Market Conditions: Tight Credit Restrictions Are Hurting Condo Sales
We’ve chattered about the problems with the Freddie and Fannie requirements in new condo buildings in the past. Both lenders will no longer guarantee mortgages in buildings that are less than 70% sold.
According to the Chicago Tribune, the restrictions are making it extremely difficult for developers to sell new units.
In March, sales of Chicago condo units listed with Midwest Real Estate Data LLC’s multiple listing service were down 41 percent from a year ago. In April, the year-over-year decline was 55 percent, and in May it was 56 percent. Yet according to the Chicago Association of Realtors, condos have experienced less price erosion than single-family homes.
“This is telling us that this is the healthiest segment of our real estate market,” said David Hanna, Realtors association president. “Why are we punishing people to be there? This is quashing entry-level buyers, which we need to get the market going.”
This year, almost 4,700 new condo and townhouse units are expected to be completed and ready for occupancy, and less than 60 percent of them were under contract in the year’s first quarter, according to data from Appraisal Research Counselors.
“I walk out of my office in Printer’s Row and all around me I see condos dead in the water,” Hanna said.
Developers are turning to FHA designation in order to get around some of the Freddie and Fannie restrictions.
As a result, some developers are turning to their own lenders and arranging short-term private financing for buyers. An increasing number, though, are applying to have their developments approved by the Federal Housing Administration.
A building has to be only 51 percent sold in order for buyers to receive FHA-backed mortgages, and the down payment required is 3 1/2 percent.
Because of the lesser underwriting requirements, the FHA’s share of mortgages insured for new-home purchases has grown, even before the more stringent Fannie Mae and Freddie Mac rules were adopted. For the five-month period between October and February, FHA’s market share of new-home purchases was almost 23 percent.
Condo buildings want in on that action. Since October, 68 Chicago condo buildings have received FHA approval, and an additional 51 buildings have applications pending.
Squeeze in lending rules choking condo market [Chicago Tribune, Mary Ellen Podmolik, July 12, 2009]
I was perplexed by the comment that the condo segment is the healthiest part of the market juxtaposed with the comment that there are tons of condos dead in the water.
Boo-hoo. Who’s crying now that the developers have to go FHA to sell their overpriced and shoddy developments. The gravy train is over for these folks. Maybe if they lowered their prices to a price point where entry level buyers could afford to pony up a 10% or 20% down payment they would sell more condos. Instead they keep prices high and pray that the government will save them with the ‘howmuchamonth’ 3.5% down payment crowd.
The quote is coming from a mouthpiece of the realtor/developer industry.
Reality is condos are holding up because developers and FBs not selling at realistic prices.
Homedelete,
I believe developers keep prices high because now they have been carrying the units for a while so there is no profit left. Second, some bank loans require units sell above a certain price. This is why Trump cannot lower prices to match resale pricing in the building.
Please do not forget that capitalism functions on greed and risk. As an example, I am looking at a home that will go to sheriff sale next week. The home needs work and I am trynig to deciede whether the potential future profit of fixing the home couple with scarcity of time and seling it in a couple years has a greater benefit than just parking my money in some bonds. Life is not a non-profit endeavor.
Given new housing starts you can expect most, if not all homebuilders of any size, to go bankrupt in this downturn.
Most of the bankruptices will be chapter 7 liquidations as well, similar to what happened with the Vetro developer recently.
Good longitudinal chart of housing prices by geographic area compared to household income, 1987-2009, posted on zerohedge:
http://zerohedge.blogspot.com/2009/07/housing-tunes-acme-cheap-credit-vs-wile.html
either incomes need to go up or prices go down…
Nothing new here… been saying this for more than a year now. Typical media, day late and a dollar short.
just a fun multimedia chart that gives you a sense of the magnitude of the bubble… and zerohedge is ANYTHING but typical media…
Russ: “Nothing new here… been saying this for more than a year now. Typical media, day late and a dollar short.”
Also, homedelete I know you probably see some really unscrupulous stuff from banks. There are bad lenders, builders, developers and home buyers out there. We can never get rid of all bad business people, but we can keep the percent of them down through regulation from the government and other business people.
For me, I found Countrywide to be unscrupulous after I saw what went on with my wife’s mortgage that see set up prior to us getting married. She was on a fixed rate 30 year and they somehow had language in it to keep raising the monthly payment. It is worth noting this was a low money down mortgage and Countrywide escrowed the taxes. Over the course of 2 years, Countrywide raised the monthly payment almost 50%! I refinanced through Schwab and now have a true 30 year fixed rate. As more people move from bad to good, this will hopefully put the bad ones out of business.
If you are going into bonds, make sure they are short term! Huge bond bubble going on right now!
A great place for your money is in your mattress. Your dollar buys more and more goods each passing day and in the future deals will be even better. Another good option is to pay off debt regardless of the interest rate. Tomorrow’s dollars will be more valuable than today’s.
FHA will be the next big tax payer funded bailout. And then all the so called “experts” will go on TV, raise their hands and say “Nobody could have predicted this…”
homedelete: I have 10k left in student loans I keep primarily because, for some reason, if I pay them off my credit rating goes down. Dont ask me why, but sometimes its good to have a small amount.
I would think you could keep up your credit rating by having a couple of credit cards with high limits (but no revolving balances).
“FHA will be the next big tax payer funded bailout. And then all the so called “experts” will go on TV, raise their hands and say “Nobody could have predicted this…””
Quoted for the win. It would be really funny if it weren’t so true. Even these days legislators like Barney Frank are pushing for lower standards for qualifying for FHA and Fannie/Freddie in order to try to open the market to more potential buyers.
A legislator integral to the bubble and meltdown is now trying to dictate policy directly to two previously private entities (Fannie & Freddie) that would’ve melted down without government intervention & the FHA.
Remember Fannie & Freddie would be out of business almost a year ago due to taking too much risk in the past and now some legislators want to expand the risk they are taking.
Additionally our Treasury secretary is a tax cheat. I really don’t have a lot of hope this housing/financial/economic crisis being dealt with effectively any time soon unless you are a company seeking a bailout.
This story is old news. Why does the trib bother?
Bob, speaking of “quoting for the win,” this bunch of quotes was posted on The Housing Bubble Blog by commenter “wmbz”:
2004
1. “The ability of lending institutions to manage the risks associated with mortgages that have high loan-to-value ratios seems to have improved markedly over the past decade.”
-Alan Greenspan [February 2004]
-2005
2. “Home sales are coming down from the mountain peak, but they will level out at a high plateau, a plateau that is higher than previous peaks in the housing cycle.”
-David Lereah, Chief Economist, National Association of Realtors [December 2005]
-2006
3. “I don’t know, but I think the worst of this may well be over.”
-Alan Greenspan, [October 2006]
-2007
4. “We have a very strong global economy… and I feel very comfortable with the global economy.
-Treasury Secretary Henry Paulson [March, 2007]
5. “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
-Ben Bernanke [March 28, 2007]
6. “In today’s environment, it is virtually impossible to violate rules.”
-Bernie Madoff [November 2007]
-2008
7. “Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, then rise later in the year and continue to improve in 2009.”
-National Association of Realtors [January 2008]
8. “Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession.”
-US Congressional Budget Office [January 2008]
9. “I don’t think we’re headed to a recession.”
-President George W. Bush [February 2008]
10. “I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
-Ben Bernanke [February 28, 2008]
11. “No! No! No! Bear Stearns is not in trouble.”
-Jim Cramer, CNBC commentator [March 2008]
12. “Later this year, I expect growth will pick up.”
-Henry Paulson, just after Treasury had mailed out 130 million economic stimulus cheques [May 2008]
13. “Fannie Mae and Freddie Mac are fundamentally sound. They’re not in danger of going under…. I think they are in good shape going forward.”
-Barney Frank, chairman of the House Financial Services Committee [July 2008]
14. “My own belief is if we were going to have some sort of big crash or recession, we probably would have had it by now.”
-Canadian Prime Minister Stephen Harper [September 2008]
15. “We’re probably somewhere pretty close to a bottom.”
-Fund manager Barton Biggs [September 2008]
16. “The fundamentals of our economy are strong.”
-US Senator John McCain [Sept 15, 2008]
17. “We remain committed to examining all strategic alternatives to maximize shareholder value.”
-Lehman Bros. CEO Dick Fuld, shortly before Lehman went bankrupt [Sept 2008]
“11. “No! No! No! Bear Stearns is not in trouble.”
-Jim Cramer, CNBC commentator [March 2008]”
For all the idiocy that Cramer spouts, this was in response to a question about whether to take money out of *brokerage accounts* at Bear Stearns (that’s not spon either–find the whole clip and you’ll see). In that limited scope, he was not wrong–perhaps the only time he was not wrong that day.
““I don’t think we’re headed to a recession.”
-President George W. Bush [February 2008]”
Isn’t this just missing a semicolon?
““Home sales are coming down from the mountain peak, but they will level out at a high plateau, a plateau that is higher than previous peaks in the housing cycle.””
Are total home sales lower than at some 19th-c. peaks?
“In that limited scope, he was not wrong–perhaps the only time he was not wrong that day.”
While you are technically right when you watch the clip you can tell he is intentionally obfuscating the question being asked. The clip was part of a segment where people call in and ask about a company and it is implied by the show format people are asking about the stock price of the company they ask about. According to Cramer at the time “Bear Stearns is solid” to give an endorsement of owning BSC common stock.
Cramer is just a speculator, however is not dumb. He could’ve answered the question in a more nuanced way but chose not to. Why? Because BSC management probably gave lots of airtime to the CNBC talking head hacks and in the event BSC survived they wanted continued access to interview top management to fill up their airtime.
In short Cramer was being intentionally deceptive. Probably more of a red flag than just guessing wrong, IMO.