Surging fees put the squeeze on buyers
Pockets of the US housing market remain fiercely competitive, with bidding wars and six-figure offers over asking still common in some areas. But the condo sector, by comparison, is increasingly emerging as a weak spot.
That contrast has rarely been more apparent than it is today, according to Rate’s senior vice president of mortgage lending Sammy Iliopoulos. He told Mortgage Professional America that while he’d noticed huge competition for certain property types, that wasn’t the case in the condo sector – with little sign that the outlook there is about to improve.
One of the most challenging environments in at least a decade has emerged for the condo market, Iliopoulos said, with a large part of the pressure stemming from evolving agency rules.
Fannie Mae and Freddie Mac have recently released new guidelines that, while containing some positive updates, also introduce a fundamental shift in how condo buildings must manage their finances.
Beginning on January 4 of next year, the Reserve Funding Baseline used by Fannie and Freddie will increase to 15%, from its current level of 10%. A mortgage lender considering a loan application for a unit in an association must review the association’s budget, check for red flags, and review other documentation and inspection reports.
That’s a big negative step for the condo sector, according to Iliopoulos. “I think this is probably, as far as I can remember, the worst condo market we’ve seen in 10 years,” he said. “The biggest, most drastic change is going to be the budgetary concerns.
“I don’t know of a single condo that actually has their budget allocate 15% to reserves. I think that’s going to be a big killer for a lot of people.”
A long shadow over the condo landscape
On paper, healthier reserve funds should strengthen buildings and protect homeowners. In practice, though, Iliopoulos sees the change creating a significant barrier for many existing associations, especially in dense urban areas.
“Obviously you’re not going to see many high-rises in farmland, but certainly you’re going to see this as a massive issue [in downtown regions] going forward,” he said.
While the rules aren’t yet in effect, they’re already casting a long shadow over the condo landscape. Some agency changes are more straightforward, but the broader picture was described by Iliopoulos as a “ticking time bomb” for buildings that aren’t proactively adjusting their budgets and governance.
Earlier this month, LendingTree’s chief consumer finance analyst Matt Schulz told MPA surging HOA or condo fees had already squeezed millions of homeowners.
“The amount of money that we’re talking about, where some people are paying $500-plus a month for an HOA fee, that’s just a wild number,” he said. “That’s a really significant amount of money. And chances are if you’re paying that much, you’re probably living in a high-end community or an upscale condo. But still, $500 a month is a lot of money.”
Changes making condo purchases increasingly unappealing
For purchasers who are already contending with high rates and affordability constraints, an extra layer of cost or complexity could push them toward single-family homes or townhouses instead.
“What eventually is going to end up happening is you’re going to see HOAs [Homeowners Associations] increase their fees,” Iliopoulos said. “They’re going to have larger increases because they need to account for that 15% reserve allocation – an additional percentage increase.”
The administrative burden could also be about to grow, with property managers and management companies required to attest to more detailed financial and physical-condition information about their buildings. That could feed into expanded condo questionnaires and other duties.
The combined effect, Iliopoulos said, could be higher ownership costs that don’t show up in the usual payment calculations.
“These fees are going to be driving up the cost of things that have nothing to do with your taxes, nothing to do with your homeowner’s insurance, and nothing to do with your mortgage,” he said. “It’s going to become less and less desirable to live in some of these complexes.”
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