December 05, 2008

Hitting the skids

What has been obvious to lenders for months is finally getting some attention from the Statesman. The condo market has hit the skids...

PhotobucketSales at the four towers under construction — the Austonian, the Four Seasons Residences, Spring and W — have slowed to a crawl since the financial crisis exploded in August, although developers all say they have contracts for 45 percent or more of their units.

"In the last two months, what we've seen in other parts of the country for the last two years has finally gripped the psyche of Austin," said Devlin McNamara, a vice president with Bank of America Mortgage, a preferred lender on many of the projects. "Everyone's so blown away by the volatility and uncertainty in the markets that they're hesitant to pull the trigger on anything at this point. ... They're mulling it over in their heads but won't actually commit to anything."

Since Fannie Mae stopped approving condo projects, the market for mortgages on condominium projects has functionally dried up. While many lenders are still writing the loans (including me), we're doing so with many restrictions. Which means you gotta prove income and put some money down. The big surprise out there? A bunch of the units already sold were financed with... wait for it... OPTION ARMS. Those lovely loans will start to reset next year. For any that are based on LIBOR, it's going to cause some problems not to mention a forced recast when the loan balance exceeds the original loan amount by 10%.

If those start to go bad, you could easily see a 50% drop in values on the existing units and the new units will sit vacant. For a while.

Ironically, the one thing that may end up saving the market downtown is a steep price decline. There is tremendous demand for housing in the CBD, the problem even now are the prices. The smart developers who will end up riding this out are the ones who change to building affordable projects with prices under 280m, at least for the majority of the units. And it can be done.

Posted by mcblogger at December 5, 2008 10:49 AM

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