Most of the conversation on this blog over the past few years has focused on the single family resale market. There are two reasons for this… first, nearly 80% of the sales activity in our market is made of single family resales, and second, about 90% of my clients are looking to buy or sell single family homes.Because of this, sometimes we ignore condos, so let me take a few moments to educate you on some of the key differences between the single family market and the condo market, including some of the very serious issues facing the condo market today.
First, in overall terms, the single family market is healthier than the condo market. Of course, this is a generalization, and there will always be localized exceptions to every rule (condos near universities, for example, will be safer investments than condos in the suburbs). But overall, there are some characteristics of condo ownership that have made that segment of the market extra vulnerable to the economic downturn of today.
While the average homeowner will reside in a property for an average of almost 10 years, condo ownership tends to be a shorter term proposition. The most recent average reported by NAR was 4.6 years, which means condo ownership tends to be more transitional in nature and thus, as an investment, they are more volatile.
If you trace back 4.6 years from today, you are talking about the middle of 2005, or the peak of the “easy money” lending era. A disproportionately high number of today’s condo owners got in at the top of the market, with risky financing. Today, most cannot refinance, even if they want to. And without easy financing, the buyer pool has shrunk, leading to a surplus of inventory, leading to a loss of value, leading to an increase in foreclosures, leading to more losses in value… and soon the whole market is spiraling uncontrollably.
If you trace back 4.6 years from today, you are talking about the middle of 2005, or the peak of the “easy money” lending era. A disproportionately high number of today’s condo owners got in at the top of the market, with risky financing. Today, most cannot refinance, even if they want to. And without easy financing, the buyer pool has shrunk, leading to a surplus of inventory, leading to a loss of value, leading to an increase in foreclosures, leading to more losses in value… and soon the whole market is spiraling uncontrollably.
Because FHA has traditionally insured a higher percentage of condos than most traditional banks, FHA’s losses in the condo market have been severe. As a result, FHA is in the process of implementing a number of new restrictions on condo financing that will only hurt existing condo owners more going forward.
Last November, FHA was poised to flip the switch on new guidelines that would have restricted lending in condo developments. After outcries from condo owners, home owners associations and mortgage lenders, FHA agreed to phase in its new condo rules, some of which are already in effect and some which will now kick in at the end of the year.
These include:
· Not lending in developments where FHA insures more than 30% of the units
· Not lending in units where owner occupants occupy less than 50% of the units
· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments
· Not lending in units where a single investor owns 10% or more of the units
· Not lending in units where the HOA isn’t withholding sufficient reserves
· Not lending in units where owner occupants occupy less than 50% of the units
· Not lending in developments where 15% or more of the owners are delinquent in their HOA payments
· Not lending in units where a single investor owns 10% or more of the units
· Not lending in units where the HOA isn’t withholding sufficient reserves
These new guidelines are going to significantly reduce the number of FHA loans in many condo developments, which will further shrink the buyer pool and (at least in the short term) cause more defaults and value loss.
