Call it the condo conundrum: Demand for condominium units is rising in many urban areas nationwide, according to new real estate industry estimates, yet mortgage financing is getting squeezed for entry-level condo buyers by a key federal agency.
It’s a little schizophrenic. List prices for condos in major markets are rising faster for single-family detached homes in the same area. Nationwide, condo sales are steadily taking away market share from traditional homes as suburban boomers downsize and other owners want to live closer to urban workplaces and center city attractions.
But here’s the troublesome flip side: Significant financing barriers erected by the federal government are making purchases of entry-level condos by millennials and other first-time buyers more difficult. Despite indications from the White House as recently as last month that the government wants to loosen up on mortgage credit availability for middle-income Americans, the Federal Housing Administration continues to severely restrict the number of condo projects where it will make its low down payment insured mortgages available. The same restrictions make it impossible for large numbers of seniors who own condo units to obtain reverse mortgages — an important home-loan niche that the FHA dominates.
Despite these problems, condos on the whole are doing well. The real estate site Trulia reports that increases in asking prices in the 20 largest condo markets are outpacing increases in single-family asking prices. In Miami, list prices for condos in September were 17 percent higher than the year before, compared to single-family list prices, which jumped 11.7 percent. In Boston, condo list prices increased at a rate four times as fast as single-family homes. In the Washington, D.C., area and in San Diego, condo list prices rose by nearly double the rate of single-family homes. Nonetheless, selling prices for condos remain significantly below detached homes on average nationwide, making them more affordable.
All of this points to rising popularity and market share for condos. Lawrence Yun, chief economist for the National Association of Realtors, estimates that condos recently have grown from roughly an 8 percent market share to between 11 percent and 12 percent. But in some urban markets, the condo share is considerably higher. During September in Los Angeles, according to CoreLogic’s DataQuick, condos accounted for about 27 percent of home resales. In Miami, they were 44.9 percent.
The main problem in the otherwise surging condo sector, many housing experts say, is the unnecessary blockage of entry points at the lower ranges of the price spectrum. The FHA, which for decades was the go-to source of mortgage money for first-time buyers, currently will only consider insuring mortgages in less than 7 percent of the country’s estimated 150,000-plus condominium developments. The agency has stopped approving so-called “spot” loans in condo projects that have not applied for and received special “certification” — a process that many condo homeowner association boards consider burdensome and frequently leads to rejection.
David Stevens, who was FHA commissioner in 2010 when the agency banned spot loans and now heads the Mortgage Bankers Association, says “it’s time” to bring them back with reasonable restrictions because for many young first-time purchasers, “FHA is the sole source” of low down payment financing. Though the agency confronted significant condo foreclosure problems stemming from the housing bust, Stevens told me in an interview “that doesn’t mean you keep [these restrictions] on” when the crisis has abated, as at present.
Eric Boucher, chief operating officer of ReadySetLoan, a national condo consulting firm based in South Windsor, Connecticut, says the current spot loan ban can have crushing impacts on seniors who need reverse mortgages to supplement their incomes. He says he attended a condo association meeting recently where unit owners in their 80s described their inability to obtain a reverse mortgage, solely because of the FHA’s policy.
So are there any fresh signs of a change of heart at the FHA — any reason to hope for an improvement? Maybe. The agency won’t comment on whether it might loosen its certification restrictions and allow spot loans to buyers and owners in uncertified developments that can qualify under financial stability criteria. But industry and other sources say the agency is feeling the political heat — from real estate and mortgage lobbies as well as from Capitol Hill — and is drafting a major condo proposal for 2015 that could bring back FHA financing to greater numbers of buyers and existing unit owners.
Kenneth Harney is executive director of the National Real Estate Development Center.