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 and Trends 1
Greater Piedmont is now part of a very large multi-centered urban region. Greater Washington now has a commuting radius of 70 miles centered on the Dulles Corridor. Greater Piedmont is centered in Virginia s Northern Tier portion of this multi-state region. Culpeper has emerged along with Winchester and Fredericksburg as a satellite urban growth center. 2
Integration with Greater Washington has altered housing market dynamics. Real estate and mortgage markets throughout the region have become more integrated. Local area trends in home sales, prices and financing are more closely mirroring those of the Greater Washington region. In the current housing crisis, Virginia s Northern Tier region including the Greater Piedmont area has performed differently from downstate regions. 3
Home sale trends in the Northern Tier remain ahead of downstate regions. 150 Existing Home Sales Index 4 Index (1st Qtr 2003 = 100) based on 4-quarter rolling average 100 50 03-1 03-2 Index based on four-quarter rolling average Source: VAR 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 09-3 09-4 10-1 Northern Tier Charlottesville-Central Valley Greater Richmond Greater Hampton Rds Northern Tier Roanoke-Blacksburg-Lynchburg Downstate Regions
Area sales are out-performing those in other parts of the Northern Tier. 175 Existing Home Sales Index 5 Index (1st Qtr 2003 = 100) based on 4-quarter rolling average 100 25 03-1 03-2 Index based on four-quarter rolling average Source: MRIS Greater Piedmont Area Prince William Area Fredericksburg Area 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 Greater Piedmont Area 07-1 07-2 07-3 Fairfax-Arlington-Alexandria Area Dulles Area (Loudoun) Pr. William Area 07-4 08-1 08-2 08-3 08-4 09-1 09-2 09-3 09-4 10-1 Blue Ridge Area (Winchester-Front Royal)
Area home sales continue to rise, but are 15% below their pre-boom level. 400 Existing Home Sales Greater Piedmont Area 350 300 250 Aug '05 270 6 200 150 100 50 0 Oct-99 Apr-00 Source: MRIS Average Oct 99 to Apr 03 = 175 12-month rolling average Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Apr '08 119 Apr '10 148 Oct-08 Apr-09 Oct-09 Apr-10
Prices are stabilizing, but continue to be impacted by excess inventory. Greater Piedmont Market Area 50% 25% Months of Unsold Inventory 30 15 0% 0-25% -15-50% Annual Change in Median Price -30 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 7 Source: MRIS
Area price trends mirror those in other outer submarkets of the Northern Tier. 50% 40% 30% Annual Change in Median Existing Home Prices Northern Tier Region -- Outer Suburbs & Exurbs 8 20% 10% 0% -10% -20% -30% -40% Source: MRIS Jan-05 Apr-05 Jul-05 Oct-05 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 Frederickburg Area MLS Greater Piedmont MLS Winchester Area MLS
The supply of unsold homes is tighter in the core of the region. 24 Months Supply of Unsold Homes Northern Tier Region 21 18 9 15 12 9 6 3 0 Jan-04 Apr-04 Jul-04 Source: MRIS Balanced Market Oct-04 Jan-05 Apr-05 Jul-05 INNER (Northern VA MLS) Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 MIDDLE (Loudoun and Prince William Area MLSs) OUTER (Greater Piedmont, Fredericksburg and Blue Ridge MLSs) Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
Tight inventory in inner submarkets has supported a rebound in prices. 40% Annual Change in Median Existing Home Prices Northern Tier Region -- Inner Ring 10 30% 20% 10% 0% -10% -20% -30% -40% -50% Source: MRIS Jan-05 Apr-05 Jul-05 Oct-05 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 NoVA MLS Prince William MLS Loudoun MLS
A change in market dynamic is needed to further reduce inventory. 2,000 Prince William Area Rising sales and falling listings have played equal parts in reducing the unsold inventory 575 Greater Piedmont Area Sales are rising, but inventory reduction has been mostly due to falling listings 1,750 500 1,500 1,250 New Listings 425 350 New Listings 1,000 275 750 500 250 Jan-00 Jan-01 Jan-02 Existing Home Sales Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 200 125 50 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Existing Home Sales Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: MRIS / data reflect 12-month rolling averages 11
Factors Impacting Market Recovery 12
Supply Factor: The large inventory of distressed properties is, and will continue to be, a significant market drag. 13
Depressed prices and unemployment will continue to keep defaults rates high. The foreclosure crisis began with unprecedented defaults on weakly underwritten sub-prime and low documentation alt-a loans. That problem is waning. Nonetheless, large inventories of foreclosed homes continue to depress home values, and are keeping a very large share of area mortgages under water. Now, it is unemployment and loss of income that is mainly driving homeowners into default especially those who are underwater and cannot sell. The impact on high unemployment on default rates will not peak until late 2010 or early 2011, and then abate slowly as people regain jobs. 14
Subprime foreclosures are declining as prime loan foreclosures rise. 12,500 10,000 Virginia Mortgage Loans in Foreclosure Subprime 7,500 5,000 Prime & Govt. ARM Prime & Govt. Fixed Rate 2,500 0 2006-2 2006-3 2006-4 2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 2008-3 2008-4 2009-1 2009-2 2009-3 2009-4 2010-1 Source: Mortgage Bankers Association (MBA) 15
Subprime and Alt-A loans no longer dominate foreclosure activity. 56% 1st Qtr. 2008 18,000 Active Foreclosures Subprime & Alt-A Loans 10,000 Prime & Govt. Fixed Rate Loans 3,500 Virginia Foreclosures 19% Prime & Govt. Adjustable Rate Loans 4,500 25% Change 2008 to 2010 Subprime Foreclosures Prime & Govt. ARM Foreclosures 30% 1st Qtr. 2010 29,400 Active Foreclosures Subprime & Alt-A Loans 8,700 Prime & Govt. Adjustable Rate Loans 8,500 29% - 1,300 + 4,000 Prime & Govt. Fixed Rate Foreclosures + 8,700 Prime & Govt. Fixed Rate Loans 12,200 41% 16 Source: Mortgage Bankers Association (MBA)
The lull between the two waves has caused foreclosures to plateau. 32,000 Virginia Mortgage Loans in Foreclosure 24,000 Subprime 16,000 Prime & Govt. ARM 8,000 Prime & Govt. Fixed Rate 0 2006-2 2006-3 2006-4 2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 2008-3 2008-4 2009-1 2009-2 2009-3 2009-4 2010-1 Source: Mortgage Bankers Association (MBA) 17
In the 1 st Qtr. of 2010, the serious delinquency rate had a slight dip. 6.00% 5.00% Share of Virginia Loans Seriously Delinquent (Loans 90+ Days Delinquent including Loans in Foreclosure Processing) 4th Qtr '09 = 5.77% 1st Qtr '10 = 5.62% 4.00% 3.00% 2.00% 1.00% 0.00% 1st Qtr '06 = 0.67% 1980-1 1982-1 1984-1 1986-1 1988-1 1990-1 1992-1 1994-1 1996-1 1998-1 Calendar Year Quarter 2000-1 2002-1 2004-1 2006-1 2008-1 2010-1 18 Source: Mortgage Bankers Association (MBA)
Likewise, early delinquency rates have shown small recent declines. 3.5% Virginia Delinquency Rates 4-Quarter Rolling Averages 3.0% 2.5% 2.0% 30-Day Delinquencies 1.5% 1.0% 0.5% 60-Day Delinquencies 0.0% 2003-4 2004-2 2004-4 2005-2 2005-4 2006-2 2006-4 2007-2 2007-4 2008-2 2008-4 2009-2 2009-4 19 Source: Mortgage Bankers Association (MBA)
Nonetheless, the peak of the second wave will not likely come until 2011. Experience of Last Major Recession in Early 1990's 1.75% 15 months 7.0% 20 Virginia Serious Delinq. Rate (4-quarter rolling average) 1.50% 1.25% 1.00% 0.75% Unemployment 1990-1 1990-2 1990-3 1990-4 1991-1 1991-2 1991-3 1991-4 1992-1 1992-2 Source: Virginia Employment Commission and Mortgage Bankers Association (MBA) Peak in 3rd Quarter 1992 Serious Delinquencies Calendar Year Quarter Peak in 4th Quarter 1993 1992-3 1992-4 1993-1 1993-2 1993-3 1993-4 1994-1 1994-2 1994-3 1994-4 6.0% 5.0% 4.0% 3.0% Virginia Unemployment Rate (4-quarter rolling average)
In this recession, problem loans made defaults a leading rather than a lagging indicator, thereby extending the pain. Current Recession 6.0% 8.0% 21 Virginia Serious Delinq. Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 2007-3 2007-4 Source: Virginia Employment Commission and Mortgage Bankers Association (MBA) Serious Delinquencies Calender Year Quarter Unemployment 2008-1 2008-2 2008-3 2008-4 2009-1 2009-2 2009-3 2009-4 2010-1 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% Virginia Unemployment Rate Seasonally Adjusted
The foreclosure problem is likely far from over. 15,000 Virginia Mortgage Loans in Foreclosure 12,500 10,000 7,500 5,000 Subprime Prime & Govt. ARM Prime & Govt. Fixed Rate 2,500 High and Low Scenarios 0 2006-2 2006-4 2007-2 2007-4 2008-2 2008-4 2009-2 2009-4 2010-2 2010-4 2011-2 2011-4 2012-2 2012-4 22 Source: Mortgage Bankers Association (MBA)
The market will be adversely impacted through at least 2012... 32,000 Virginia Mortgage Loans in Foreclosure Lower Scenario End of 2012 +/- 13,000 Loans 24,000 16,000 Subprime Prime & Govt. ARM 8,000 0 Prime & Govt. Fixed Rate 2006-2 2006-4 2007-2 2007-4 2008-2 2008-4 2009-2 2009-4 2010-2 2010-4 2011-2 2011-4 2012-2 2012-4 23 Source: Mortgage Bankers Association (MBA)
but, the impact of distressed inventory could extend well beyond 2012. 32,000 24,000 Virginia Mortgage Loans in Foreclosure Higher Scenario End of 2012 +/- 20,000 Loans 16,000 8,000 Subprime Prime & Govt. ARM 0 Prime & Govt. Fixed Rate 2006-2 2006-4 2007-2 2007-4 2008-2 2008-4 2009-2 2009-4 2010-2 2010-4 2011-2 2011-4 2012-2 2012-4 24 Source: Mortgage Bankers Association (MBA)
Area foreclosure levels remain high, and exceed downstate rates. Winchester MSA Prince William County April 2010 Foreclosure Activity Greater Piedmont Area Washington-Arlington-Alexandria MSA Downstate Regions Trustee Sales Bank Repossessions Culpeper County Orange County Fauquier County Madison County Rappahannock County 0.00% 0.25% 0.50% 0.75% 1.00% Share of Homes with a Mortgage 25 Source: RealtyTrac and Census Bureau
The inventory of foreclosed homes is again rising after being level in 2009. Foreclosed Homes Greater Piedmont Area 125 750 100 Inventory of Lender-Owned Homes 600 75 450 50 New REOs 300 25 150 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 26 Source: RealtyTrac
Demand Factors: By traditional measures, the cost of home purchase has dropped. But 1. Access to favorable mortgage terms remains a challenge. 2. Consumer purchasing power and confidence remain weak. 27
Mortgage rates remain in a narrow band at historically low levels. Average Mortgage Interest Rate 30-Year Fixed Rate Loans 28 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% Oct-93 Oct '93 - Jun '02 Avg. = 7.58% Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Source: Federal Housing Finance Agency (FHFA) Jun '02 - Dec' 08 Avg. = 6.07% Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Dec '08 -? Avg. = 5.03% Oct-10 Oct-11
Mortgage rates will likely remain low well into 2011. The fear that mortgage rates would jump once the Fed stopped direct purchases of GSE securities on March 31, has been unfounded. 10-year Treasury rates, to which mortgages are pegged, are at new lows due to the flight to safety in the wake of the European debt crisis. Furthermore, the Fed continues to add to its holding of MBS in new ways, and appears unwilling to significantly reduce its holdings anytime soon. Total Fed MBS holding now exceed $1.1 trillion. 29
The Fed s holding of MBS has risen by $45 billion since March 31. Federal Reserve Direct Securities Holdings (Trillions $) 2.0 1.5 1.0 Mortgage-Backed Securities Federal Agency Debt U.S. Treasuries 0.5 0.0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 30 Source: Federal Reserve Board
By traditional measures, homes are again affordable. Alexandria Arlington Fairfax Loudoun Fauquier Pr. William Stafford Spotsylvania Ratio of Median Home Price to Median Household Income Historic affordability threshold 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Pre-Boom: April 2000 Peak of Boom: May 2006 Current: April 2010 Affordability has returned to historic norms in markets outside the Beltway. Lower prices coupled with historically low mortgage rates have mitigated the problem of unaffordable monthly mortgage payments. 31 Source: MRIS and Census Bureau
Nonetheless, traditional buyers are still struggling to enter the market. Young households are especially impacted by unemployment and under-employment this has off-set the stimulus impact of the federal home purchase tax credit. Affordability remains a barrier due to ongoing tightening of lending standards. In some areas 1 st -time buyers have had trouble competing against investors with cash. Would-be trade-up buyers are holding back due to significant loss of equity. 32
Area unemployment is higher than in the Washington Metro Area. U.S. Winchester (VA pt) Virginia Greater Piedmont Area Washington, DC (VA pt) April 2010 Unemployment Rates Culpeper County Orange County Madison County Rappahannock County Fauquier County 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 33 Source: Virginia Employment Commission (VEC)
Good news: The area is recovering lost jobs faster than elsewhere. 3.0% Annual Change in Employment 2.0% 1.0% Virginia part of Washington Metro Area 0.0% -1.0% -2.0% Greater Piedmont Area Virginia -3.0% Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 34 Source: Virginia Employment Commission (VEC)
Funds for down payment is a growing barrier for first-time buyers. Higher minimum loan-to-value ratios have significantly increased down payment requirements. Young households lack the savings needed to cover down payment and closing costs. Parents are less able to assist with these costs due to loss of income, home equity and the value of stock holdings. 35
Burdensome debt is another major obstacle for young households. Average Credit Card Debt Among Households Age 25 to 34 with Credit Card Debt (2004 dollars) +52% $2,873 $4,358 1989 2004 Young households are carrying far higher debt loads than in the past. Acquiring financial management skills and paying down debt are essential for successful home purchase. 36 Source: Survey of Consumer Finance
The investor share of sales continues to rise, despite the federal tax credit. Cash Sales Share of Total Existing Home Sales Fauquier-Culpeper-Orange-Rappahannock-Madison 30% 25% 20% Jan '09 28.6% Apr '10 18.8% 37 15% 10% 5% 0% Jan-98 Source: MRIS Jul-98 Jan-99 Jul-99 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 Prince William Area Jan-10
Investors are playing a critical role, but they cannot sustain a full recovery. Investors will play a key role for several more years until the distressed inventory is resolved. However, investor appetite will wane quickly as price rise therefore, home appreciation will be constrained until sales to owner-occupants increase. The industry must work together to motivate qualified potential buyers in the face of uncertain employment and stagnant home values. 38
As the federal tax credit winds down, a new demand driver is needed. Annual Change in Existing Home Sales Greater Piedmont Area 100% 80% Housing Boom Bottom Fishing Fed. Tax Credit 60% 40% 20% 0% -20% -40% -60% -80% Traditional Correction REO Flood Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 39 Source: MRIS
VHDA is addressing the need for down payment assistance and financial education. VHDA is continuing to fund down payment assistance through our FHA Plus program. 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. 40
There is more to do to re-instill the confidence of first-time buyers. This will require 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 41
What is the near-term market outlook? 42
Home sales are likely to drop following the end of the tax credit program. A large share of sales were pushed forward to meet the tax credit deadline lenders and closing agents will be hard pressed to meet the June 30 federal loan closing deadline. Mortgage loan reservations were down significantly in May VHDA s reservations fell 50% between April and May on a seasonally adjusted basis. 43
Home prices will remain weak. Continued high levels of distressed sales coupled with weakened demand among traditional buyers will restrain prices and could result in a double dip in prices. Long-term appreciation will depend on employment and income growth. Nonetheless, since current prices reflect traditional fundamentals, any further drop in prices will be recouped as the foreclosed inventory is drawn down. 44
Greater Piedmont will be impacted by closer-in parts of Greater Washington. A stronger rebound in the inner parts of the region would help lift the Greater Piedmont market however, inner area sales have been relatively flat for the past 12 months despite the tax credit. Land-use decisions by inner area localities will determine the extent to which regional housing needs are met in proximity to jobs or in outlying localities. 45
The area will increasingly compete with other parts of the region for growth. In the future, market demand will not support the drive until you qualify buyer psychology that told hold in the recent boom. Local community development in the Greater Piedmont will need to support attractive, sustainable residential and commercial development that will support local employment as well as entice longer distance commuters. This will mean resolving local infrastructure challenges that would otherwise hinder growth. 46
In Summary: Market conditions will remain challenging for the next several years until the foreclosure problem is resolved and economic recovery takes fuller hold. Longer-term, the Greater Piedmont area is poised for solid growth. Long-term economic fundamentals are very strong. The area continues to experience strong population growth. Home prices are now in line with affordability fundamentals. The area s ability achieve potential market growth will depend on steps to retain competitiveness with other parts of the Greater Washington region. 47