s existing home market continues to weaken. 1

3 Sales have steadily declined since the end of the federal tax credit stimulus. 60% 40% 20% Annual Change in Existing Home Sales (Arlington/Alexandria/Falls Church/Fairfax) Housing Boom Traditional Market Correction Foreclosure Crisis / Initial Flood of Distressed Properties Fed. Tax Credit 0% -20% -40% Investor Market / Bottom Feeding -60% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 2 Source: MRIS

4 Trended sales are hitting new lows. October was 49% below the May 2005 peak and 29% below January ,000 Existing Home Sales (Arlington/Alexandria/Falls Church/Fairfax) 3,500 3,000 May '05 2,777 2, ,000 1,500 1, Jan '00 2,005 Jan-00 Jul-00 Source: MRIS Trend based on prior 12-mos. avg. Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul '08 1,444 May '10 1,737 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Oct '11 1,423

5 Three things are needed in order for the local housing market to regain growth: 1. Reduction in consumer uncertainty about the impact of federal fiscal tightening on local employment and income 2. Reduction in the distressed inventory and stabilization of home prices 3. Revival of a stable private mortgage market 4

6 Employment and Income 5

7 Virginia, in contrast to the U.S., has regained a large share of lost employment. Change in Employment from Peak Seasonally Adjusted 0.0% -1.0% -2.0% Number of Months Since Onset of Recession in November Virginia Sep ' % -4.0% -5.0% U.S. Dec '09 Oct '11-6.0% Dec '09 6 Source: Virginia Employment Commission

8 From a national and state perspective, NoVA s unemployment rate is low. 8.0 Unemployment Rate Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Apr ' Jul-07 Oct-07 Jan-08 Apr-08 Source: Virginia Employment Commission Virginia Feb ' Virginia part of Washington Metro Area Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Sep '11 4.9

9 During the boom, the NVAR area s income growth outpaced Virginia s but, during the recession, it lagged the state. 5% 4% 3% 2% 1% 0% Annual Change in Inflation-adjusted Per Capita Personal Income -1% -2% Virginia Arlington/Alexandria/Fairfax -3% Source: Bureau of Economic Analysis (BEA)

10 Affordability is high, but so is consumer anxiety regarding future employment and income. Looming federal fiscal retrenchment could hit the area hard: Civil service and federal contract cutbacks will extend the weakness in employment growth. Continued weak federal wage/salary growth will further compress purchasing power and may further weaken consumer confidence. 9

11 Mortgage Foreclosures and Distressed Inventory 10

The NVAR area s foreclosure rate continues to out-perform Virginia s Northern Tier Region and, for the past year, has out-performed downstate regions.

12 The NVAR area s foreclosure rate continues to out-perform Virginia s Northern Tier Region and, for the past year, has out-performed downstate regions. Trustee Sales and Lender Repossessions 3-month rolling averages 0.75% Share of Homes with a Mortgage 0.50% 0.25% 0.00% Arlington/ Alexandria/ Fairfax Northern Tier Region Downstate Regions Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul Source: RealtyTrac and Census Bureau

13 The lender-owned inventory is still high, but it remains below the Northern Tier, and is converging with Downstate regions. 3% Lender-Owned Inventory as a Share of Homes with a Mortgage 2% Northern Tier Region 1% Arlington/Alexandria/Fairfax Downstate Regions 0% Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct Source: RealtyTrac and Census Bureau

14 Ups and downs in median price directly correlate to the share of cash sales a data proxy for distressed purchases. $700,000 $600,000 NVAR Area: Alexandria, Arlington, Fairfax City/County & Falls Church 17.5% 15.0% $500,000 $400,000 Median Price (Nominal $) 12.5% 10.0% $300,000-36% 7.5% $200,000 Jan 98 $ 5.0% $100,000 Cash Sales Share of Market 2.5% $0 0.0% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan Source: MRIS

15 Annual price volatility is highest in lower price tiers where distressed sales are most prevalent. Annual Change in Home Prices, Washington, DC MSA S&P Case-Shiller Seasonally Adjusted Home Price Index Data through August % 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Lower Price Tier (<$268,604) Middle Price Tier ($268,604to $441,120) Higher Price Tier (>$441,120) 14 Note: Tier price breaks are as of August 2011

16 Monthly price changes show that upper tier prices are now experiencing weakness. 5.0% Monthly Change in Home Prices, Washington, DC MSA S&P Case-Shiller Seasonally Adjusted Home Price Index Data through August % 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Lower Price Tier (<$268,604) Middle Price Tier ($268,604 to $441,120) Higher Price Tier (>$441,120) 15 Note: Tier price breaks are as of August 2011

17 The share of underwater owners is slowly falling, but remains extremely high. Estimated Share of Washington MSA Mortgages with Negative Equity 31.4% 30.6% 29.5% 28.7% 29.4% 28.7% 28.3% 2009 Q Q Q Q Q Q Q2 16 Source: CoreLogic, a real estate data and analytics company

18 Despite some positive local trends, the area s market problems are far from over. 17 Since mid-year, the decline in initial loan defaults has slowed. Initial delinquencies, while below their peak, remain high. The steady drop in home sales coupled with large inventories of distressed properties continues to constrain home prices, keeping a large share of homeowners under water. The upper tier of home prices is showing further weakness as the Jumbo Market faces new capital challenges due to the lowering of federal conforming limits. Federal policymakers are still struggling to remove barriers preventing refinance by many underwater homeowners. Judicial foreclosure backlogs in DC and Maryland have resulted in a very large shadow inventory north of the Potomac. At some point, this will further stress prices in those markets. While the immediate price impact will be in DC and Maryland, this will present a long-term drag on price appreciation throughout the region.

19 Mortgage Markets 18

20 The Fed remains committed to keeping mortgage interest rates at historic lows. 10.0% 9.0% Average Mortgage Interest Rate 30-year Fixed-Rate Loans Oct '93 - Jun ' % 8.0% 7.0% Jun '02 - Dec ' % 6.0% 5.0% 4.0% 3.0% Since Dec ' Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Source: Federal Housing Finance Agency (FHFA) 19

21 20 Federal and state intervention options are limited and carry considerable risk. Interest Rates: Low mortgage rates are helping to cushion the drop in home prices and stabilize default rates. However, current low rate levels are perpetuating dependence on federal GSE securities, while having limited impact on home sales. Loan Standards: The market remains highly dependent on FHA and the GSEs to fund new mortgages. At the same time, they must take action to stem mounting loan losses for which Congress and the public lack patience.

22 Loss Mitigation: Federal loss mitigation programs have had limited success due to the: Legal complexity of mortgage-backed security transactions The substantial share of defaults due to loss of income Large share of borrowers who are significantly under water Now, just as a massive wave of default cases are moving into foreclosure, the legal necessity to correct procedural problems continues to slow resolution of distressed properties. The backlog of distressed loans is far worse in Maryland and DC than in Virginia due to differing legal processes and requirements. 21

23 In Summary: Market conditions will remain challenging for the next several years until the foreclosure problem is resolved and economic recovery takes fuller hold. Long-term increases in home sales and prices will depend on sustained employment and income growth, and the ongoing ability of purchasers to access credit under affordable terms and conditions. 22

Review of Regional Market Conditions in the Greater Piedmont Area

Review of Regional Market Conditions in the Greater Piedmont Area Greater Piedmont Area Association of Realtors June 7, 2010 Virginia Housing Development Authority Overview of Current Market Conditions