FHA Change Could Cripple Condo Recovery

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For those willing to pay cash, the condo crash must be like taking candy from a baby.

MGM Mirage made headlines this week, announcing a 30 percent price cut on remaining condos in the $8.5 billion City Center project, which is set to open in December. The Journal also reported that it will be decades before more casinos are built.

On the other coast, luxury condos in the Boston area were recently auctioned off for between 36 and 64 percent of their original price.

Said one auction attendee , ""It may not be a number that the developer wants, but it's a number that he has to accept.''

One penthouse suite sold for $626,000, more than $1 million below than its original price.
While the single-family home market has shown some signs of life, there is still a 12-month overhang of of supply in the condo market, compared to 8.2 in the single-family market, according to NAR data.

Also, the single-family home market is distributed across the country, but condos are often highly concentrated in some of the cities that have been hardest hit, such as Vegas and Miami. In August, single-family home prices were down 12.1 percent year over year; condo prices were down 15.7 percent.

At the same time, new rules from the Federal Housing Authority are going to make it harder for condo buyers to get a mortgage.

These changes include:
  • A 30 percent limit to the number of owners in a development who have FHA financing.
  • A limit on new developments; at least half the units must already be sold before a buyer can get FHA financing.
In the case of the Boston condo auction, only 43 percent of the 178 units have been sold so far, so any of the auction-winners who were planning to use FHA financing better hurry up and close before the new rules kick in.
The new rules go into affect on November 2nd, so their impact may not be felt until next spring, when higher interest rates, no first time buyer credit, and these restrictions may further handicap the recovery of the condo market.
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