Foreclosures, Home Sales Cast a Pall on Public Spending Plans

Residential property values are dropping lower than county and city officials had projected, foreshadowing an even tougher budget season next year.

The Manassas City Council budgeted a 2.5 percent drop in real estate property assessments for fiscal 2009, but values have dropped 6 percent, said John P. Grzejka, Manassas's commissioner of revenue. There are 20 percent more houses for sale now than at this time last year, he said, and the number of foreclosures continues to rise. The foreclosure rate and the flooded market are blamed for the falling property tax base.

"The big question is whether we've seen the bottom or if we see a continuing drop in values because of more houses on the market. . . . The pressure is to continue to lower their prices," he said.

The Prince William Board of County Supervisors budgeted for a 2 percent overall drop in assessed real estate values, but the county is seeing a nearly 4.5 percent drop when comparing prices from May 2006 to those in May 2007, said Allen Scarbrough, the county's investment portfolio manager. The market slowed much faster than county officials had anticipated, he said, requiring delays of long-term capital projects such as building schools and roads.

Nearly 700 homes in Prince William County entered the foreclosure process in the first quarter of 2007, according to RealtyTrac, an online real estate company that tracks foreclosures nationally. RealtyTrac data show that during the first three months of this year, 68 Manassas properties either were the subject of a default notice, were posted for sale or were repossessed by a bank. That compares with the first quarter of 2006, when there were 80 houses in the foreclosure process in Prince William and 12 in Manassas -- itself a significant increase from the first quarter of 2005, when there were 10 properties in the foreclosure pipeline in Prince William and just one in Manassas.

"It just seems like the foreclosures are really hitting the construction workers' areas and some of the lower-end demographic," said Supervisor W.S. Covington III (R-Brentsville), who said local real estate agents had told him that some county neighborhoods are seeing closer to a 9 percent drop in values.

Last year, the supervisors unanimously voted to freeze rezoning applications for a year to slow the residential market. Their goal was to demonstrate the county's need for state action to help build transportation and other infrastructure.

The county watches sales, assessments and appraisals throughout the year, Scarbrough said. "The wild card in all of this is interest rates, which, if they go higher, will only exacerbate the impact on the weak holder," such as those defaulting on subprime loans, he said.

Real estate markets hit an all-time high in 2005, and more people began to use creative financing such as subprime mortgages, which offer borrowers with unimpressive credit very low interest rates and payments in the first years, said John McClain, deputy director of George Mason University's Center for Regional Analysis. Some subprime mortgages written in 2005 were reset to higher interest rates this spring, he said.

Prince William and Manassas had some of the highest rates of subprime lending in the Washington region, according to a March study by NeighborhoodInfo DC, a project of the Urban Institute and the District's Local Initiatives Support Corp. Nearly 18.5 percent of the county's new-home purchases or refinanced mortgages in 2005 were through subprime lenders, according to the study. In Manassas, 23 percent of 2005 mortgages were made by subprime lenders.

These types of mortgages are very favorable to people who have "informal income," such as illegal immigrants and people who are self-employed, said Peter Tatian, a housing expert at NeighborhoodInfo DC. Buyers who thought they were going to "flip" a house for a higher price also were candidates for these mortgages, he said. Many of the people who were counting on the market to continue rising are now the ones struggling to make regular payments, he said.

"Even if those homes don't go to foreclosure, people end up having to sell at unfavorable terms for them. . . . Whatever they put into that home, they are likely to lose," he said.

Manassas has been trying to "get a heads-up on when houses are going to be foreclosed on," said Grzejka, who said the city's zoning and inspections officials are attempting to make sure the properties are maintained and the lawns are cut before it is obvious they have been abandoned.