Addressing Current Market Challenges

1. Addressing Current Market Challenges Virginia Association of Realtors Legislative Conference February 12, 2009

2. Large inventories of unsold homes Falling home prices Curtailment of mortgage credit Lack of consumer confidence Four factors continue to undermine market recovery

3. Inventory Factors

4. Rising foreclosure inventories undermine prices and cause non-distressed sellers to exit the market As foreclosure inventories grow, this can become a self-perpetuating cycle Declining values put more homeowners “under water,” which exacerbates foreclosures The rising share of distressed sales then accelerates price declines Foreclosures continue to negatively impact inventories

5. The Good News: Foreclosure inventories in NoVA are falling Source: RealtyTrac

6. Steep price drops are bringing REO investors into the market Source: MRIS

7. The Bad News: Inventories remain high, and are rising down state Source: RealtyTrac

8. The cycle in downstate markets trails NoVA by 12 months Source: VAR

9. The unsold new home inventory is mainly larger “trade-up” homes The trade-up market peaked earlier this decade, and is no longer supported by increases in middle aged households Demand is further weakened by the inability of would-be trade-up buyers to sell their current homes at prices they will accept Purchase of trade-up homes by marginal buyers is no longer supported through loose lending practices The inventory of unsold new homes also remains a problem

10. Home Price Factors

11. Future home purchase demand will be heavily driven by “Gen-Y” first-time buyers who lack the purchasing power of their Baby Boom parents Gen-Y needs home prices to fall in order to afford home purchase with their limited savings, high debt ratios, and new tighter credit standards In contrast, the Baby Boom needs home values to remain high in order to support retirement savings and the ability to continue extracting home equity to support current consumption There is growing generational conflict over home values

12. In NoVA, price trends favor Gen-Y The large inventory of foreclosed homes has resulted in “fire sales” that are driving prices back to historic affordability levels Source: VAR and Census Bureau

13. In markets with lesser declines, affordability remains an issue Source: VAR, CAAR & Census Bureau

14. During the boom, historic demand for “trade-up” homes by Baby Boomers drove the market Baby Boomers were initially able to afford large houses due to rising incomes, falling interest rates and growth in the equity in their current home These factors contributed to the steep inflation in home prices during the early part of this decade However, affordability can only be stretched so far, and the hyper-inflation in home prices led to lax lending that finally brought the boom to an end The inflation in home prices triggered the current crisis

15. At the local level, land use policies actively promoted large home construction while inhibiting denser, more affordable development At the federal and state levels, the needs of less affluent, first-time buyers who lacked equity were met through low interest rates and loosely regulated mortgage products that supported price-to-income ratios well above historic norms Public policies supportedhome price inflation

16. Demographic demand for large homes has peaked and will decline substantially over the coming decade The over-purchase of housing is no longer supported through easy access to cheap mortgage credit Therefore, prices will have to readjust to historic affordability levels Now, the props for inflated home values are gone

17. Mortgage Credit andBuyer Confidence Factors

18. Everyone agrees that sound lending practices must be restored However, the near-term pain associated with the removal of easy credit is severe Today’s policy dilemma is how to reinvigorate the market without putting in place a new set of distortions that will lead to future market problems In the short-run, the return to sound lending practices will be painful

19. Prince William Co. is illustrative of unfettered market forces Source: MRIS

20. The County faces a severe shortfall in revenues Recent home buyers are deeply “under water” with little chance of recouping their equity loss in the foreseeable future Once mainly homeowner neighborhoods are transitioning to heavily absentee ownership and renter occupancy Lenders, facing substantial losses from foreclosures and asset write-downs, must tighten access to credit Prince William County has felt the full impact of the market correction

21. The return of affordability in the Northern Virginia market creates the opportunity for first-time buyers to again 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 The hope for fuller market recovery lies with first-time homebuyers

22. VHDA does not make subprime, ARM, option payment or limited document mortgages VHDA services its loans in-house, and works hard to keep borrowers in their homes The strong performance of VHDA’s portfolio has enabled the Authority to continue serving the needs of first-time buyers VHDA offers first-time buyers affordable and sustainable credit Source: Mortgage Bankers Association and VHDA

23. VHDA continues to finance down payment and closing costs through its “FHA Plus” program to enable first-time buyers with limited savings to afford home purchase VHDA loan programs remain active in all state housing markets in order to ensure an ongoing flow of affordable mortgage capital VHDA will be partnering with the VA Dept. of Housing & Community Development to assist first-time buyers in purchasing foreclosed homes through the federal Neighborhood Stabilization Program VHDA is serving first-time buyersin spite of market challenges

24. 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 VHDA is partnering with housing counselors in NoVA to air 30-minute public access TV talk show programs on homebuyer education issues This spring, VHDA will launch a media campaign to promote free homebuyer education classes and to re-instill the confidence of first-time buyers VHDA is building homebuyers’ knowledge and confidence

25. Realtors, homebuildersand lenders facefour mutual challenges

26. 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 core values of homeownership that derive from the traditional idea of “one’s home as one’s castle” rather than the recent notion of housing as an investment tool— Security of tenure Stability in housing costs arising from long-term, fixed rate financing Pride of ownership and control of one’s living environment We must re-instill the confidence of first-time homebuyers

27. The current crisis resulted from excessive market stimulation Loose lending from 2004 to 2007 was a short-term expedient to maintain high home sales and loan volume following the peak of the trade-up and refinance booms earlier in the decade The industry must avoid new stimulus measures that will wreak further market damage when the props are later removed We must avoid unintended stimulus consequences

28. The housing industry cannot achieve full recovery until prices return to historic norms However, a rapid drop in prices is itself destabilizing to the market Our challenge is to avoid a price “crash” without unduly subsidizing artificially high prices We must manage the return of prices to sustainable levels

29. Pent-up demand is growing—the longer and deeper the recession, the greater pent-up demand will be We lack the right mix of housing types in the right locations to address future demand—The uncertain long-term ownership of distressed properties further complicates the balance of supply and demand The housing industry needs to find a new consensus with government on the regulatory structure and subsidy support needed to sustain a thriving post-recession housing sector We must build consensus on sustainable means for meeting future housing needs