Easing FHA condo certifications and the Collapsing Housing Market

By Deborah Goonan, Independent American Communities

Is the next house of cards getting ready to fall?
Is the next house of cards getting ready to fall?


Experts are beginning to debate whether or not the US housing market is creating another bubble about to burst. Some say that strict Dodd Frank regulations enacted after the 2008 real estate fiasco have prevented the creation of bad loans made to unqualified buyers, and therefore we won’t see another 2008-style real estate market crash.

The problem is that the housing market recovery has been uneven. At the high end of the market, prices have soared to astronomical new heights. But at the lower end of the market, according to the following CNBC report, 18% of homeowners still have less than 20% equity in their property, and cannot afford to sell and move.

The relatively low supply of homes for sale, combined with significant investor activity in the real estate market, has forced prices ever higher, making homes less and less affordable.


Experts sharply divided over whether surging home prices signal new bubble
Matthew J. Belvedere | Diana Olick

But Ethan Penner, managing partner at Mosaic Real Estate Investors, and Shari Olefson, attorney and director of The Carnegie Group think tank, disagree about whether the crosscurrents in the property market are pointing to a bubble.

Penner told “Squawk Box” that he’s not worried about these factors causing a bubble. “We are clearly at very high pricing by historical standards. But that’s true of every financial asset. And in my mind, it’s more of a reflection of [Federal Reserve] interest rates policy than anything else.”

Olefson said she’s concerned about how the 2008 housing crash has changed the way Americans think about homeownership.

“When Americans start looking at housing as something to speculate on,” she said, “that’s actually the biggest indicator I think in this modern-day housing world of a bubble.”



At the same time, the market for luxury properties is starting to implode, and investors – both domestic and foreign – are not buying at the same pace, nor at the same price levels as a year ago. Three markets in a nosedive: The Hamptons, Aspen, and Miami. That market includes not only expensive mansions, but also posh condos selling for several million dollars apiece.


I’ve Never Seen Anything Like This Before” – The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing
by Tyler Durden
Aug 27, 2016 11:58 PM

One month ago, we said that “it is not looking good for the US housing market”, when in the latest red flag for the US luxury real estate market, we reported that sales in the Hamptons plunged by half and home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York’s favorite weekend haunt for the 1%-ers.

We concluded this is just the beginning, and sure enough, several weeks later a similar collapse in the luxury housing segment was reported in a different part of the country. As the Denver Post reported recently, high-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating, pushing Pitkin County’s sales volume down more than 42 percent to $546.45 million for the first half of the year from $939.91 million in the same period of 2015.

Luxury condo sales in Miami have crashed 44%.

According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen.

The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market.

A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.

Other potential buyers are also stepping back: cash sales for townhouses and condominiums, an indicator of investor activity, hit their lowest level in a year last month: 633 transactions, representing a 30.4% year-over-year decline, according to the report.



And so the market collapse begins from the top down. Note at the end of the article that the writer says condo and townhouse sales have been dominated by INVESTORS the past few years – not “homeowners” in the traditional sense of people who actually live in the property they own. (What a concept!)

Could this be why the industry has pushed so hard for the passage of Housing Opportunity Through Modernization Act HOTMA, in order to attempt to force FHA to reduce the owner-occupancy requirement for condo association certifications to a mere 35% from its current 50%? How many units in condominium associations were recently purchased by investors, therefore reducing owner-occupancy levels below 50%?

Now that demand is softening at the high end of the market, perhaps bulk investors are hoping to cash in on sales of “affordable” housing – condos and townhouses – to FHA buyers. But in order to do that, FHA must ease its restrictions on condominium projects, and make an effort to certify more condo associations. The goal is to increase the pool of available buyers for condos and townhouses in condominium associations.

But FHA buyers will have down payments as low as 3.5% and credit scores as low as 580. And according to one lender, borrowers with even lower credit scores may qualify for FHA financing if they are able to come up with a 10% down payment.

Sound familiar?

Isn’t this putting households with limited financial resources at high risk for default and foreclosure?

According to David Dayen, columnist at the Fiscal Times, the dichotomy of residential housing is creating several negative consequences:

This divide has tremendous implications for the country.

First of all, home values remain one of the few ways for lower-income families to gain wealth in America. If they don’t want or don’t feel they can get a mortgage, we have to find other wealth-building strategies.

Second, the continuing trend toward the luxury market could create a price spiral that eats away at affordability, especially if mortgage interest rates rise.

Third, housing groups could continue to push to “open the credit box” when that isn’t the problem, exposing those vulnerable families willing to buy a home to more risk. And finally, the economy won’t expand as much if residential housing is a mere playground for the rich.


If FHA goes through with reducing condo certification requirements, specifically dropping the owner-occupancy ratio requirement to 35%, will it help some institutional investors to sell excess condo inventory in their portfolio? Or will condo owner-occupants finally be able to poke their heads above water in order to sell and move on?

In the next market crash brough on by speculation, when prices fall and struggling condo and townhouse owners begin to default on either their mortgage or condo assessments, will those same investors swoop in like vultures hunting prey?

Dodd Frank regulations or not, who’s to say that real estate industry stakeholders at the top of the food chain are not orchestrating their next feeding frenzy?

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