May 29th, 2009
Bad News for the Condo Market
Condominiums are becoming more difficult to purchase as lending guidelines are changing to offset what Fannie/Freddie are calling a higher risk of lending to those looking to buy a condo. These new risk adjustments for condo specific loans are part of a larger effort for Fannie/Freddie to limit their exposure in an area of real estate that has been hit particularly hard by the housing downturn.
I currently own a condo, and am hoping to weather this downturn long enough to make a profit when I sell in a few years. These new higher loan fees and regulations do not make buying a condo more appealing to prospective buyers, thus hurting my chances to sell at a higher price. Fannie/Freddie are imposing higher down payment amounts on purchases, requiring at least 20% down, as well as adding additional risk fees to the loan. These risk adjustments will cause a buyer to have to pay additional closing costs, or take a higher mortgage rate than he would typically receive if he were to buy a single family residence.
The reasoning behind these adjustments is that just a few condo foreclosures in a building can affect the entire complex’s value. Also a factor is the condo fees which typically go unpaid when a condo is foreclosed on; these fees will pile up and cause additional debt for the complex that will affect their ability to manage the property in a fiscally sound manner.
These changes seem very problematic in terms of re-energizing the housing market. Most first-time homebuyers look to condos as a viable way to enter the market with condos’ lower prices and lower maintenance. If someone is qualified to receive a loan, it seems unfair to penalize that person for wanting to buy a condo instead of a single family home. Having a 20% down payment is a huge barrier-to-entry, and then enforcing higher loan fees and rates will cause prospective buyers to forgo complicated condo financing and continue to save for a larger home.
Fannie/Freddie are playing a dangerous game right now; their loans are being modified with government assistance into below market terms, while they raise standards and rates on incoming purchases and refinances to offset their increasing losses. With these new regulations, there will be drop off in the amount of condominium sales which will stagnate the housing market as condos make up a significant portion of the housing market in many metropolitan areas.
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