Update on Market Challenges

1. Update on Market Challenges Charlottesville Area Association of Realtors August 6, 2009

2. Home prices Foreclosures Mortgage credit Consumer confidence Four inter-related factorscontinue to hold back recovery in the Charlottesville area market:

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. The Charlottesville area’s 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. Charlottesville will more likely follow the NVAR market than Pr. William

13. Foreclosures

14. Loan defaults continue to rise,and are at an historic level Source: Mortgage Bankers Association (MBA)

15. 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. Problem loans, falling prices and unemployment will keep defaults high

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 region’s 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. 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 tosound lending practices is painful

25. The private mortgage-backed securities market remains dysfunctional, with access to affordable capital dominated by governmental entities (the GSE’s and Ginnie Mae). Non-conforming / non-government loans—especially jumbo mortgages—still 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. The mortgage market remainshighly reliant on federal intervention

26. Affordability remains a barrier due to tightened lending standards. Young households are especially impacted by unemployment and under-employment—this 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. First-time buyers still struggleto enter the market

27. 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. VHDA is helping to make the federaltax credit work for first-time buyers

28. Efforts to “monetize” the credit—such as VHDA’s “Homebuyer Tax Credit Plus” loans—require 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 board—nonetheless, in July, the $8.7 million in Tax Credit Plus reservations was just over 10% of VHDA’s total monthly loan production. As with other stimulus measures, the federal tax credit remains a challenge

29. Consumer Confidence

30. There has been a dramatic shift in demand from the peak of the boom Source: VEC and Census Bureau

31. 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 The hope for fuller market recovery now lies with first-time homebuyers

32. 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. This spring, VHDA carried out a statewide marketing campaign to increase awareness of, and participation in, homebuyer education—the result was a 120% increase in class participation. VHDA is building homebuyers’ knowledge and confidence

33. 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 one’s living environment There is more to do to re-instill the confidence of first-time buyers

34. What is the near-termmarket outlook?

35. Home sales are still declining, but may be nearing bottom. The price correction is still ongoing, and will likely continue until inventories are reduced—prices 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. Charlottesville’s market will likely continue to correct into 2010