Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #74 • July 2011
Getting Sober in the New Economy
Are Rentals a Better Solution for Affordable Housing?
by Tyler P. Berding, Esq.
"The crux of (the) analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners and the market is in the protracted process of evicting this group."
Sometime in the early sixties, a large California developer opened its first development of condominiums for sale. They were offered at rock bottom prices. A home for a single family that could be bought for $10,000.00 was big news even then. The desire for suburban housing that could be built in high densities and thus be affordable was apparent. Condos could be sold in volume which meant higher profits for home builders. Other developers followed suit, and condominiums became a ubiquitous part of the national real estate market. Those home buyers who could not afford a single family home on its own lot could still get in on the real estate ownership bandwagon. Low interest loans backed by the government gave many low and moderate-income wage earners the opportunity to purchase a home. Most people could buy with 5% or no money down. Veterans could buy a new home for nothing down. Condominiums, and their planned development cousins, became the darlings of the real estate industry and they were constructed by the carload.
A huge number of former renters became homeowners due to the massive availability of product and government-backed financing. In fact the decline in rentals was roughly equal to the increase in condo ownership during that period, meaning a lot of renters became owners. An industry, as well as a type of housing, was born. But multi-family developments were not new, even in the Sixties. For over a hundred years, rental apartments provided affordable housing for millions of people in urban areas. What was new was offering these units for sale. That's exactly what condominiums are - apartment units that are sold to individual owners. In every other respect, they are just like the apartment buildings that are familiar to everyone. The big difference is that the maintenance and repair of these condominiums is now the responsibility of the owners - there is no landlord to manage the repairs and foot the bill.
Until the mid-nineties, the flaws in the condominium model were largely unknown. Even though the occasional recession slowed things down for a year or two, the real estate market was hot and price appreciation, especially during the five years preceding 2008, was on fire. The huge real estate “bubble” encouraged more people to move from rentals into condos using low-cost financing. Developers could sell anything that could be built, as fast as they could build it. The real estate market was a party. Buyers were seduced by cheap financing and the promise of unrealistic rates of return. But the expectations and the euphoria went south as we eventually sobered up and found that a lot of those sometimes hastily-built condominiums were racked with not only construction defects, but also suffered from underfunded reserve budgets that left later owners to foot a large repair bill.
If that wasn't bad enough, the recession that began in 2008 collapsed the condominium market along with the market for other types of housing. A lot of those former renters who were enticed into buying condominiums by low initial-rate financing had assumed a rapid increase in their equity and an easy, profitable, eventual transfer of their interest. Those buyers are now facing unaffordable mortgage payments. With no appreciation to borrow against, they are rapidly falling into foreclosure. “Short sale” has become a term of art. A recent article in Business Week bluntly summed it up this way: "The crux of (the) analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners and the market is in the protracted process of evicting this group."


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