While this current economic crisis has certainly been caused, at least in part, by the effects of poorly placed restrictions on mortgages and mortgage lending for a variety of types of real estate, mortgage lending has seen a pendulum that threatens to make economic recovery difficult at least in the realm of condo buying.
In the past and in the development of our current economic struggle, mortgages for a variety of types of homes were fairly easy to obtain, even if they posed particularly low risk to lenders. Many of the homes purchased with these subprime loans are now back on the market as bank-owned and foreclosed properties.
At present, however, the swing of the pendulum is sharply the other way from the logic of lending, at least for condos. Lenders are making it much harder to get a condo loan to reduce the risk on that type of loan; condos are generally more risky than a single-family home to begin with. So there are some strict requirements in place to prevent lenders from taking on much of that risk, including approving home loans where the buyer is buying a building that is 51% owner-occupied, at most only 10 % of condos can be owned by a single investor, buyer must provide 25% down payment and other strict regulations related to condo construction.
Buildings with a high percentage of foreclosures or rentals are more difficult to obtain loans due to the higher risks associated with them and the potential for property values to fall when owners who are desperate to sell slash condo prices. .
Condo prices have come down pretty clearly by almost 20% since last year. In some places, years of excessive construction have created a saturated market that is doubly struggling because there are fewer buyers to buy the excess units.
The purpose of the new trends in condo lending is to help correct the careless risk-taking that helped cause the economic crisis, but it may be too far a pendulum to be really helpful. What needs to happen to support the economic recovery is not just more financially responsible lending, but also more sales in general. The scarcity of loans for the sale of condos makes it more difficult for anyone to buy them, leading to more buildings that people can’t get loans to buy. This creates a vicious cycle that we hope we can get out of before the condominium real estate situation worsens.