Foreclosures Continue To Lead Market Activity

Long lines. Price wars. The decision became easy. She and her fianc/ finally bought the one townhouse they won on price.

Fueled by a lot of emotion, the couple wanted what many others continue to seek today, a place to call home after their wedding.

It didn't turn out to be the fairytale they imagined. Three years later, the couple found themselves just last month, keys in hand, back at the bank which was foreclosing on their more than $450,000 mortgage. The payments no longer made sense as the home's value had dropped to about $350,000, less than the value of the loan.

There's a similar story behind many home foreclosures in Loudoun County. Whether purchasers reached beyond their means or were just flat out taken advantage of, these personal struggles continue to shape the county's real estate market.

Realtors take a slightly different view, pointing out that June served as the second consecutive month in which sales reached more than 500, a number not seen in Loudoun County since 2006.

"[It's the] highest level of sales in five months, and primarily it's due to buyers coming back into the marketplace because there are high levels of foreclosures on the market for good value," Sue Smith, a ReMax associate broker with territories in Loudoun, Fairfax and Arlington counties, said.

Geographic trends in Loudoun County, as presented in the Loudoun County Housing Market Analysis, a report put together by Fulton Research and Consulting, published in July, showed significantly more foreclosures in ZIP codes 20164 and 20176, Sterling and Leesburg. Those areas include the two lowest median sales prices in the county, $238,000 and $375,000, respectively.

Foreclosures correlate with sales by area.

"I found in 20164 high sales of 101 units," Smith said of the month of June. "Waterford has the highest decrease."

Out in the market, Smith has also seen buyer trends instigated by price points and location.

"Arlington is the number one area which has had a price increase this year," she said. "I think that it's very typical for certain areas."

The surge could also be attributed to availability of loan programs for first-time buyers, which will end Oct. 1, Smith said.

"That has brought a sense of urgency," Smith said. "There are a lot of buyers that have been on the fence waiting to buy but couldn't afford it. Now they see it's a good time. I agree now is a good time."

More investors have also come into the market but a different type than years prior. She's seen an increase of cash payments for properties and investors taking out lines of credit with the intention to buy foreclosure properties and rent them for long-term hold.

"The longer you hold on to it, it goes up over time," she said. "We are still 13.1 percent below our prices from a year ago."

Uncertain Economic Impact

Although good news for realtors and first homebuyers, a sales increase masks another more negative story in Loudoun: its long-term impact on county revenue.

According to estimates by the Federal Reserve Bank of Richmond and the Federal Reserve Board, using data from First American Loan Performance, proportionately Loudoun has a low exposure to subprime loans, issued to those with the weakest credit scores. However, many of them have gone into foreclosure.

In April 2008, the Federal Reserve Bank of Richmond counted about 1,900 owner-occupied subprime loans in Loudoun County. In the Sterling and Leesburg areas, between 16 percent and 38 percent went into foreclosure. Countywide, by April, about a quarter of the subprime loans in Loudoun had gone into foreclosure.

Loudoun has more exposure to Alt-A loans-issued to borrowers with less than prime credit but better than subprime. These loans have also performed quite poorly in Loudoun but not as bad as the subprime loans. Some 3,100 owner-occupied Alt-A loans were estimated to be in the county in April, according to the Federal Reserve Bank of Richmond.

In Sterling and Leesburg, between 8 and 27 percent of Alt-A loans went into foreclosure and countywide, about 10 percent of them had gone into foreclosure by April.

In July, Loudoun County had more foreclosures in one month than ever before. It saw twice as many foreclosures in July-279 total-more than any month last year, according to data collected from Loudoun County Circuit Court Clerk Gary Clemens' staff.

What this really means locally, as the demands increase for transportation, education and other services, and amenities, remains uncertain.

"Foreclosures mean less revenue for the county and the state," Clemens said. "It's a huge impact on revenue. Couple the foreclosures with high gas prices and you have a double whammy. It's an issue this board of supervisors will have to face. The biggest question is how many more foreclosures are in the pipeline. I don't think anyone knows. [If they did], we could better project what revenue shortfall we'll have."

Future: Creative Solutions, Absorbing Supply

Smith believes prices will continue to decline as long as the supply outpaces demand as it does now.

"The other positive news [for buyers] is we're at an 11-month inventory level," she said. "A normal inventory level is six months. If you're expecting top dollar for your home this is not the market you're going to get it in."

The county acted in early September on its idea to absorb some of the foreclosures in the market through the creation of some programs for county workers to purchase homes in the county.

"There are a lot of homes available under $400,000," Jack Brown, a Loudoun County economist, said, noting there's tremendous opportunity for homebuyers who were not able to purchase a home last year at this time. Brown has prepared a number of reports for the board of supervisors so that it stays abreast of the housing market situation in the county.

In early September, the county moved forward on one program called Public Employee Live Near Your Work. The board also advanced an Eastern Loudoun Revitalization Program where people whose income sits below $100,000 can get grant assistance to purchase a foreclosed home.