2019 marks ninety years since the Great Depression began. The various financial crises our nation has weathered in the recent past weren’t easy, by any means, but a little research into the Depression is enough to make the past feel truly alien. Go back in time not even a century ago, and you’d likely be used to seeing Hoovervilles, the favela-like encampments made out of trash on the outskirts of towns and cities. Driven to destitution and homelessness by the Wall Street crash, people had no choice but to flock to these camps, and the optics didn’t do much for President Hoover’s popularity. FDR, his successor, based his whole campaign around digging the country out of the economic hole, and the Hoovervilles had to be taken care of ASAP. Thus, the beautiful bouncing baby National Housing Act of 1934 was born, and with it came the Federal Housing Administration, an integral part of the New Deal family to make housing and mortgages more accessible. And it’s precisely the FHA that we’re talking about this week – or, more specifically, its new rules.
Now, we’re not quite at Depression levels yet, but we’re undeniably in the throes of a housing crisis. Just ask the saps paying $1,200 a month to live in a glorified hostel. The FHA’s new guidelines on condos are a move to try and remedy the situation, and there’s a lot of optimism for the move. Before we look at the industry’s reaction, though, let’s have a quick overview of the actual changes.
By and large, the new policy is a targeted attempt at promoting new homeownership. One of the main ways the FHA assists the public is through housing loans, even to those with poor credit, and mortgage insurance. In the case of condos, the entire building/project had to be approved by the FHA in order to qualify for mortgage financing. One of the main changes is that, from October 15 onwards, individual condo units will be eligible even if the rest of the building hasn’t been approved yet. This is a return to the status quo, as the rules were changed to building-only approval during the 2008 crisis. It made sense back then, since irresponsible loans are what created the problem, but punishing prospective buyers with decent credit was arguably not the way forward. From mid-October on, as long as the building is “financially stable” (to quote the ruling), individual condos will be much easier to access for new and low-income prospective owners. FHA approvals, be it for the building or an individual condo, will also be extended from two to three years, and the recertification will only require the condo project to update any new information instead of resubmitting everything. Cutting down on bureaucracy makes everyone happy. Up to 75% of a condo project can be certified for mortgages, and if the whole building isn’t approved (yet or at all), if the condominium has more than ten units, up to 10% of them can be FHA-insured individually.
Former rules required at least 50% of condo units be owner-occupied (that is, not empty while for sale or occupied by a tenant) for the FHA to approve them for financial backing. Now, the owner-occupancy rate can be as low as 35%, and a larger amount of the property can be used for commercial spaces. This can be construed solely as opening up possibilities for new owners, but it could also easily be a way to justify more buy-to-let – which isn’t inherently a problem, obviously, but it’s enough to make one a little skeptical of the Housing and Urban Development Department’s stated claim that the FHA’s rule changes are done completely for the benefit of the disprivileged.
HUD Secretary Ben Carson stated, when announcing the new rules, that “condominiums have increasingly become a source of affordable, sustainable homeownership for many families… today, we take an important step to open more doors to homeownership for younger, first-time American buyers as well as seniors hoping to age-in-place.” This gels with the numbers: according to HUD data, 84% of FHA-insured buyers are first-time owners, and there’s certainly a wave of Millennials pounding at the door to find a way out of apartments where they split a two-bedroom between eight people. Condos are in demand, and the new rules are an incentive for further construction and refurbishing. But you’ll understand a little distrust towards statements coming from Carson, who famously doesn’t know the difference between REO and an Oreo.
If it makes you feel better, industry responses to the changes have been generally positive, with economists like Frank Nothaft of CoreLogic asserting the new policy would level the field for new buyers, and the trade association CAI praising the move. Depending on how the market responds, the new rules could be a real game-changer. If not, well, rustic is back in style, and what could be more rustic than a newly-minted Trumpville?