Housing s Impact on Local Government Finance Meeting of the Virginia Government Finance Officers Association Virginia Beach, Virginia June 9, 2011 Virginia Housing Development Authority
Impact of Home Values on Local Revenue Streams 1
Housing is a critical direct generator of local tax revenues. In FY08, over half (50.7%) of local revenues in Virginia were derived from real property taxes.* In 2009, 71.2 percent of the assessed real property in Virginia was single-family homes and 4.8 percent was multifamily residential property.** Together, these data show that the assessed value of residential property accounts for fully 38 percent of local tax bases. 2 *Staff, Virginia Commission on Local Governments **John Knapp, Weldon Cooper Center for Public Service, UVA based on unpublished VA Dept. of Taxation data provided by Josh Silverman in Nov. 2010
Local tax bases benefited substantially from the housing boom. Increase in Virginia Taxable Assessed Value by Type of Property, 2000 to 2006 Agricultural Commerical Multifamily Residential Single- Family Residential 61% 68% 92% 149% Rising residential property values drove local revenue increases during the past decade. Unfortunately, this short-term increase in local tax bases was unsustainable. 3 Source: John Knapp, Weldon Cooper Center for Public Service, UVA
Housing is not leading the economy out of recession as it has in the past. Historically, the lowering of interest rates during a recession stimulated housing construction and home purchase, which then led economic recovery by increasing jobs and retail sales. This time, the inventory of distressed homes and tightened lending standards are stifling housing construction and home sales. In addition, the sharp drop in home equity is putting a damper on retail sales. 4
Lack of a housing recovery is retarding local economic and revenue growth. 5 With housing as a drag rather than a stimulus, the economy is struggling to regain momentum. Limited employment growth is reinforcing a vicious cycle in which: Loss of income puts more homeowners into foreclosure and increases the inventory of distressed properties. Weak home sales reinforce price declines, which in turn put more homeowners underwater. That increases the risk of loan defaults and foreclosures, and further depresses consumer confidence and willingness to spend. Local tax revenues will not revive until more progress is made in a housing recovery.
Current Market Trends 6
Home sales have fallen to a 13-year low following the end of the federal tax credit. 7 40,000 35,000 30,000 25,000 20,000 15,000 Virginia Existing Home Sales 4-Quarter Rolling Average 98-1 99-1 00-1 01-1 02-1 03-1 3rd Qtr 2005-45% Calendar Year Quarter Source: Virginia Association of Realtors (VAR) Federal Homebuyer Tax Credit 04-1 05-1 06-1 07-1 08-1 09-1 10-1 11-1 Existing home sales appear once again to be bottoming out. However, sales are unlikely to see any meaningful rebound until employment increases and home prices fully stabilize.
Prices are still declining in most markets, and NoVA s earlier rebound has ended. Annual Change in Metropolitan Home Prices 1st Qtr 2010 to 1st Qtr 2011 Danville 0.7% Blacksburg Kingsport-Bristol Charlottesville Roanoke Washington, Winchester & Lynchburg VIRGINIA Virginia -0.5% -0.9% -1.1% -1.5% -1.6% -2.2% Hampton Roads -4.0% Harrisonburg Richmond -5.1% -5.4% 8 Source: Federal Housing Finance Agency (FHFA) Home Price Index
Prices, especially in Northern Virginia, remain significantly below their peak. Metropolitan Home Prices Relative to Their Peak 1st Quarter 2011-4% -5% -6% -8% Kingsport-Bristol Lynchburg Blackburg, Danville & Roanoke Charlottesville -11% -13% -14% -15% Harrisonburg Hampton Roads VIRGINIA Richmond -23% Washington, DC -31% Winchester 9 Source: Federal Housing Finance Agency (FHFA) Home Price Index
In most markets, home prices are correcting to historic affordability norms. Ratio of Median Home Price to Median Household Income Northern Virginia Localities Downstate Metropolitan Areas Alexandria Arlington Charlottesville Fairfax Hampton Roads Loudoun Fauquier Pr. William Frederick Stafford Spotsylvania Pre-Boom: April 2000 Peak of Boom: May 2006 Current: April 2011 Lynchburg Richmond Roanoke Danville Pre-Boom: April 2000 Peak of Boom: 2nd-4th Qtrs 2007 Current: 1st Qtr 2011 Traditional affordability range 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Traditional affordability range 0.0 1.0 2.0 3.0 4.0 5.0 10 Source: MRIS, Virginia Association of Realtors (VAR) and U.S. Census Bureau
Experience from past recessions shows that inflation-adjusted prices recover very slowly. Housing Downturn: Late 80's - Early 90's Current (thru 2011-Q1) Washington MSA Real Decline in Prices: -20.9% -27.3% Peak to Trough: 7.8 Yrs. 4.3 Yrs. Time to Regain Loss: 12.7 Yrs.? Hampton Rds MSA Real Decline in Prices: -14.5% -15.5% Peak to Trough: 7.0 Yrs. 4.3 Yrs. Time to Regain Loss: 15.2 Yrs.? Real Decline in Prices: -9.8% -20.6% Richmond MSA Peak to Trough: 5.5 Yrs. 4.0 Yrs. Time to Regain Loss: 12.1 Yrs.? 11 Source: Federal Housing Finance Agency (FHFA) Home Price Index
Non-traditional lending created a layer of artificial pricing that will not be recouped. 350 Change in Existing Home Prices, Washington, DC MSA Seasonally Adjusted Tiered Home Price Index (January 2000=100) 300 250 200 150 100 50 Decade of flat home values Surge in subprime and alt-a lending 0 Jan-90 Jan-91 Jan-92 Jan-93 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 Lower Price Tier (<$298,049) Middle Price Tier ($298,049 to $475,517) Higher Price Tier (>$475,517) 12 Source: S&P Case-Schiller Home Price Index Tier price breaks as of March 2011
Impact of Foreclosures 13
Early stage defaults are slowly abating, as is the surge in 90+ day delinquencies. 3.5% Virginia Delinquency Rates 4-Quarter Rolling Averages 3.0% 2.5% 30 Day Delinquencies 2.0% 1.5% 90+ Day Delinquencies 1.0% 0.5% 60 Day Delinquencies 0.0% 2003-1 2003-3 2004-1 2004-3 2005-1 2005-3 2006-1 2006-3 2007-1 2007-3 2008-1 2008-3 2009-1 2009-3 2010-1 2010-3 2011-1 14 Source: Mortgage Bankers Association (MBA)
In contrast, initial progress in resolving foreclosures has been set back. 2.50% Virgina Loans in Foreclosure as a Share of Loans Serviced 2.00% 1.50% 1.00% 0.50% 0.00% 2003-1 2003-3 2004-1 2004-3 2005-1 2005-3 2006-1 2006-3 2007-1 2007-3 2008-1 2008-3 2009-1 2009-3 2010-1 2010-3 2011-1 15 Source: Mortgage Bankers Association (MBA)
The unprecedented volume of foreclosure activity has lengthened processing time. 14 12 10 8 6 4 2 0 2003-1 Average Months to Process Foreclosures (Ratio of Foreclosure Inventory at End of Quarter to Average Monthly Foreclosure Starts) 2004-1 2005-1 2006-1 2007-1 2008-1 2009-1 U.S. Virginia Sharp drop in 3rd Qtr. 2010 2010-1 2011-1 Accelerated foreclosure processing in the 3rd Qtr. of 2010 precipitated legal issues that resulted in temporary processing moratoria by national mortgage servicers. Nationally, in April 2011, loans in foreclosure, on average, had been delinquent for 567 days, up from 319 days two years ago.* Source: Mortgage Bankers Association (MBA) *LPS Analytics 16
Foreclosure completions have moderated in the inner part of Northern VA (PD8). Now, the highest activity is in the outer part of NoVA, Hampton Roads and Richmond. Northern Tier Inner Outer Foreclosure Completions* March 2011 Northern Tier -- Outer Hampton Rds-Chesapeake Bay Greater Richmond 0.38% 0.41% 0.45% VIRGINIA 0.32% Northern Tier -- Inner (PD 8) 0.30% Roanoke-Blacksburg-Lynchburg Charlottesville-Central Valley Southern Tier 0.08% 0.15% 0.14% *Trustee sales and lender repossessions Share of Homes with a Mortgage 17 Source: RealtyTrac and Census Bureau
To date, the slowdown in foreclosure completions has had limited impact on the number of lender-owned homes. 25,000 Virginia Inventory of Lender-Owned Homes 20,000 15,000 10,000 5,000 0 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 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Northern Tier Downstate Regions 18 Source: RealtyTrac
Timely disposition of the substantial lender-owned inventory is proving difficult, and is undermining market recovery. Investor sales are rising, but remain insufficient to substantially reduce lender-owned inventories. The increased market shares of distressed sales is undercutting prices and keeping traditional buyers and sellers on the sidelines. A renewed decline in home sales is reinforcing price weakness and keeping large numbers of homeowners under water. Any substantial further drop in prices would risk renewed increases in mortgage defaults and a set back in the limited progress in reducing foreclosures. 19
Investor sales are rising, but are not substantially reducing lender inventories. 20% 15% Cash Sales Share of Total Existing Home Sales Northern Tier Region Feb '09 15.5% Jan '10 17.1% Feb '11 18.8% 10% 5% 0% Apr '06 3.1% 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 20 Source: MRIS
Inventories have risen year over year except in Northern Tier markets where there have been modest reductions. Inventory of Lender-owned Homes Northern Tier -- Outer Northern Tier -- Inner Hampton Rds-Chesapeake Bay VIRGINIA Virginia Greater Richmond Roanoke-Blacksburg-Lynchburg Charlottesville-Central Valley Southern Tier May 30, 2010 May 30, 2011 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Share of Homes with a Mortgage 21 Source: RealtyTrac and Census Bureau
Future Outlook 22
Demographic change will play a dominate role in housing s recovery. The housing downturn has focused attention on the impact of mortgage lending on home construction and overall market health. Less attention has been paid to the critical role that shifting demographics play in shaping the magnitude and nature of housing demand. We are now in a new a market cycle that will be heavily influenced by large shifts in housing demand driven by demographic change. 23
Four broad stages of life drive changes in housing choices. Young Households (under age 35) Need affordable rental housing and starter homes Middle Age Households (ages 35-54) Tend to be larger (need more space) and/or more affluent many are able and willing to trade up Empty Nesters and Younger Retirees (ages 55-74) Predominately homeowners who mostly choose to age in place Older Seniors (age 75 and older) Maintenance and use of their existing home may become burdensome If so, then they may seek alternative senior housing options 24
The coming housing cycle will look different from the one recently ended. The differential size of successive generations causes differing types of need to dominate in each housing cycle. In the cycle just ended, demand was dominated by affluent, middle age Baby Boomers who traded up to larger homes. The number of middle age households peaked in 2005, and will now decline steadily over the next 15 years as aging Boomers are replaced by the much smaller Baby Bust ( Generation X ). 25
The Trade-Up Era is Over. Young Renters & 1st-Time Homebuyers Middle Age Trade-up Homebuyers Empty Nester & Younger Senior Homeowners Older Seniors w/ Special Needs 13,878-71,103-57,707 39,604 140,322 213,561 227,529 205,278 99,502 26,828 32,336 32,297 48,547 50,599 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+ 65,937 118,488 109,840 Projected Population Change 2005-2020 17,931 30,955 119,900 189,787 192,947 Estimated Population Change 1990-2005 167,928 42,747 32,013 63,409 We are now in a new market cycle in which young households, empty nesters and younger retirees will dominate. 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+ 26-68,932-53,235 Source: U.S. Census and estimates based on Census Bureau and VEC Virginia population projections
Today s housing stock is not adequate to meet emerging needs. Relatively little starter home and new rental construction occurred in the recent housing cycle. Except in the fastest growing regions, existing apartments and starter homes that were vacated by Baby Boomers trading up to newly built larger homes, served much of the needs of Generation X. Now, as Generation X replaces Baby Boomers in the trade up market, and Generation Y forms independent households, we face an over-supply of larger trade up homes and a shortage of smaller affordable units. 27
Quality, affordable rental housing will be especially needed. 58% Share of Virginia Households that Rent by Age 63% 26% 29% 2006 2009 17% 17% 21% 22% A large and growing majority of young households are renters, while middle age and older households are mostly owners. In the past housing cycle, a large share of rental investment involved the upgrade of existing properties. In the coming cycle, a larger net increase in rental units will be needed in order to accommodate the growth in young households. UnderAge 35 Age 35-54 Age 55-74 Age 75 and Older 28 Source: American Community Survey
Generation Y will likely have more difficulty achieving homeownership. Average credit card debt among households age 25 to 34 with credit card debt (2004 dollars) +52% $2,873 $4,358 1989 2004 Over the past two decades, young households have incurred substantial debt compared to previous generations. Credit card debt has risen dramatically, and many are burdened by student loans. For the Class of 2011, student loan debt is estimated to average $22,900. Significant tightening of credit standards and down payment requirements will likely delay home purchase by Generation Y despite lower home prices. 29 Source: Survey of Consumer Finance, 1989 and 2004
30 54% Housing affordability will continue to be an issue in a housing recovery. Median income by age as a share of overall median household income 95% 115% 132% 112% 74% 52% Under 25 25 to 34 35 to 44 45 to 54 55 to 64 65 to 74 75+ Source: 2000 Census Age Group Overall Median In the past housing cycle, demand was concentrated in the age group with the highest income. Now, demand is shifting to age groups with more limited means. The current surplus of trade up homes is mismatched with future needs.
We continue to face housing challenges that require strong public/private partnerships. Recovery of local housing markets and real estate tax revenues will require new public land use strategies that facilitate the private development of affordable rental and ownership opportunities to meet emerging demand. The public sector must also help the private market address the housing inventory imbalances resulting from demographic shifts, the overhang of foreclosed inventories, and the ongoing need to revitalize aging housing stock and neighborhoods. Finally, federal, state and local officials will need to work in partnership to ensures the affordability of housing for all people in a manner that is fiscally sound and builds more sustainable local communities. 31