A subtle chain of events that is impacting the sale of condos.
FHA is removing many condo developments from its approved list of condo complexes. If the condos are in a price range that buyers will typically rely on FHA financing, removal of FHA approval will also remove many of the buyers. FHA has put controls in place so not to concentrate too much risk in any condo development. One of their controls pertains to limiting the number of FHA loans allowed in the development. As soon as the limit is reached the development can be pulled from the approved list.
There are many reports that FHA is now backing about 30% of all loans, so removal of the condo complex from the approved list can instantly remove 30% of the buyers.
Values plummet, causing more foreclosures, causing values to plummet some more, causing more foreclosures
Owners who made perfectly rational purchase decisions are now faced with devastating declines through no fault of their own.
HOA fees go up, values go down
Increased defaults can cause the HOA fees to increase for the remaining owners, which can cause even more defaults and the cycle continues. FHA also examines the HOA reserves. The lower the reserves the lower the chances that the complex will be reapproved by FHA. Also, FHA monitors delinquency rates.
Investors don't need FHA, investors buy, rentals abound, values go down
Many condos fall to foreclosure and eventually get bought by investors who use them as rentals. That lowers the values even more, and further diminishes the chances of FHA reapproval. One of the FHA tests is ratio of owner-occupancy.
There is nothing evil or sinister about this cycle, there are no bad guys. It's just an unfortunate cycle.
These dynamics will be different for different condo communities in different cities and different price ranges.
Instead of high condo fees, buyers can buy more house for their money
My experience listing condos in the $100,000 to $130,000 range in Louisville indicates great difficulty in finding buyers who don’t rely on FHA loans. Since condo fees are rising to compensate for the loss of fees from defaulting owners, many buyers balk at the combined mortgage plus condo fee and opt to buy a house and cut their own grass. Sellers are having a terrible time selling their condos.
It amazes me that affordable condos in beautiful developments that only are only 3 to 10 years old are taking such a beating in the marketplace because of all these factors.
Short sale approvals are harder to get
The short sale lenders also seem to reject offers that reflect the new lower market value because they’re stuck on the old value that doesn’t exist anymore. Again, this is my experience, in this price range, in Louisville, Kentucky.
Now when sellers call me and say "I want to sell my condo, and I owe too much" I must do extra research to make sure I'm not giving them unattainable false expectations.
Dave Halpern
Louisville Short Sale Experts Realtors
(502) 664-7827
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