How the FHA subverts market forces, incents sprawl
Anti-market zoning laws are only one of the ways the government promotes suburban sprawl: the FHA actively finances it. The Market Urbanism Report looks into the economics of government favoritism for single family homes and bias against density.
"The FHA was formed in 1934, amid a lagging Depression-era housing market, to insure long-term mortgages that required little money down. It began by engineering a single-family housing agenda that prevails today. According to its website, the agency has "insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio." The Washington Post adds that "through August of [2015], condos represented barely 2.8 percent of total FHA loan volume."
"Is the FHA's wide discrepancy a reaction to organic consumer preferences? Hardly. Instead, the agency has simply made obtaining mortgage insurance for single-family homes easier, requiring only a 3.5% down-payment. Meanwhile, the certification process for condos is much harder, and if projects don't qualify, then prospective buyers must provide around a 20% down-payment, have excellent credit and pay higher interest rates.
"According to Next City:
As late as 2012, a condo project received certification only if 90 percent of its units were owner-occupied (as opposed to investor-owned or renter-occupied), while only 25 percent of the building space could be used for business purposes. The agency also forbade the insuring of units unless they were inside condo buildings where every other unit qualified for insurance. Lastly, a provision existed forcing owners to attain “certification” for insurance — something not required of single-family homes. This certification must be renewed every two years, in an expensive process that typically takes six months.
"As a result, only 10% of condo projects nationwide qualify for FHA insurance. Lacking these government protections enjoyed by single-family home buyers has naturally discouraged condo buyers, which then reduces demand for existing condos and prevents new construction.
"According to Megan Booth, a policy representative for the National Association of Realtors, the longtime rationale for these tighter guidelines was that condo buyers were generally lower-income, and having the FHA insure them carried more risk. But she explained that these stereotypes are outdated, as cities gentrify and condos attract wealthier demographics. A policy letter that the NAR wrote in 2013 claimed that delinquency rates for condo projects were actually lower than the national average."
Read the whole thing here.