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By

Rosemary deButts, Housing Analyst, MIRM

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Source: The Conference

Board

In the first half of 2009, total non-farm payrolls declined by over 3.4 million jobs. While

every month this year showed declines, the pace of job losses is slowing. In fact, losses

declined by 37% from the first to the second quarters. Since December 2007, when the

current recession began, the national economy lost nearly 6.5 million jobs.

Not since August of 1983 have initial claims for unemployment reached June’s 9.5% rate.

During this decade, unemployment remained in the 5% range until August 2008 when it began

to rise steeply and steadily. Unemployment across the nation has risen for the last nine

consecutive months and fourteen of the last eighteen months. Unemployment is a lagging

indicator and will not recover at the same pace as the rest of the economy as excess

inventories are absorbed.

The Dow Jones Index advanced 838 points during the second quarter of 2009 with particularly

strong growth in April (+559) and May (+332). June recorded a slight decline (-53). The

second quarter average was 8,331 - up 7% from the average of 7,757 in the first quarter.

The Consumer Confidence Index

surveys 5,000 households in the

country about their confidence

in the overall economy, both

present and future. The overall

Index reached an all-time low since the surveys began in 1967 of 26 in March 2009. Overall

consumer confidence rebounded in the second quarter with two strong increases in April and

May. The June Index stands at 49.3, down 10% from May 2009 and 3.3% from June 2008. The

Present Situation Index which measures how respondents feel about the current economy, at

24.8, was down 62% from last June. While the long term outlook as measured by the

Expectation Index declined compared to May 2009, it registered a 58.2% increase compared to

June 2008.

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The Conference Board also surveys Americans about their home buying plans. In June 2009,

the percentage of survey respondents who planned to buy a home within six months (2.7%)

declined 3.6% from May but was 12.5% higher than in June 2008. Compare June to the 3.6% in

25% in June from May and is down 40% compared to June 2008. Conversely, those

14.3% year over year. The year-over-year increases signal improving conditions in the housing

market.

The success of the Treasury Department’s mortgage loan modification program, announced in

mid February and designed to help beleaguered homeowners avoid foreclosure, is mixed. The

government allocated $75 billion to subsidize payment reductions and provide incentives for

servicers and borrowers to participate in the program. However, many borrowers did not

qualify for the program if equity losses increased their loan to value ratio beyond acceptable

limits. Program details continue to evolve, including the announcement in April that

mortgage investors would be paid to decrease the interest rate set on second liens for risky

loans made in the 2004 to 2007 timeframe. Freddie Mac sweetened the deal for its borrowers

on July 1 by offering home mortgage refinancings of up to 125% loan-to-value ratios.

Qualified borrowers must be current on existing Freddie Mac owned (or guaranteed)

mortgages.

The First Time Home Buyer’s Credit continued to develop. It was $7,500 in 2008 and had a

repayment requirement. It morphed into the current $8,000 credit with no repayment

requirement available to first time buyers who could close between January 1 and December

1, 2009. In late May, HUD announced that these funds could be used to pay closing costs and

a portion of a buyer’s down payment on FHA loans. However, there is a movement afoot to

raise the credit amount to $15,000 and allow all buyers to participate (not just low end, first

time buyers). While partially intended to aid the new home industry, only those builders with

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standing inventory can benefit from spurred demand at this late point in the year. (It is

unlikely a new start would be able to close by December 1.)

Mortgage rates were trending up by the end of the second quarter. Weekly conventional

mortgage rates rose 13% from 4.78% in early April to 5.42% in late June. Rates hovered

within 9 points of 4.78% for eight weeks but remained above 5% for the last four weeks of the

quarter. Monthly rates followed a similar trend, up from 4.81% in April to 5.42% in June

resulting in a year-to-date average of 5.05% which compares favorably to the 5.99% year-todate

average as of June 2008.

Source: Federal Reserve Board

Low mortgage rates in the spring helped to delay the expected onslaught of new loan defaults

among the 564,000 outstanding adjustable-rate mortgages (ARMs). Monthly mortgage

payments typically reset when either the debt exceeds some cap on the loan’s value or within

a certain timeframe. Interest rate declines helped to stave off the rash of foreclosures but

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the usual timeframe to reset is five years. Since most of the ARMs were issued between 2004

The percentage of US residents able to afford a median priced home surged 10 points in May

to 72.5%, the highest point since the NAHB/Wells Fargo Housing Opportunity Index (HOI)

series began 18 years ago. The underlying catalysts were low interest rates, declining home

prices and the $8,000 First Time Buyer’s Credit.

Building permits reached an annualized pace of 563,000 units in June, 8.7% above May’s

revised figure but 52% below those issued in June 2008.

Annualized housing starts fell to the lowest level on record in April 2009 (479,000 units) but

increased 17% in May (562,000 units) and another 4% in June (582,000 units). In June, new

construction was 46% below June 2008 levels. While encouraging, two months of increases

may not represent the beginning of a strong recovery.

In the second quarter, the United States posted the highest

number of foreclosures recorded in a single quarter since the

indicator began in 2005 thereby exceeding the previous high

recorded just last quarter. New foreclosures increased by 11%

compared to the first quarter of 2009 and by 20% compared to

the second quarter of 2008.

Preliminary existing home statistics in June showed an annualized sales rate of 4,890,000

units, up 4% from May and down slightly from May 2008 (-.2%). Median sales prices rose to

$181,800 in June, up 4% from May and down 15.4% from one year ago. The month’s supply of

inventory fell to 9.4 months in June, down from 9.8 months in May and from 11 months in

June 2008.

889,829 803,489 739,714

10.7% 20.3%

Source: RealtyTrac

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Price distortion (disproportionally high sales of distressed homes) plagues many areas in the

country implying that a large percentage of homeowners are underwater. Recognizing that

only 5% of the nation’s owner-occupied homes will change hands, the large percentage of

distressed sales is unduly warping perceptions about mortgage health and will continue to

decrease median sales prices.

During the second quarter, establishing a protocol for appraisals became an issue at the NAR

as real estate agents became increasingly aware of inconsistencies among appraisers on the

use of distressed comparables and the affect they have on loan-to-value ratios and contract

fallouts.

After strong sales in May, June new home sales increased significantly (11%) to an annualized

rate of 384,000. That represents a 23% decrease over new home sales in June 2008. The

median sales price for new homes decreased after two consecutive monthly increases

($206,200, -7%) and prices fell to 10.7% below the median last June. Inventories declined for

the third consecutive month to 8.8 months. June was the first time since February 2008 that

new home inventories fell below 10 months.

NVR, Inc., a leading homebuilder in the state, recorded a 35% drop in revenue in the second

quarter but a 2% increase in sales.

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Statewide Economic Backdrop

Through June 2009, the Commonwealth has lost 89,100 jobs, an enormous increase in losses

compared to 2008 and to the rest of the decade.

In 2009, the trend established during the first quarter worsened. In fact, average monthly

losses in the second quarter exceeded those in the first quarter by 27% and in June reached a

milestone of -111,800 jobs.

Source: BLS, NSA

-115.0

-110.0

-105.0

-100.0

-95.0

-90.0

-85.0

Source; BLS, NSA

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All of the jurisdictions in the Mid-Atlantic region that make up Virginia’s neighbors suffered

job losses comparing June 2009 to June 2008. Virginia lost 2.94% which compares favorably

to Pennsylvania, West Virginia, and particularly to Delaware.

During the course of the second quarter, most of Virginia’s employment sectors saw

improvement - including construction and manufacturing.

Mining/Logging; Construction; Trade, Transportation, Utilities;

Financial Activities; Education/Health; Leisure/Hospitality;

Federal Govt; Local Govt

Manufacturing; Information; Professional & Business; Other Svcs;

State Govt

However, compared to June 2008, every employment sector except for Government,

Education & Health Services, and Mining/Logging has declined. The highest declines occurred

in the Construction, Manufacturing and Professional and Business Services sectors, a recurring

trend.

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

Source: BLS, NSA

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Unemployment in Virginia continued its upward progression in the second quarter, reaching

7.2% in June. It hasn’t been this high since March 1983. For the sake of comparison, the

monthly average since January 2000 was 3.8%. While troubling, it is important to look at the

broader picture. The following graph illustrates the relationship between Virginia and the

nation. The national unemployment rate is now at 9.5% and since 2000 has exceeded

Virginia’s rate by a minimum of 1.3% (2001) and a maximum of 2.3% (2009) in June. Even as it

struggles, Virginia’s economy continues to outperform other states. Virginia’s 7.2%

(5.1%).

Source: BLS, NSA

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The graph below illustrates how Virginia is faring compared to the other states in the Mid-

Atlantic region. In June 2009, Virginia again had the lowest unemployment rate among its

five neighbors. The unemployment rate in the District of Columbia is approaching 11%.

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

DE DC MD PA VA WV

Source: BLS, SA

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Source: BLS, SA

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The following graph compares the June 2009 unemployment rate among the major

metropolitan areas across the state. The Danville MSA, with its heavy manufacturing base,

stands out for its atypical unemployment rate of 13%.

According to the Federal Reserve Bank of Richmond, 17.63% of Virginia’s prime or subprime

loans were ARMs as of March 2009. However, the highest concentrations are in Northern

Virginia (27.02%), Winchester (15.86%), Charlottesville (12.69%), Virginia Beach-Norfolk

(11.68%) and Richmond (10.96%). Other Commonwealth MSAs have less than 7% of

outstanding ARM loans. Another potential foreclosure concern is the effect that declining

equity will have on interest only loans. Again, it is a regional phenomenon centered primarily

in Northern Virginia and Winchester. As of March 2009, 19.21% of the loans in Northern

Virginia were interest-only. Of those, 4.55% were 90+ days past due in March and 4.01% were

in foreclosure. Particularly worrisome is the situation in Prince William County where 7.15%

of interest-only loans were 90+ days past due and 6.74% were already in foreclosure.

Trends in building permits are used as an indicator of upcoming activity in both the new home

and existing home markets as existing home sellers frequently have a home to sell before

buying a new move-up home. Building permits issued in 2009 across the state (as shown on

the following graph) lag behind 2008 and significantly behind 2007 levels. Through May, the

4.0 6.0 8.0 10.0 12.0 14.0

Source: BLS, NSA

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number of building permits issued in Virginia during 2009 was 29.3% below the first five

months of 2008 and 47.2% below those issued during the same period in 2007.

Total quarterly starts in the South Region (of which Virginia is a component), declined 6.6%

from the first to the second quarters but they seem to be stabilizing at around 270,000 units

per month. The following graph clearly illustrates how dramatically the new construction

industry has constricted over the last two years or so.

700

1,200

1,700

2,200

2,700

3,200

3,700

4,200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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712

796

752

732

688

708

638

695

592

625

598

571

549

574

514 505 492 485

436

397 408 407

355

283

254

306

274

231

276 272

200

300

400

500

600

700

800

900

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2007

2008

2009

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Although still lagging corresponding levels in 2008, statewide existing home indicators showed

strong improvement during the second quarter of 2009 compared to the first quarter. But,

for the last three years, the second quarter has had the highest sales volume of the year

(please see graph below) suggesting that total sales will decline in the remainder of 2009. A

good deal of the second quarter 51% increase in total sales (23,733 in the second quarter vs.

15,795 in the first) can be attributed to the first time buyer credit and normal cyclical sales

patterns. Total sales were 4.4% lower than in 2Q08. Median and average sales prices

followed a similar trend. Virginia’s median sales price of $245,885 was 10.2% higher than the

median in the first quarter but 8.6% below the second quarter of 2008. The average sales

price was 34.4% higher than in the first quarter and 10.7% less than corresponding 2008

prices.

Sales and Median Sales Prices

Virginia: 1Q07 – 2Q09

Sales

MSP

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The local associations with the highest percentage sales volume increase year-over-year were

Fredericksburg (+25.2%), Blue Ridge (18.7%) and Northern Virginia (+8.6%) - all in the northern

tier of the state. Generally it is believed this area leads others and can serve as an indicator

of what’s to come for other associations in the future. However, median sales prices in the

second quarter showed the strongest improvement on a percentage basis over last year at this

time in Lexington/Buena Vista (+32.9%), Southern Piedmont (+10.3%) and Williamsburg

(+6.3%). Average sales prices showed the highest percentage increase in Williamsburg

(+13.2%), Southwest Virginia (+7.2%), and Southern Piedmont (+5.9%) compared to 2Q08.

The following table summarizes the foreclosure activity in Virginia during the second quarter

of 2009 by local association. Foreclosures across the state continued to climb – they were up

5.5% from the first quarter of 2009. The highest percentages of the total statewide

foreclosures occurred in Northern Virginia (21.3%), Prince William (18.6%), and Hampton

Roads (17%). The rural areas served by the Northern Neck, Southern Piedmont, South

Central, and Eastern Shore associations all had around .1% of the total foreclosures in the

Commonwealth.

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