A regular Source feature, Undercurrents slips below the surface of Virgin Islands daily routines and assumptions to explore in greater depth the beauty, the mystery, the murky and the disregarded familiar. It is our bid to get to know the community more deeply.
Like Sahara dust washed away by September rains, that magical bubble shielding the Virgin Islands from the national real estate crisis has dispersed into thin air, leaving the territory facing its lowest housing market in decades.
At the time of an interview early this month, veteran Realtor April Newland said there were 163 houses listed for sale on St. Thomas and 339 on St. Croix.
“Once you get over 150 properties (listed for sale) that’s a buyer’s market,” she said.
Moreover, sales have slowed and prices are dropping almost daily. Just 61 St. Thomas properties sold in the first eight months of this year, Newland reported. That’s 61 sales for the 157 real estate sales agents working on the island. And in the course of a 30-minute telephone interview, she reported receiving email reduction notifications for three different properties whose asking prices had just been lowered.
Things are even worse on St. Croix, where the largest industry, the Hovensa refinery, shut down earlier this year, laying off hundreds of well-paid workers.
“We thought we’d reached the bottom and then Hovensa closed, so it’s a double dip,” said Chris Hanley of Farchette and Hanley Real Estate.
From the 2008 peak to 2012, Hanley said land values have decreased by 50 to 60 percent and “houses are off by 35 to 45 percent.” So that $250,000 house you may have bought five years ago is currently worth $160,000.
Hanley said the St. Croix housing market is “on the fringe” of being worse than it was after Hurricane Hugo devastated the island in 1989.
Originating with the general economic downturn nationally, the real estate freefall is gaining momentum from a number of factors as it blusters through the territory.
For one thing, a large share of the V.I. market consists of second homes and investment properties owned by people who live on the mainland, and many of those people are facing financial setbacks.
“If they want to retrench, they are going to concentrate on home,” said James Crites, president and chief executive officer of Merchant’s Commercial Bank.
That means they may let go of their V.I. property, adding to the unbalance between available properties and potential buyers.
At the same time, the rental market is also softening, especially on St. Croix because of the Hovensa lay-offs. Many homeowners – both on-island and absentee – depend on rental revenues to pay their mortgages, Hanley noted. Without that income, they will have to struggle to pay the mortgage and may be set up for foreclosure in the not too distant future.
And that’s one of the most significant factors affecting the market: the state of foreclosures.
“I think there’s a lot more (active and pending foreclosures) than people are realizing,” Newland said, adding that she expects a large number of them to surface in the next three to four months. “If all this inventory comes on the market, it’s going to have a huge impact.”
Hanley was more conservative in his view of the numbers of foreclosures but said they are seeing some increase.
He and Newland both cited the relatively recent loosening up of down payment requirements as one possible reason for the change. Historically, buyers in the Virgin Islands were required to put up a down payment of at least 20 percent of the cost of a home. But recent years have seen the introduction of federal programs under which the down payment may be as little as 5 percent, and in some instances, no down payment is required. If a buyer has no equity in a property “it’s easier to walk away,” Newland said.
Crites disagreed. “I don’t think that played a major role” in increasing foreclosures, he said. The lower the down payment, the stricter other criteria became, such as the buyer’s job status and credit rating. Besides, “this is a small community,” and people know one another so there’s less chance of a financial surprise.
There was general agreement, however, on a related issue: the difficulty of foreclosing and the harm it does to other buyers when someone defaults on a mortgage.
Once the bank has exhausted all other possibilities to help a struggling borrower – such as restructured payment plans – it heads to court to foreclose on the property and what it finds is not always helpful.
“The foreclosure process is both lengthy and uncertain,” said Jeffrey McNeil, senior vice president of the Eastern Caribbean Region for First Bank. There is a lot of disparity between areas and between judges in how cases are handled, he said.
Some owners and some lawyers “know the system,” Crites said, and they play the system. “They’re going to string this thing out for four or five years.”
But they aren’t the only ones dragging their feet. As long as it may take a foreclosure case to wend its way through the system, it can languish even longer on a judge’s desk.
“Some judges are just not doing their jobs,” Crites said. “Some people have had to get a writ of mandamus” – an order from a higher court to a lower one – “to get a judge to act.”
McNeil told a similar tale. In some cases, a judge took up to a year to actually sign the judgment made in favor of the bank. All that time, the owner was making no payments and the bank was unable to sell the property.
Both men noted there are also judges who move cases expeditiously but said those who don’t aren’t doing anyone a favor. They may think they are protecting the little guy, but what they are really doing is making it more difficult for the next guy to get a mortgage.
“With this kind of backlog, I’ve got to strengthen my underwriting criteria to compensate for the possibility of a future lengthy foreclosure,” Crites said.
“Anytime there’s uncertainty, it comes with a cost,” McNeil said. So the unpredictability of foreclosure actions means tighter criteria and higher costs for future mortgages. And in dollar-and-cents terms, “it makes a difference in what capital we have” to lend, he said.
Both said they try to avoid foreclosure when possible, instead working with clients on payment plans or, in some cases, taking a Deed in Lieu of Foreclosure, in which, essentially, the borrower surrenders the property rather than go through the court process.
“Once you go through the foreclosure process, your credit is ruined for a long time,” Newland said. The deed in lieu protects the borrower in that sense.
“If you have a cooperative buyer, the deed in lieu does work,” Crites said. But what he’d really like to see instituted in the territory is something called non-judicial foreclosure, at least for property that is not someone’s principal residence.
Under this system, which is used in Texas and some other jurisdictions, foreclosure is essentially an administrative action resulting when one side reneges on a contract.
Getting a handle on foreclosures may help improve the market in the long term, but it’s doubtful it will have an immediate impact or reverse the current downward trend.
“I don’t think we’re in that panic stage,” Newland said, but she predicted things will get worse before they get better.
“In a year or two it should stabilize” she predicted. However, “It’s going to take several years to turn around.”