by Dina ElBoghdady, The Washington Post

30 Dec 2010

“Although Washington area housing has  outperformed the national market, which has been devastated by the twin ills of unemployment and foreclosure, the question going into a new year is whether the rest of the country can follow the D.C. area into recovery – or whether the local market will be dragged down by national trends.

“Economic forecasters are singling out the housing sector as a weak spot even as the rest of the economy appears to be gaining steam. About 57 percent of the economists and real estate experts surveyed by Macro Markets in December said they don’t see home prices recovering until some time in 2012. About 35 percent said they don’t see that happening until 2013.

“The recent run-up in mortgage interest rates from record lows and some lenders’ decision to temporarily halt evictions while they sort through foreclosure paperwork errors only add to general unease about the housing market’s direction.

“The Washington region has suffered less than many other parts of the country, but it, too, continues to have problem areas. From January through November, median prices dropped in Maryland’s Prince George’s, Calvert and Frederick counties, compared with a year earlier, according to George Mason University’s Center for Regional Analysis. Prince George’s showed the steepest decline: 15.6 percent.

“So what are the biggest obstacles standing in the way of a robust recovery?  The nation’s high unemployment rate – 9.8 percent – and the swelling volume of foreclosures.

“As long as people are unemployed or working for reduced pay, they are unlikely to buy a home and saddle themselves with a mortgage. Meanwhile, homeowners who have been out of work for long stretches are falling behind on their mortgages, adding to the foreclosure glut.

“Mark Zandi, chief economist at Moody’s Analytics, estimates that 4 million homes were in foreclosure or on the brink of it heading into this year. That’s in addition to the 6.2 million homes that were foreclosed upon between 2007 and 2010. Together, those 10.2 million foreclosures are equivalent to the populations of North Carolina and Vermont combined.

“Clearing these homes off the market is key to a recovery, because foreclosures tend to drag down prices nearby. As 2010 drew to a close, foreclosures and other distressed properties made up about one-third of existing home sales, according to the National Association of Realtors. Home prices were 26 percent off their 2006 peak.

“With prices down from their heights, about one in four borrowers in this country is underwater, meaning that any equity they may have had has vanished and they now owe more on their mortgages than their homes are worth, according to financial research company CoreLogic. That threatens to exacerbate the foreclosure crisis, because it leaves these borrowers unable to refinance or sell their homes if they face a job loss or other setback.

“U.S. Treasury Secretary Timothy F. Geithner cited all these factors as challenges in the year ahead when he testified before the Congressional Oversight Panel in December.

” ‘The most important thing that’s going to affect the trajectory of house prices, the overall number of foreclosures, the ability of people to stay in their home, is what the government is able to do to get the unemployment rate down much more quickly,’ Geithner told the panel.

Fewer foreclosures
“The Washington housing market has held up better than many parts of the country in part because of its relatively low unemployment rate and robust supply of high-paying jobs that helped fuel demand for homes.

“The region’s foreclosure rate and its delinquency rate for borrowers at least three months behind on their mortgages have trailed the national averages since the housing crisis began, according to CoreLogic. As of September, the area’s foreclosure rate was 2.1 percent, vs. 3.3 percent nationally, and its seriously delinquent rate was 6.9 percent, vs. 7.8 percent nationally.

“In the third quarter, the area’s average home price climbed 3.1 percent from the previous quarter and 6.2 percent from a year earlier to $410,839, according to the most recent report from real estate research firm Delta Associates.

“Prices remained highest in the District, Alexandria and Arlington County, rising 8 percent in the quarter from a year earlier to $514,073, the report says.

“The biggest yearly price gains were in the outer suburbs of Prince William, Loudoun and Frederick counties, where average prices jumped 9.4 percent year-over-year to $327,108.

“In the region’s inner ring – Fairfax, Montgomery and Prince George’s counties as well as the cities of Falls Church and Fairfax – prices increased 4.7 percent to $414,176.

“But the weakest links were in the Maryland suburbs. Third-quarter prices fell 11.4 percent in Prince George’s and 8.5 percent in Frederick County from a year ago.

“The report concludes that the Northern Virginia suburbs are recovering earlier than their Maryland neighbors because job growth there has been stronger and faster, boosting demand for housing. Northern Virginia’s housing market also eroded earlier in the downturn and is therefore experiencing the “first-in, first-out” effect, the report says.

The price difference
“John McClain, deputy director of George Mason University’s Center for Regional Analysis, said Maryland’s troubles may soon be overcome given that home prices there never fell as sharply as they did in Northern Virginia.

“The average price dropped about 32 percent in Northern Virginia from September 2007 through September 2008, compared with about 10 percent in Maryland, McClain said.

“Against that backdrop, McClain expects Prince George’s to follow the same path as Prince William. Both counties were clobbered by foreclosures after the housing bust, albeit at different times, and their home values plummeted. When prices dropped low enough in Prince William, bargain-hunters started snapping up the deals, sales bounced back and prices eventually followed.

“There may be more than timing to explain the different experiences, however.

“The housing market in both counties took off during the boom years for slightly different reasons, said economist Anirban Basu of Sage Policy Group.

“Prince William’s proximity to job centers in the District and the Dulles Corridor, plus Northern Virginia’s free-market approach to development, helped lure potential buyers who were priced out of closer-in suburbs when the housing market sizzled, Basu said. To meet demand, construction took off, aided by the county’s ample supply of land.

“In Prince George’s, a desire among public policymakers to upgrade the county’s housing stock and cater to upwardly mobile professionals helped fuel development, although Maryland policies generally had a more anti-growth leaning, he said.

“Both counties attracted a huge concentration of buyers who took out subprime loans, many of them with adjustable interest rates. When those loans reset, borrowers’ monthly payments shot up to unaffordable levels, and many lost their homes. As prices eroded, they could not sell or refinance their way out of trouble.

“But clearing out the foreclosures took far longer in Maryland, which, unlike Virginia, requires some court intervention in approving the foreclosure paperwork. Maryland also passed laws slowing the foreclosure process.

” ‘Because there has been relatively less government involvement in the commonwealth, the market’s adjustment has probably been more rapid than in Maryland,’ Basu said. ‘The adjustment in Prince William, though more jarring, has been more rapid.’

“As evidence of that rapid adjustment, the inventory of foreclosed properties made up about 84 percent of total sales in Prince William in January 2009, according to a county official. They were down to 40 percent by the end of that year.

” ‘Prince George’s may have been better off if it had worked through the foreclosures earlier,’ said McClain, of GMU’s Center for Regional Analysis. ‘Prince William got hit with the foreclosures immediately and bang, the bottom fell out and then prices started climbing.’

“But sales are starting to pick up in Prince George’s, McClain said. They were up nearly 22 percent from January through November compared with the same period a year earlier.  ‘That’s the first sign that things are slowly getting back on track. . . . Some parts of the region are in a different stage of recovery than others.’

“In fact, if Prince William and Prince George’s were out of the mix, the Washington region would be looking far more stable than it is, McClain said.

“But there are risks ahead for the local housing market.

“Sellers could become overconfident and stall sales. The most recent price statistics about the Washington area are exactly what sellers have been waiting for – a reason to resist reducing their asking prices, said Marc McGee, former general manager of Pardoe Real Estate.

” ‘Sellers, of course, have been long-suffering, and they by-and-large feel, with some justification, that they were unfairly treated by the market,’ said McGee, now the business development director at the real estate search engine HotPads.com. ‘But the reality remains that it’s worth what someone is willing to pay for it.’

Federal pay factor
“A recently enacted two-year pay freeze for federal workers could cast a pall over area sales going forward, though the effects are not likely to be disastrous, said Stephen Fuller, director of George Mason University’s Center for Regional Analysis.

“But if the federal government cuts back on private defense contractors, as Defense Secretary Robert M. Gates proposed in August, that’s a ‘much bigger deal,’ because defense contracting jobs are more than double the size of the federal payroll, Fuller said.

“Another possible stumbling block for the housing market – nationally and locally – may be mortgage interest rates.

“Rates for a 30-year fixed-rate mortgage averaged 4.17 percent in mid-November, the lowest level since Freddie Mac started tracking the figures in 1971. But they’ve been higher since then, creating some angst about how that will affect home purchases and refinancings.

“Freddie Mac economists predict that rates will stay below 5 percent in 2011. But the Mortgage Bankers Association expects rates to rise to 5.5 percent by year’s end. The MBA predicts that total mortgage originations will drop to $967 billion in 2011, the lowest level since 1997, mainly because of a sharp drop in refinancings.

“While refinancing made up 69 percent of all mortgage originations last year, that share should dwindle to 36 percent this year and 24 percent in 2012 as the economy strengthens and rates climb above the 6 percent mark, the group estimated.

“Employment trends will most likely outweigh interest rates, anyway.

” ‘I don’t anticipate home values to go anywhere broadly speaking, but with job creation, we will begin to see that home sales will get nice support from the recovering economy,’ said Lawrence Yun, chief economist of the National Association of Realtors. ‘Things are shaping up a little better for 2011.’ “