By Ann Gutkin, NVAR Public and Government Affairs Specialist

 

 

Just how to analyze and understand today’s tumultuous economic conditions was the order of the day at NVAR’s Sept. 11 Economic Summit. More than 400 Realtors® gathered at George Mason University’s Johnson Center to learn the important data points and likely destiny of the housing and financial markets.

 

This 12th annual summit showcased speakers from the National Association of Home Builders, the National Association of Realtors®, Fannie Mae, the Northern Virginia Transportation Authority and GMU’s Center for Regional Analysis.

 

“The housing market is a big puzzle,” said Dr. David Seiders, Chief Economist for NAHB and the summit’s first presenter. “If one of the pieces falls out, it creates a problem.” In the current market, he contends that the mortgage piece is missing. Seiders stated, “The U.S. economy is really linked together pretty tightly.” Notwithstanding the local nature of real estate, “you can’t escape a national recession,” he said, adding that whether the current period of financial turmoil will be labeled as a recession is unclear.

 

Seiders predicted a “moderate positive net effect from the Housing and Economic Recovery Act of 2008 on home sales.” He said, “Builder surveys show some positive impacts at this point.” However, he cited the increase in minimum down payment requirements for FHA-insured loans and the loss of seller-funded down payment assistance as possible mitigating factors.

 

The federal takeover of Fannie Mae and Freddie Mac in the days preceding NVAR’s Economic Summit portends a short-term boost for borrowers, Seiders noted. “A drop in the GSE [Government Sponsored Enterprise] cost of borrowing translates to lower mortgage rates in conforming markets.”

 

Seiders also cited the role of the November elections in the national housing outlook. “With a change of administration, you worry immediately about what’s going to happen to our tax preferences,” Seiders warned, “the most important of which is the deductibility of home mortgage interest.”

 

In a summary of new home construction statistics, Seiders said that sales of new single-family homes have hit bottom. He stated that new home inventory is still running historically high, with a “serious imbalance between supply and demand.” The silver lining of the current reality, he concluded, is that “we’re looking at one heck of an upswing when we’re over this.”

 

NAR’s Managing Director of Quantitative Research Dr. Jed Smith noted, “We had a great boon, and now we’re paying for it.”

 

Delivering an overview of current housing data, Smith explained differences among several widely-used measures of pricing: The Case-Schiller Index, the Office of Federal Housing Enterprise Oversight (OFHEO) Index, and NAR’s MLS-based analysis. He maintained that NAR data is most representative of actual market conditions.

 

Both the OFHEO and the Case-Schiller rely on repeat transactions on the same property. The OFHEO index is restricted to non-subprime Fannie Mae or Freddie Mac-secured loans that do not exceed conforming levels. The Case-Schiller includes jumbo (loans above the Fannie Mae and Freddie Mac limits) and subprime loans but is limited in its geographic coverage. Smith emphasized that since Case-Schiller is strongly concentrated in those markets where prices have gone down, it is “highly unrepresentative of the U.S. market.” Seiders later added that, “none of these indexes is nailing the truth.”

 

Reminding listeners that all housing is local, Smith reported that comparing the median price of housing with household income, Northern Virginia is approaching a reasonable level of affordability. He cited studies by the investment firm, Goldman, Sachs and NAR, indicating that this region now sits at the upper end of the affordable range.

 

Smith predicted improvement in the housing market by the end of 2008 or the beginning of 2009 and in closing, advised Realtors® as trusted professionals to ensure that the public has correct market information.

 

On the heels of the government takeover of Fannie Mae, its chief economist, Dr. Doug Duncan, described the credit market disruption that began in July of 2007 with fears about the short-term institutional lending rate. He cited the conservatorship of Fannie Mae as one side-effect of the global credit market turmoil. Duncan’s observation that, “the financial markets have not healed” has since been borne out by other upheavals in the finance industry: the buyout of Merrill Lynch, the bankruptcy of Lehman Brothers and the government takeover of American International Group and Washington Mutual, occurring at press time. Duncan added that the subprime mortgage crisis was a triggering mechanism, but said, “The principal that has created fear across the credit markets is one of leverage,” the degree to which businesses rely on borrowed funds.

 

Addressing foreclosures, Duncan said that most problems arise before the first reset of an adjustable mortgage occurs. Traditionally, a major cause of delinquency and foreclosure had been job loss, he noted. In this market, however, the majority have occurred for non-standard reasons.

 

The highest new foreclosures are occurring in California and Florida, according to his estimates. Those states are responsible for 18.5 percent of the U.S. Gross Domestic Product, Duncan said—a percentage roughly equal to the proportion of total housing there. California and Florida also showed high rates of speculative investment, followed by rapid job growth and subsequent job decreases with the market downturn. Duncan contrasted that situation with the state of Michigan, where losses are related to the economy: unemployment is high, people are leaving and a glut of homes permeates the market. “It’s important to look at the regional impacts on the national numbers,” Duncan said.

 

This country has adopted a public policy that homeownership is positive, he said. “As a society, we’re willing to take on more risk to advance [this],” he stated. “The question is: have we reached the limits of tolerance for the risk that is required to expand homeownership?”

 

The current housing market is like a brimming swimming pool with tightly-filtered drains at the bottom representative of credit market conditions, Duncan concluded. Other positive economic factors exist, but easing of credit market conditions will aid recovery.

 

Today’s Traffic Report: No Relief In Sight
The credit market is not the only roadblock preventing the Northern Virginia real estate market from moving forward. John Mason, Executive Director of the NVTA, explained why solving the transportation crisis in this region is critical to our local economy.

 

With no funding for new construction available in the near term from Washington or Richmond, Virginia in economic gridlock, he explained.

 

“The five cities and four counties comprising Northern Virginia represent 3 to 4 percent of Virginia’s land mass, yet approximately 40 percent of the state’s economy is developed here,” said Mason. A State Supreme Court decision earlier this year overturned legislation allowing the NVTA to levy taxes to improve the region’s roadways. The General Assembly could not reach a decision to create solutions. Mason said that more than $30 billion during the next 20 years in new construction funding is needed. New sources of funding will be needed to supplement VDOT’s share. Mason encouraged Realtors® to urge state lawmakers to act on regional transportation issues in the 2009 legislative session.

 

Northern Virginia: Still A Good Place To Be
“What has happened to the national economy is very complex,” said Dr. Stephen Fuller, Director of GMU’s Center for Regional Analysis, “and it started with a change in the housing market. What’s most visible is the construction of new homes, which drives the GDP.” The glut in the housing market can be compared to eating too much at a buffet, Fuller said. “It takes a while to work off the consequences; we’re now working off our irrational exuberance.”

 

“We’re producing the right amount of housing now,” Fuller explained. The resale market has an eight- to nine-month backlog, which in August had begun to diminish. “Every Northern Virginia jurisdiction had more sales than it did a year ago,” said Fuller, because prices were lowered in response to increased inventory.

Comparing Northern Virginia’s market to the national picture, Fuller said, “We are not as vulnerable, and our economy continues to grow.” When a rebound does occur, local changes will not be as dramatic as those in the national arena, he pointed out. The outlook for Northern Virginia remains more positive than elsewhere in the state and nationally, according to Fuller. “Underlying economics [in this region] are favorable and will not get less favorable.”

 

Bank holding company: one that does not directly engage in banking, but owns banks and other subsidiaries involved in non-banking activities, such as mortgage lending and consumer credit card operations.

 

Basis point: equals 1/100 of 1 percent. As an example, a decline in percentage rate from 7 percent to 6 percent is a decline of 100 basis points.

 

Capital markets: where companies or governments raise money to fund themselves. The stock market and bond market are examples.

 

Credit-loss ratio: compares losses related to delinquencies and foreclosures to the overall scale of a firm’s mortgage business.

 

HUD-1 Statement: published by the Department of Housing and Urban Development. Contains itemized listing of closing costs payable at the closing or settlement meeting when buying property.

 

Mortgage-backed security: type of bond made up of principal and/or interest payments from many individual home mortgage loans.