NVAR’s 18th Annual Economic Summit Reveals a Region in Transition

The Panel:
Kenneth Harney, Nationally Syndicated Washington Post Columnist
David Versel, Senior Research Associate, Center for Regional Analysis, George Mason University
James Dinegar, President and CEO, Greater Washington Board of Trade
Dr. Michael Fratantoni, Chief Economist and Senior Vice President, Research & Industry Technology, Mortgage Bankers Association
Mitchel Kider, Chairman and Managing Partner, Weiner Brodsky Kider PC

What is the dynamic of a less than dynamic housing market? Moderator Kenneth Harney sought to elicit the answer to this question from panelists during NVAR’s Sept. 4 Economic Summit. 

The market has righted itself, Harney said, and the danger of another bubble has been averted. Mortgage rates are still incredibly low, but qualifying for a mortgage is still very difficult. Why, he asked, can’t lenders loosen up?

In addition to tight credit, Harney asked the panelists to discuss the impact that the reduction in federal jobs will have on the housing market. For years, Harney said, the DC area’s economy was considered immune from the boom and bust cycles that wracked the rest of the nation. Lately, however, the notion of an exceptional, “Teflon-coated” DC-area housing market has taken a beating. 

IS OUR ECONOMY TEFLON-COATED OR CONTRA-CYCLICAL?
The DC-area economy, argued panelist David Versel of GMU’s Center for Regional Analysis, is not Teflon-coated but contra-cyclical. Bad times for the rest of the country are good times for us because when times are bad, the government increases its presence and hires. Federal government and contractors have been the backbone of our local economy, Versel said. Since April 2010, however, this region experienced a steep decline in federal employment:
• Over the last four years approximately 20,000 federal jobs vanished
• Federal contracting has declined; in 2010, federal procurement made up one quarter of our local economy or $82 billion; the total value of federal procurement shrunk to $71 billion by 2013 
• The white-collar economy lost 23,000 jobs from 2010 to 2013 
• Since 2010, job growth has been in the lower-wage sectors; we are not creating jobs that pay $40-70K per year. 

Northern Virginia has the third lowest unemployment rate in the country, but from February 2013 to February 2014 there has been negative job growth. Only 20,000 new jobs were created in 2014. Today, the DC-area’s rate of job growth is comparable to that of Detroit.
Versel on Northern Virginia Housing
• Construction still is lagging
• Inventory is up 23 percent from last year 
• Housing sales are flat
• Closed sales and sale prices have both decreased.

DC METRO REGION: ON A DATE WITH DESTINY?
Jim Dinegar, of the Washington DC Board of Trade, believes that the DC Metro area is exceptional but not just because of federal sector jobs. 

Consider these DC-metro characteristics that Dinegar shared with the audience:
• A major center for media, banking and cyber security
• Exceptional cultural resources put it in a class with the world’s greatest cities
• The highest levels of education and income in the country; 70 percent of Arlington County’s population has a college degree.
• Home to several major universities 
• Forbes Magazine recently named the greater DC area “America’s coolest City.” 

DC has incredible cultural assets and diversity, Dinegar said. It’s worth noting, he shared, that when the government was closed due to the sequester, the number one complaint was that the panda cam at the National Zoo was shut down.

Dinegar sees a grand transformation in our area’s near future that will have geographic, transportation and economic impacts. He believes this will occur in the next 7-10 years. Among those changes: DC’s Union Station. Dinegar believes that it will be transformed to provide better commuter connections and expanded capacity, with the surrounding neighborhood developed for mixed-use. To learn more about other changes on the horizon, please read the Commercial Real Estate article on page 18. 

“When global investors get scared, he said, They invest in the U.S.”

Although Dinegar conceded that there are some dark clouds lurking in the horizon — specifically the uncertainty that comes with the threats of sequestration and terrorist attacks, but he believes that the DC metro area has the cultural, educational, technical and financial resources and the vitality to take its place with other world-class cities.

A LOG JAM
Dr. Michael Fratantoni of the Mortgage Bankers Association was bullish on Washington’s rise to global influence. “When global investors get scared,” he said, “They invest in the U.S.” 

From a lender’s perspective, Fratantoni said that the national economy is improving quickly. He predicts a very strong 2015. Because of the improving national economy, he expects the Federal Reserve to raise interest rates soon and predicts a 5 to 5.5 percent mortgage interest rate by the end of the year.

The housing sector is still lagging, Fratantoni said. National home sales are flat. In this region, there has been a 4 percent decline in existing home sales for 2013-14. This is partly due to a dramatic decline in mobility, he said. 

People aren’t moving to take jobs in other parts of the country because job creation is still very slow. Employment uncertainty has also contributed to a decline in aspirational moving; people are staying put instead of moving up. This is especially true of the Baby Boomers who are staying in their homes during retirement. 

The biggest factor in the flat housing market is that first-time homebuyers are missing, Fratantoni said. New college graduates can’t find jobs period, let alone the sort of jobs that would make it possible for them to enter the housing market. 

The Generation X and Y-ers are paying off student debts while seeing their incomes decline. Fratantoni compared the housing market to a log jam and said, “Everything is stuck. You can’t run a housing market on high-end buyers alone. You need move-up buyers.”

Availability of mortgage credit is another obstacle. The Dodd-Frank lending environment has an “enormous number of new regulatory actions, which has led to unintended consequences.” The cost of originating a loan has effectively doubled due to the new regulations. Lenders are also concerned that they may have to buy back loans in the event of a default, so they only underwrite the most creditworthy buyers. FHA is ending up with the highest risk borrowers and FHA insurance premiums have increased. Fannie and Freddie have priced themselves out of the first-time homebuyers’ market. 

REGULATORY THICKET OR JUNGLE?
These unintended consequences were at the heart of panelist Mitch Kider’s presentation. Kider’s firm, Weiner Brodsky Kider, PC, is a national practice focused on guiding clients on regulatory issues related to financial services. 

The regulation and enforcement environment, Kider said, has a direct impact on a customer’s ability to purchase a home and the “43 percent back-end debt-to-income ratio cuts a lot of people out of the market.” Underwriting discretion has been taken away from the mortgage market, he said. 

The Consumer Financial Protection Bureau is tasked with redefining the ground rules for home mortgage lending under Dodd-Frank, Kider explained. Most agents and brokers are subject to enforcement by the CFPB for potential violations of the Real Estate Settlement Procedures Act. Kider noted that RESPA is an extraordinarily vague and ambiguous statute.

“These things matter to you,” Kider said. “You need to understand that your own personal economic well-being can be adversely impacted by some of these regulatory changes. You need to stay informed, you need to monitor developments and you need to comment on these regulations.”

“You have to put yourself in the shoes of your customer. You have to ask yourself — if my wife, ... and father were on the other side of this table with me, would I be doing this?"

Realtors® and brokers need to be aware of the increase in enforcement actions concerning: 
• Affiliated business arrangements
• Insufficient disclosures
• Joint ventures
• Home Mortgage Disclosure Act (HMDA)
• Unfair, Deceptive, Abusive Act or Practices Statute (UDAP)
• Kickbacks
Section 8 of RESPA has both criminal and civil penalties, which can be as high as $1 million a day.

“You have to think long and hard about everything you do in this regulatory environment,” Kider concluded. “You have to put yourself in the shoes of your customer. You have to ask yourself — if my wife, my son, my daughter, my mother and father were on the other side of this table with me, would I be doing this? Those are the questions you have to ask yourself today to stay out of trouble.”