1. Virginia Housing Development Authority Housing’s Impact on Local Government Finance Meeting of the Virginia Government Finance Officers Association Virginia Beach, Virginia June 9, 2011

2. 1 vhda.com | 800-227-VHDA Impact of Home Values on Local Revenue Streams

3. 2 vhda.com | 800-227-VHDA Housing is a critical direct generator of local tax revenues. In FY08, over half (50.7%) of local revenues in Virginia were derived from real property taxes.* In 2009, 71.2 percent of the assessed real property in Virginia was single-family homes and 4.8 percent was multifamily residential property.** Together, these data show that the assessed value of residential property accounts for fully 38 percent of local tax bases. *Staff, Virginia Commission on Local Governments **John Knapp, Weldon Cooper Center for Public Service, UVA based on unpublished VA Dept. of Taxation data provided by Josh Silverman in Nov. 2010

4. 3 vhda.com | 800-227-VHDA Local tax bases benefited substantially from the housing boom. Rising residential property values drove local revenue increases during the past decade. Unfortunately, this short-term increase in local tax bases was unsustainable. Source: John Knapp, Weldon Cooper Center for Public Service, UVA

5. 4 vhda.com | 800-227-VHDA Housing is not leading the economy out of recession as it has in the past. Historically, the lowering of interest rates during a recession stimulated housing construction and home purchase, which then led economic recovery by increasing jobs and retail sales. This time, the inventory of distressed homes and tightened lending standards are stifling housing construction and home sales. In addition, the sharp drop in home equity is putting a damper on retail sales.

6. 5 vhda.com | 800-227-VHDA Lack of a housing recovery is retarding local economic and revenue growth. With housing as a drag rather than a stimulus, the economy is struggling to regain momentum. Limited employment growth is reinforcing a vicious cycle in which: –Loss of income puts more homeowners into foreclosure and increases the inventory of distressed properties. –Weak home sales reinforce price declines, which in turn put more homeowners “underwater.” –That increases the risk of loan defaults and foreclosures, and further depresses consumer confidence and willingness to spend. Local tax revenues will not revive until more progress is made in a housing recovery.

7. 6 vhda.com | 800-227-VHDA Current Market Trends

8. 7 vhda.com | 800-227-VHDA Home sales have fallen to a 13-year low following the end of the federal tax credit. Source: Virginia Association of Realtors (VAR) Existing home sales appear once again to be bottoming out. However, sales are unlikely to see any meaningful rebound until employment increases and home prices fully stabilize.

9. 8 vhda.com | 800-227-VHDA Prices are still declining in most markets, and NoVA’s earlier rebound has ended. Source: Federal Housing Finance Agency (FHFA) Home Price Index

10. 9 vhda.com | 800-227-VHDA Prices, especially in Northern Virginia, remain significantly below their peak. Source: Federal Housing Finance Agency (FHFA) Home Price Index

11. 10 vhda.com | 800-227-VHDA In most markets, home prices are correcting to historic affordability norms. Source: MRIS, Virginia Association of Realtors (VAR) and U.S. Census Bureau

12. 11 vhda.com | 800-227-VHDA Experience from past recessions shows that inflation-adjusted prices recover very slowly. Source: Federal Housing Finance Agency (FHFA) Home Price Index

13. 12 vhda.com | 800-227-VHDA Non-traditional lending created a layer of artificial pricing that will not be recouped. Source: S&P Case-Schiller Home Price Index Tier price breaks as of March 2011

14. 13 vhda.com | 800-227-VHDA Impact of Foreclosures

15. 14 vhda.com | 800-227-VHDA Early stage defaults are slowly abating, as is the surge in 90+ day delinquencies. Source: Mortgage Bankers Association (MBA)

16. 15 vhda.com | 800-227-VHDA In contrast, initial progress in resolving foreclosures has been set back. Source: Mortgage Bankers Association (MBA)

17. 16 vhda.com | 800-227-VHDA The unprecedented volume of foreclosure activity has lengthened processing time. Source: Mortgage Bankers Association (MBA) Accelerated foreclosure processing in the 3rd Qtr. of 2010 precipitated legal issues that resulted in temporary processing moratoria by national mortgage servicers. Nationally, in April 2011, loans in foreclosure, on average, had been delinquent for 567 days, up from 319 days two years ago.* *LPS Analytics

18. 17 vhda.com | 800-227-VHDA Source: RealtyTrac and Census Bureau Foreclosure completions have moderated in the inner part of Northern VA (PD8). Now, the highest activity is in the outer part of NoVA, Hampton Roads and Richmond. Northern Tier Inner Outer

19. 18 vhda.com | 800-227-VHDA To date, the slowdown in foreclosure completions has had limited impact on the number of lender-owned homes. Source: RealtyTrac

20. 19 vhda.com | 800-227-VHDA Timely disposition of the substantial lender-owned inventory is proving difficult, and is undermining market recovery. Investor sales are rising, but remain insufficient to substantially reduce lender-owned inventories. The increased market shares of distressed sales is undercutting prices and keeping traditional buyers and sellers on the sidelines. A renewed decline in home sales is reinforcing price weakness and keeping large numbers of homeowners “under water.” Any substantial further drop in prices would risk renewed increases in mortgage defaults and a set back in the limited progress in reducing foreclosures.

21. 20 vhda.com | 800-227-VHDA Investor sales are rising, but are not substantially reducing lender inventories. Source: MRIS

22. 21 vhda.com | 800-227-VHDA Inventories have risen year over year except in Northern Tier markets where there have been modest reductions. Source: RealtyTrac and Census Bureau

23. 22 vhda.com | 800-227-VHDA Future Outlook

24. 23 vhda.com | 800-227-VHDA Demographic change will play a dominate role in housing’s recovery. The housing downturn has focused attention on the impact of mortgage lending on home construction and overall market health. Less attention has been paid to the critical role that shifting demographics play in shaping the magnitude and nature of housing demand. We are now in a new a market cycle that will be heavily influenced by large shifts in housing demand driven by demographic change.

25. 24 vhda.com | 800-227-VHDA Four broad stages of life drive changes in housing choices. Young Households (under age 35) Need affordable rental housing and starter homes Middle Age Households (ages 35-54) Tend to be larger (need more space) and/or more affluent—many are able and willing to “trade up” “Empty Nesters” and Younger Retirees (ages 55-74) Predominately homeowners who mostly choose to age in place Older Seniors (age 75 and older) Maintenance and use of their existing home may become burdensome—If so, then they may seek alternative senior housing options

26. 25 vhda.com | 800-227-VHDA The coming housing cycle will look different from the one recently ended. The differential size of successive generations causes differing types of need to dominate in each housing cycle. In the cycle just ended, demand was dominated by affluent, middle age Baby Boomers who “traded up” to larger homes. The number of middle age households peaked in 2005, and will now decline steadily over the next 15 years as aging Boomers are replaced by the much smaller Baby Bust (“Generation X”).

27. 26 vhda.com | 800-227-VHDA The “Trade-Up” Era is Over. We are now in a new market cycle in which young households, empty nesters and younger retirees will dominate. Source: U.S. Census and estimates based on Census Bureau and VEC Virginia population projections

28. 27 vhda.com | 800-227-VHDA Today’s housing stock is not adequate to meet emerging needs. Relatively little starter home and new rental construction occurred in the recent housing cycle. Except in the fastest growing regions, existing apartments and starter homes that were vacated by Baby Boomers “trading up” to newly built larger homes, served much of the needs of Generation X. Now, as Generation X replaces Baby Boomers in the “trade up” market, and Generation Y forms independent households, we face an over-supply of larger “trade up” homes and a shortage of smaller affordable units.

29. 28 vhda.com | 800-227-VHDA Quality, affordable rental housing will be especially needed. A large and growing majority of young households are renters, while middle age and older households are mostly owners. In the past housing cycle, a large share of rental investment involved the upgrade of existing properties. In the coming cycle, a larger net increase in rental units will be needed in order to accommodate the growth in young households. Source: American Community Survey

30. 29 vhda.com | 800-227-VHDA Generation Y will likely have more difficulty achieving homeownership. Over the past two decades, young households have incurred substantial debt compared to previous generations. Credit card debt has risen dramatically, and many are burdened by student loans. For the Class of 2011, student loan debt is estimated to average $22,900. Significant tightening of credit standards and down payment requirements will likely delay home purchase by Generation Y despite lower home prices. Source: Survey of Consumer Finance, 1989 and 2004

31. 30 vhda.com | 800-227-VHDA Housing affordability will continue to be an issue in a housing recovery. In the past housing cycle, demand was concentrated in the age group with the highest income. Now, demand is shifting to age groups with more limited means. The current surplus of “trade up” homes is mismatched with future needs. Source: 2000 Census

32. 31 vhda.com | 800-227-VHDA We continue to face housing challenges that require strong public/private partnerships. Recovery of local housing markets and real estate tax revenues will require new public land use strategies that facilitate the private development of affordable rental and ownership opportunities to meet emerging demand. The public sector must also help the private market address the housing inventory imbalances resulting from demographic shifts, the overhang of foreclosed inventories, and the ongoing need to revitalize aging housing stock and neighborhoods. Finally, federal, state and local officials will need to work in partnership to ensures the affordability of housing for all people in a manner that is fiscally sound and builds more sustainable local communities.