Experts: Plummeting prices have rendered condos nearly worthless

Experts say changes to FHA-backed loans could force some unfinished buildings into foreclosure

 

 

by J. Craig Anderson - Oct. 9, 2009 03:02 PM

The Arizona Republic

 

 

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.

 

The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space.

 

In addition, no single investor - including the developer - may own more than 10 percent of the units in a particular project. That particular restriction alone creates a catch-22 from which condo builders most likely cannot escape, said mortgage originator Jill Hoogendyk of Wallick & Volk in Glendale.

Another rule that has sellers and brokers scratching their heads prohibits FHA loans in condo developments that aren't "primarily residential," which could be taken to mean the FHA won't guarantee loans in future mixed-use projects.

 

"I'm predicting that what we'll see is whole condominium complexes sitting empty," Hoogendyk said.

 

The new rules are a reaction to substantial losses on federally insured condominium mortgages in the past year, government officials have said. In Maricopa County, condominium foreclosures have outpaced condo-unit sales by nearly two to one since Jan. 1, according to real-estate analyst Zach Bowers of Ion Data in Mesa. According to Bowers, lenders foreclosed on about 8,200 condo units between Jan. 1 and Sept. 30, compared with about 4,900 units sold during the same period.

 

"It's been pretty much consistent throughout the year that no one's buying condos," Bowers said. "The whole market seems to have stagnated."

 

The new restrictions won't directly affect high-end, luxury condos that sell for more than the Federal Housing Administration's roughly $350,000 lending limit, but Hoogendyk said FHA loans are by far the most commonly used loan among condo buyers. Without that option, buyers would have to obtain conventional loans, which are more expensive and difficult to qualify for, or they would have to pay cash.

 

Hoogendyk said the FHA rules amount to a death sentence for the Phoenix-area condo market, which had only been kept on life support by the continued availability of FHA loans.

 

Creating a special restriction that only applies to one type of housing is discriminatory, local critics said, and it punishes existing condominium owners by making their properties nearly impossible to sell.

 

"They'll lose everything," Hoogendyk said, "And quite honestly, they'll move just because they're afraid to live there."

 

Bowers said there are Phoenix-area condominium projects in which only a handful of buyers purchased individual units. The only viable use for such projects would be renting the unsold units as apartments, which many condo building owners already have been doing.

 

However, most have continued trying to sell units, hoping to eventually sell out as the real-estate market recovers. Because of the new rules, local and national experts seem to agree that owner-occupants in half-empty condo buildings are now practically doomed to foreclosure. Hoogendyk said the last thing Arizona's real-estate market needs is government decisions that hinder its recovery.

 

"They should be making it more attractive to buy condos, not less," she said.