Loan Modification

FHA condo policy devastating to some markets

By Gina Pogol

National guidelines, local effects

Tighter FHA condo guidelines have rendered many projects all but unmarketable  in the most troubled parts of the country, say some Realtor organizations. With the dissolution of spot approvals, buyers cannot finance a condo through FHA unless the entire project goes through a rigorous approval process. In parts of the country already decimated by foreclosures, the new policy is especially devastating.

In Gainesville, Florida, for example, median sales price for all homes was up 11 percent to $174,000 from $156,700 a year ago, evidence of perhaps finally some recovery in its housing market. However, the median price of Gainesville condominiums fell 49 percent to $60,000 from $116,700 a year ago.

Realtor association president Joyce Dorval indicated that many buyers chose affordable condos during the boom years, but the FHA has tightened its loan standards. She said she just took a condo listing for $65,000 that sold for $150,000 during the boom.

This same scenario is playing out across the country, with U.S. condo and co-op sales down 28 percent and the median price dropping 4 percent to $166,000.

How does this drive the economy?

In a 2008 study of first-time home buyers, Elliot F. Eisenberg, Ph.D concluded that attached housing and condominiums are more popular among first-time buyers because of their relative affordability.  And with sub-prime and Alt-A products having left the mortgage industry, and mortgage insurers on the sidelines,  FHA is taking on a much larger role in financing for those with smaller down payments.  And according to Dr. Eisenberg, first-timers have less money to put down the average loan-to-value ratio (or LTV) was 87 percent, and 30 percent of first-time buyers borrow 95 percent or more of the purchase price of the home. Finally, a new survey of Realtors concluded that half of real estate sales this year were to first-time home buyers. So:

1. Today, first-time buyers execute half of property purchases.

2. These folks have a preference for condos because they are more affordable.

3. These buyers have less money to put down and rely more on FHA financing.

With FHA making it more difficult to finance condos, a significant part of the market is being cut off from this bloc of buyers, causing the prices of condos to fall even while prices of other properties in the same area are increasing. Associations are scrambling to make the change — in the past, building development and management companies rarely considered getting properties FHA approved because they didn’t need the extra paperwork and buyers could always apply for “spot” approval, that is get the approval to finance a single unit even if the project did not have approval.  back then, too, buyers lined up outside their doors  and other low-cost financing options were available.

Real estate ownership is often touted by experts as the most common vehicle for wealth building for those with lower incomes. Today, the rules create a drag on condo-heavy real estate markets and keep some of the most affordable options out of the reach of first-time home buyers.  The economy will have to wait a little longer.

Full post as published by FHA Mortgage Guide on November 24, 2010 (boomark / email).