Update on Market Challenges

1
Update on Market Challenges

• Charlottesville Area Association of Realtors
• August 6, 2009

2
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
5
Charlottesville and other markets are trailing
NoVA by 12 months
Index based on four-quarter rolling
average Source VAR
6
Price changes generally lag behind changes in
sales volume
Source MRIS
7
Unsold inventory must first decline in order to
put a floor under prices
Source MRIS
8
Needed inventory reductionsare occurring in
different ways
Source MRIS
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.

Historic affordability threshold
Source MRIS and Census Bureau
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.

Historic affordability threshold
Source VAR Census Bureau
11
Charlottesville price adjustments lag adjacent
Northern VA markets
Source CAAR, VAR and MRIS
12
Charlottesville will more likely follow the NVAR
market than Pr. William

• The Charlottesville areas 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
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
CAAR
Source RealtyTrac
17
In 2009, foreclosures are impactinga widening
number of local markets
CAAR
Source RealtyTrac
18
So far, the Charlottesville area has experienced
a low foreclosure rate
Source RealtyTrac and Census Bureau
19
Unemployment has risen sharply, but is lower than
in other markets
Source Virginia Employment Commission
20
The Charlottesville area also has a low share of
sub-prime mortgages
Source 1st American CoreLogic and Census Bureau
21
The regions share of alt-A loans is higher and
poses future risks
Source 1st American CoreLogic and Census Bureau
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.
• 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.

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
  GSEs and Ginnie Mae).
• Non-conforming / non-government loansespecially
  jumbo mortgagesstill 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-employmentthis 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 creditsuch as VHDAs
  Homebuyer Tax Credit Plus loansrequire
  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
  boardnonetheless, in July, the 8.7 million in
  Tax Credit Plus reservations was just over 10 of
  VHDAs 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
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 educationeither 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 educationthe 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 ones
  living environment

34
What is the near-termmarket outlook?
35
Charlottesvilles 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
  reducedprices 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.