‘A long way to go’

The local housing market is still in trouble as many homeowners continue to face foreclosure — a problem exacerbated by persistent job losses and the expectation of more unsound mortgages coming due.

Such was the dreary message at a three-hour economic forum Tuesday sponsored by the Greater Piedmont Area Association of Realtors and held at the GCC Daniel Technology Center in Culpeper.

“While things are improving, we have a long way to go,” Barry Merchant, policy analyst with the Virginia Housing Development Authority, told an audience of about 60 local real estate professionals.

The real estate market peaked in 2005, but then sales declined through 2007 before it “bottomed out” last spring, he said. In the greater Piedmont area, encompassing Culpeper, Fauquier, Orange, Madison and Rappahannock, home sales increased slowly for the past 18 months, Merchant added, but still remain 20 percent below the “pre-boom” level.

“It’s been a slow climb back.”

Foreclosure crisis continues
Abundant financial charts presented Tuesday morning gave evidence of a troubled housing market in recent years with arrows either shooting off the charts (loan defaults) or plummeting far below the base line (home values). The amount of financial data presented was almost mind numbing, but certainly eye-opening.

At the peak in August of ’05, 270 homes sold in the Piedmont, Merchant went on, giving a PowerPoint presentation.

That figure last month was 139, he said, using figures from the Metropolitan Regional Information System.

Four factors continue to impede recovery, Merchant said, that is: foreclosures, home prices, mortgage credit and consumer confidence.

“Loan defaults continue to rise and are at an historic level,” the slide said.

“We don’t like to look at this, but unfortunately this is the reality we are facing,” Merchant said. “It is not a pretty picture.”

The VHDA does not expect mortgage defaults to slacken when third-quarter figures are released later this week, he said.

“You all are in the part of the state that has taken the brunt of the foreclosure activity,” he said.

Statewide, 4.8 percent of all mortgages were considered “seriously delinquent” in the second quarter of this year. That’s compared to less than 0.5 percent back in 1980. Last December, the Piedmont saw its worst month for foreclosures with nearly 700 homes going into default.

In Culpeper County, the foreclosure level as of Nov. 1 was about 5.75 percent, including both bank-owned homes and properties in trustee sales. Piedmont-wide, as of Nov. 1, the inventory of foreclosed homes was about 620 units, according to the VHDA chart, and another 400 were listed as auction sales.

The good news, said Merchant, is that foreclosure rates have stabilized. The bad news is there is no sign of decline.

Culpeper leads state in bad loans
Problem loans, depressed prices and unemployment will continue to drive up foreclosures, he said, adding that the crisis began with “unprecedented” defaults on “weakly underwritten” sub-prime and “Alt-A” loans, that is, higher interest rate loans that have less than full documentation from the borrower, who usually has less than good credit.

In fact, according to figures from the U.S. Census Bureau, Culpeper leads the state for its share of both types of mortgages.

“This is one of the poster child areas of the state,” Merchant said.

Startlingly, Culpeper’s share of subprime mortgages was just less than 12 percent, compared to Blacksburg at 4 percent, the lowest in the state. The story is the same with Culpeper’s share of Alt-A loans, nearing 8 percent.

Though the wave of subprime loan resets is over, Merchant said, “a second major wave” of the same involving Alt-A products is coming.

The expectation when buyers signed on to these loans was that their home value would increase, they could refinance and secure a fixed rate loan before the Alt-A rate increased substantially, he said.

But that did not happen. Why? Home values decreased dramatically, he said, and so did the ability to refinance.

Merchant expected the Greater Piedmont’s real estate market would remain weak through 2010, in part, because of continued foreclosures due to high unemployment — he said joblessness would not peak until spring 2010.

He also predicted a wave of defaults in the commercial real estate market and said that’s why “there is a lot of capitalization going on in banks right now” and not a lot of lending.

The good news in all this, he said, is that home prices are back in the affordable range, making home ownership more attainable for the younger, first-time buyer.

However, Merchant said, if that is to happen there must be renewed confidence and evidence of the benefits of owning a home.
“What we have been through and are going through is very, very scary,” he said. “Owning a home is not as exciting an opportunity as it was three or four years ago.”

More bad news
Economist John Stewart, managing director of Catlett-based Vantage Economics, covered the second half of the talk, presenting more dismal financial statistics.

For example, from December 2007 to December 2008, nationwide household wealth fell 17 percent. By January of this year, Americans had lost more than $10 trillion in the same span, Stewart said.

On average, a recession spans 17 months; the latest recession lasted 19 months, he said, adding that it ended this summer.

“We need to be very careful when we say that,” said Stewart. “We have basically entered a period of stabilization. We are basically flat in many sectors and many businesses are still fighting to stay alive.”

It’s all tied to consumption or consumerism, Stewart said, noting that personal consumption fell in 2008 — by 2 percent — for the first time in 60 years. Home values, economists contend, are tied to consumption, he said, stating that when home values peaked in 2006 or 2007 so did consumption.

On the topic of foreclosures, or, “the anti-stimulus,” Stewart said, that could top out at $1 trillion in losses. In addition, he said, an estimated 15.4 million mortgages nationwide are “under water,” that is, owing more than what the home is worth.

The good news, Stewart said, is, “We do see the bottom in housing prices.”

The bad news is that layoffs and foreclosures will continue and so will a reduction in consumption.

As for the banking system, here’s some more startling news: 151 banks have failed since January 2007 — of those, 120 happened this year, according to Stewart. And yet the federal government has given banks more than $200 billion.

Since tax dollars started to flow into banks last November, bank loans have decreased by 7.8 percent, he said, noting that the banks are “making a ton of money.”
“There is a disconnect.”

In recovery
Chuck Cornwell, GPAAR president and co-owner of Re/Max Regency in Warrenton, felt there was a disconnect as well in terms of public perception of the local market.

“We are in recovery,” he said.

“Yet, the stats on inventory are causing confusion in the marketplace in terms of supply of homes.”

Whereas Merchant estimated the Piedmont had about a 10-month supply of homes, Cornwell estimated that number to be much lower, about three to four months in Fauquier.

He said the confusion over the inventory figure comes from the fact that it takes so long for banks to close on short sales — of which there are many.

According to Cornwell, it takes six months or longer for banks to close on short sales in which sale proceeds fall short of the balance of the mortgage. Banks are slow to process short sales, he said, because the longer the process takes the more money the loan servicer makes.

“It is in their best interests to slow the process,” said Cornwell, a real estate broker for 25 years.

He said Congress was working on making the closing process more uniform, but until then many potential homebuyers will wait and some will just give up.

Cornwell predicted the next housing crisis would be a shortage of housing inventory, lacking the start of new building.

“We still have growth here, people are still moving here for jobs,” he said, “but it’s been very difficult to find housing for them to move into.

“We need to get the builders going again.”

Mortgage data

Seriously delinquent mortgages in Va.
1980-81: 0.5%
1990-91: 1.5%
2000-01: 1.25%
2006: 0.67%
2009: 4.81%

Subprime share of home mortgages
Culpeper: 11.8%
Va. Beach area: 8.9%
Winchester: 8.3%
Richmond: 8.1%
Lynchburg: 6%
Charlottesville:   4.8%
Blacksburg: 4%

Alt-A share of
home mortgages
Culpeper: 7.5%
Arlington area: 6.5%
Winchester: 5.1%
Va. Beach area: 4.8%
Charlottesville: 3.6%
Richmond: 3.3%
Lynchburg: 2.6%
Bristol: 1.3%