Could New HUD Rule Crush Condo Prices?
HUD recently released Mortgagee Letter 2009-19,
regarding FHA financing for Condominium purchases. I think this move
could have a serious negative impact on Condo owners and future Condo
values.
A Quick History
Most people understand that when you own a condo, you own your
unit (to varying degrees) and a share of the common areas and other
community assets. Unfortunately, when times are tough, as they are now,
owners will stop paying their condo fees long before they stop paying
their mortgage. Thus, you can have a condo regime in serious financial
straights, which may not be visible without a review of their books.
It is understandable that if the condo association is struggling, HUD
would want to limit their exposure to that risk, by limiting the number
of homes in that community with FHA financing.
HUD Responds
In order to limit their exposure to defaults in a condo community, HUD has decided to limit the Maximum FHA Concentration to 30% for any project.
Thus, if you are a buyer looking to purchase in a condo where 30% of
the properties currently have FHA financing, you will be required to
use conventional financing. The problem is that almost all first-time
buyers are using FHA financing now because of the lower down payment
requirements, less stringent underwriting guidelines and the expense of
using private mortgage insurance if they can get a mortgage with less
than 20% down.
The Result?
If you own a condo, and the community is already at 30% FHA financing
concentration, you will only be able to sell to those who can get
conventional financing. Real estate is all about supply and demand,
and this financing restriction will limit the demand for condos among
those who must use FHA financing. One can only imagine what that
reduction in demand will do to an owner’s ability to sell, and their
future home value. If you are a buyer, even if you can get in before
the community reaches 30% FHA financing concentration, you run the risk
of the community staying at that percentage for some time, making
future sales more challenging, and lowering demand for that type of
property.
Reduced
demand with stagnant supply = lower values. As an economics major in
college, I am sometimes accused of a “geekish” belief that everyone
understands supply and demand. If you don’t visit here!