Foreclosures and Bank-Owned Homes: More Challenges Ahead Virginia Association of Counties Annual Meeting November 10, 2008 Virginia Housing Development Authority 1
What is the size and extent of Virginia s foreclosure problem? 2
The rise in serious delinquencies has been steep, but is starting to slow 2.00% 90-Day Delinquency Rate 1.75% 1.50% 1.25% U.S. 1.00% 0.75% 0.50% 0.25% Virginia 0.00% Source: Mortgage Bankers Association (MBA) 3 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08
The leveling off of foreclosure starts provides some encouragement 3.00% Foreclosure Start Rate 2.50% 2.00% U.S. 1.50% 1.00% 0.50% Virginia 0.00% Source: Mortgage Bankers Association (MBA) 4 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08
Despite relatively level foreclosures, bank-owned homes are up sharply 20,000 15,000 Virginia Foreclosure Activity Inventory of Bank-Owned Homes 10,000 5,000 Foreclosure Auction Notices 0 Nov-23-07 Feb-1-08 Mar-6-08 Apr-2-08 May-6-08 Jun-3-08 Jul-1-08 Aug-3-08 Sep-4-08 Oct-1-08 Oct-31-08 Source: RealtyTrac 5
The build-up of bank-owned homes is now at a critical level in Northern VA Monthly Change in Inventory of Bank-Owned Homes Northern Tier Region Credit Freeze 814 879 1,171 795 Spring Sales Peak 2,045 1,346 3,406 1,496-1,923 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Source: RealtyTrac 6
The problem is most acute in the Pr. William-Manassas & Fairfax areas Inventory of Bank-Owned Homes - October 2008 Pr. William-Manassas Fairfax Loudoun Fredericksburg Area Fauquier-Culpeper-Orange Alexandria-Arlington-Falls Ch. Winchester-Frederick 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Inventory at start of month Increase during month Source: RealtyTrac 7
Bank-Owned Home Activity - Q1 2008 Northern Tier Regional 1 Mile Radius Fairfax - Arlington -Alexandria Prince William - Manassas 1/2 Mile Radius Frederick Winchester 7 Clarke Loudoun 267 Warren I-66 Shenandoah Manassas Fairfax Fauquier Rappahannock 267 I-495 Prince William Page Culpeper I-95 Falls Church Arlington Madison Stafford I-66 Fairfax Fredericksburg Alexandria King George Orange Spotsylvania We s I-495 tm ore lan Fairfax d Caroline Ric h Es se x mo I-95 nd Prince William STUDY AREA Bank-Owned Home Density Per square mile High : 10 or more Low : 2 Source: RealtyTrac 1st Quarter 2008 Forelcosure Activity 8
Other localities have significant inventories of bank-owned homes Inventory of Bank-Owned Homes - October 2008 Norfolk-VA Beach- Chesapeake Richmond-Henrico Co. Newport News-Hampton Danville 0 200 400 600 800 1,000 1,200 1,400 Inventory at start of month Increase during month Source: RealtyTrac 9
Bank-Owned Home Activity - Q1 2008 Northumberland Region 17 Lancaster Middlesex 3 Accom Hampton Roads 1 Mile Radius Core James City Gloucester 17 Mathews Northampton Hampton Newport News Williamsburg York 64 Surry Southampton 10 Isle of Wight 460 Newport News 17 Suffolk 58 Poquoson Hampton 64 664 264 Norfolk Portsmouth 264 13 Virginia Beach 664 Suffolk 164 Federal Land 64 Norfolk Portsmouth 13 264 Federal Land Franklin 58 Chesapeake 168 Virginia Beach Federal Land 13 264 Chesapeake Bank-Owned Home Density Per square mile High : 10 or more Dismal Swamp 17 STUDY AREA Source: RealtyTrac 1st Quarter 2008 Forelcosure Activity Low : 2 10
Bank-Owned Home Activity - Q1 2008 Greater Richmond Louisa 1 Mile Radius Region 64 95 Hanover King and Queen King William Goochland 360 288 Powhatan Buckingham Richmond 60 New Kent Cumberland Henrico Charles City 360 Chesterfield Amelia 460 Hopewell Colonial Heights Prince George Petersburg Prince Edward 360 Nottoway Core 64 95 Hanover 460 460 64 360 Dinwiddie 85 Sussex 95 Bank-Owned Home Density Per square mile 295 Richmond High : 10 or more 64 60 288 Low : 2 Henrico 360 Chesterfield STUDY AREA 11 Source: RealtyTrac 1st Quarter 2008 Forelcosure Activity
The problem continues to be with higher cost & adjustable rate loans Virginia Foreclosure Start Rate by Type of Loan 4.00% 3.50% Subprime 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Prime ARM All Loans Prime Fixed Rate 2004-1 2004-2 2004-3 2004-4 2005-1 2005-2 2005-3 2005-4 2006-1 2006-2 2006-3 2006-4 2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 Source: Mortgage Bankers Association (MBA) 12
How are foreclosures impacting the market? 13
A build-up of bank-owned properties puts downward pressure on prices Relationship of bank-owned homes and declines in existing home prices Prince William Manassas Loudoun Fairfax Arlington Alexandria Fredericksburg Area 0% 10% 20% 30% 40% 50% 60% 70% Ratio of bank-owned homes to active listings Sep 1, 2008 Annual decline in median home price Sep 2007-08 Source: MRIS and RealtryTrac.com Historically, home prices have been sticky during market downturns i.e., price declines are retarded by an unwillingness of sellers to accept losses. This has meant that price corrections often occur through depressed rates of appreciation over protracted periods of time. However, a build-up of bankowned homes changes that dynamic due to the pressure on lenders to turn over properties quickly even in the face of substantial losses. 14
Price declines and foreclosures have become mutually reinforcing Initially, weak housing market conditions result in declining rates of appreciation and, in time, actual declines in resale prices. This stimulates foreclosures for at-risk borrowers who find themselves upside down with their mortgage and unable to refinance or sell. As foreclosure activity becomes substantial, then large numbers of distressed sales further depress market prices. As inventories of bank-owned homes build, the pressure to lower prices becomes intense. Sustained price declines weaken buyer confidence and cause lenders to tighten lending standards. In a worst case scenario as we see today in Northern Virginia this creates a selfreinforcing downward cycle. 15
What does the future hold for Virginia s foreclosure problem? 16
In Northern VA, falling prices are now reviving existing home sales Existing Home Sales Northern Tier Region 8,000 7,000 6,000 Peak in May 2005 5,000 4,000 3,000 2,000 1,000 12-month rolling average Trough in April 2008 0 Source: MRIS 17 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
Rising home sales are reducing unsold housing inventory 24 21 18 15 12 9 6 3 0 Balanced Market Months Supply of Unsold Homes Northern Tier Region Jan-04 Apr-04 Jul-04 Oct-04 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 INNER (Fairfax-Arlington-Alexandria) MIDDLE (Loudoun-Prince William-Manassas) OUTER (Fredericksburg-Culpeper-Winchester Areas) Source: MRIS 18
A big factor in Northern VA s sales rebound is increased affordability In 2000, affordability was a problem mainly inside the Beltway At the peak of the boom, affordability pressures were severe even in the outer suburbs Today, affordability is returning to preboom levels Ratio of Median Home Price to Median Household Income Arlington Alexandria Fairfax Loudoun Spotsylvania Stafford Pr. William 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Pre-Boom: April 2000 Peak of Boom: May 2006 Post Boom: September 2008 Historic affordability threshold Source: MRIS and Census Bureau 19
Bank-owned homes remain a drag and continue to pressure prices In June, at the spring peak in home sales, sharply lower prices briefly reduced the number and share of bank-owned homes in Northern Virginia. But since then, the seasonal slowdown in sales and fewer active listings have quickly rebuilt the bank-owned homes share of the market this has accelerated price declines. Share at Start of Month 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Ratio of Bank-owned Homes to MLS Active Home Listings Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 Loudoun Fredericksburg Area May 08 Jun 08 Source: MRIS and RealtryTrac.com Prince William- Manassas Jul 08 Fairfax- Arlington- Alexandria Aug 08 Sep 08 Oct 08 20
Lower-end prices have been under the greatest pressure 350 Change in Existing Home Prices, Washington, DC MSA S&P Case-Shiller Monthly Home Price Index (January 2000=100) 300 250 200 150 100 50 0 End of 80's boom Decade of flat home values Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Note: Tiered price breakpoints are as of August 2008 Start of 00's boom Surge in subprime and alt-a lending Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 7.5% further decline in Lower Tier index needed to restore historic price relationship Lower Price Tier (<$326,889) Middle Price Tier ($326,889 to $477,958) Higher Price Tier (>$477,958) 21
Other markets are in an earlier phase of sales and price declines Index (00-1 = 100) 200 150 100 50 Existing Home Sales Index 1st Quarter 2000 = 100 Northern Tier Peak = 2nd Qtr 2005 Other Markets Peak = 2nd Qtr 2006 0 00-1 01-1 02-1 03-1 04-1 05-1 06-1 07-1 08-1 Calendar Year Quarter Northern Tier Hampton Rds-Ches Bay Greater Richmond Balance of State Source: Virginia Association of Realtors 22
The following factors will contribute to how quickly markets rebound An upturn in home sales will mark the bottom of the market as unsold inventory declines, prices will stabilize and foreclosures ease. Current data show most Virginia markets still experiencing declining home sales. However, in Northern Virginia steep price cuts are now contributing to a rebound in sales activity. The quicker that prices fall, the sooner that home sales and appreciation rates are likely to turn positive more modest short-term price declines may contribute to prolonged price stagnation as occurred in Northern Virginia during the 1990 s. 23
What further risks lie ahead? 1. First, the length and severity of the recession is a major unknown. A layering of traditional economic foreclosure drivers on top of the current factors impacting the market will compound current weakness. 2. A second risk is bank-owned homes. This inventory is quickly building now that the June seasonal peak in sales is past. A continued build-up will reinforce current price cuts in Northern Virginia and could stimulate significant price declines in other markets as well. 3. Finally, there is the ongoing risk of further trauma in the credit markets that would significantly reduce the availability of affordable home financing. It is essential that an adequate supply of affordable mortgage funds remain available to enable the market to recover. 24