Online Reference 5: Foreclosures in Alexandria

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Summary

In last month’s Monthly Financial Report presentation, it was promised that OMB would provide additional analysis of foreclosures in the City of Alexandria.   Attachment 5 includes this additional analysis.  With all the uncertainty in the real estate market, it is difficult to estimate the seriousness of the foreclosure problem in Alexandria.  For the last several years, the government has created a variety of programs to help homeowners facing foreclosure to modify their loans and keep their homes.  The programs have helped some homeowners, but in other cases, have only delayed foreclosures.  Many banks have held back distressed properties, fearing to create a glut of homes for sale which would depress real estate values further.   However, it is likely that Alexandria’s economic advantages, such as its low unemployment, proximity to Washington, DC, and relatively prosperous economy, will make it immune to the worst of the problems facing the national real estate market.  The predominance of foreclosures in Alexandria are in condominiums, and of those, most are lower value properties.  A large number of the City’s foreclosures are centered in several condo complexes, primarily in the West End of the City, which have seen significant value declines.  However, the fact that Alexandria’s real estate market has performed relatively well to date may insulate the City from the worst of any foreclosure problems.  Clearly that has been the case to date, as the City’s current foreclosure rate is about 1/3 the national average and better than all but Arlington’s in the Northern Virginia Region.

Background

Since the collapse of the housing bubble in 2006, the number of foreclosures in the City has risen from negligible to measureable levels.   The graph below shows the number of total foreclosures by type and by calendar year from 2007 to the end of October 2010.

_{^{Source: Department of Real Estate Assessments}}

The total rate of foreclosure sales remains low in comparison with the rest of the country and most other area jurisdictions.  During the peak year of 2008, the total rate of foreclosure sales was 229 condos out of 19,190 total parcels or 1.2 percent; the total rate among single family dwellings was 124 out of 20,927 parcels or 0.5 percent.   According to RealtyTrac, which puts together the best measure for cross-jurisdictional comparisons, Alexandria’s rate of foreclosures is lower than that of any other Northern Virginia jurisdiction except Arlington.  The table below shows the foreclosure rates among area jurisdictions.

^{Source: RealtyTrac} 

For several years, housing market analysts have predicted that the number of foreclosures could increase dramatically.  The Credit-Suisse-created chart shown below which appeared on the financial blog Calculated Risk shows the amount of adjustable rate mortgages including option-arms scheduled to reset over the next three years.  According to the chart, the number of resets is expected to peak during early 2012.

However, with interest rates at historic lows, continuing low unemployment and a fairly stable housing market in Alexandria, particularly for single family homes, it is likely that most of these borrowers will be able to  refinance their mortgages when they come due, if they have not already.  According to the Mortgage Bankers Association, the average interest rate on a 30 year fixed rate mortgage was 4.46 percent as of the week of November 17, 2010.   The Federal Reserve is actively pursuing policies to keep mortgage rates low. 

Foreclosures by Value 

The graph below show the percentage of condo foreclosure sales for the last four years by value range based on Calendar Year 2010 assessments.  It is apparent from the graph that the foreclosures are concentrated in the lower range of values and that the pattern has changed little over the last four years, including the current year.   

The graph below shows the percentage of single family dwelling foreclosure sales for the last four years by value range based on Calendar Year 2010 assessments.  Again, the graph reveals that the pattern has changed little over the last four years.  There is a slight uptick in 2010 foreclosure sales exceeding $800,000, and it’s possible it has to do with the lack of financing available for high end homes, which may have made it impossible for the affected owners to sell their homes at the value necessary to pay off their mortgages, but it represents only a half dozen homes or so and may also be an anomaly.

The table below shows the average value of foreclosed condos and single family dwellings compared to the average assessed value of all properties in Alexandria in CY 2010. 

^{Source: Department of Real Estate Assessments}

Again, it is evident that the foreclosures are concentrated at the lower end of the market with few signs of any change in pattern from 2007 to the present.

Foreclosures by Geography

The following maps show the distribution of foreclosures around the City from 2007, 2008, 2009, and 2010.  A cursory glance at the four maps shows that the foreclosures are centered around several condo complexes, mainly in Alexandria’s West End, and that the pattern has changed little since 2007.

2007

^{Source: Department of Real Estate Assessments, Department of Planning & Zoning}

2008

^{Source: Department of Real Estate Assessments, Department of Planning & Zoning}

2009

^{Source: Department of Real Estate Assessments, Department of Planning & Zoning}

2010

^{Source: Department of Real Estate Assessments, Department of Planning & Zoning}

Through October 31, nearly half of the City’s condo foreclosures in 2010 have been centered in just seven condo complexes.   While the value of the average Alexandria condo decreased by approximately 26 percent between 2006 and 2010, the value of a random sampling of fifteen properties in those seven condo complexes decreased by 42 percent. 

Outlook for Future Foreclosures

According to recent information released by the mortgage research firm LPS Applied Analytics, the average number of days delinquent for loans in foreclosure nationally is 492 days and nearly 20 percent of loans that have been delinquent more than two years are still not in foreclosure.  Those numbers suggest additional distressed properties are eventually going to hit the market.  More recently, many banks have begun a moratorium on foreclosures to sort out title problems, a situation that has also kept distressed homes off the market. Home values will not settle to their natural level until the housing market is allowed to clear. 

There is clearly a connection between the drop in home values and the number of foreclosures.  If government efforts to support home values through tax credit programs, extraordinarily low interest rates, foreclosure moratoriums, and relaxed lending standards (such as the increase in the maximum FHA loan in the DC area several years ago) are withdrawn or unsuccessful, the real estate market could take another leg down. It has already begun to do in some national real estate indexes, though not in the City of Alexandria to date.  Declining home values might then lead to more foreclosures.   Clearly, the biggest risks in Alexandria are in lower priced condominiums.  However, might the foreclosure problem spread if the average condo value in the City dropped another 16 percent as it has in the most distressed condo complexes in the City?   City Staff will continue to monitor this market.