Illinois Mortgage Rates and News

A recent article in the Chicago Tribune talked about the amount of new condo units coming on the market this year here in Chicago. According to the article 5,984 units are due to come on the market this year. Last year there were 4,794 new units, and next year they are projecting 4,160 units. Condo construction has been a big part of the city’s resurgence over the last years, and the new condo units help to revitalize neighborhoods. But with so many units coming onto an already glutted market, at the same time that condo financing is getting increasingly more stringent, we are sure to see some problems.

Over the last few years we have seen a boom in new condos, both in Chicago and throughout the Chicago suburban area. Part of these were new construction condos, and a lot were conversions from apartment buildings to condo units. The condo conversions made sense when the market was flying. If you could buy an apartment building based on the rental income it produced, make some improvements to the property and change the ownership to condominium, the developers could sell the new units at a much higher per unit basis, ensuring a huge profit. The same economics apply to new construction condos, but the lead time between starting the project and finishing can take much longer. Because of the longer lead time, we are now seeing a surge in new units coming on the market, even though the market has shifted and demand is much lower than it was a year or two back.

Even as more condos are coming on the market, condo financing is getting tougher. Mortgage qualification has gone through a series of tightening over the last 9 months, and it is harder for most buyers to qualify than it was before, but this is especially true of condos. Condos carry a higher risk because the lender has to measure the risk of not only the borrower, but also the condo project. When processing a loan for a condo we need to send out a condo questionnaire which asks information about how many units have been sold and closed, how many units are owned by investors and what financial shape the condo association is in. In order to qualify for the best financing, the condo needs to meet Fannie Mae guidelines. Condo projects that have a history have an easier time, but they are still looked at as riskier than a single family home and some lenders require more documentation and charge premium pricing to finance any condo unit. But it gets tougher for new and rehab condos which have to go over a higher hurdle than existing condo units. Fannie Mae (and Freddie Mac) require a higher down payment and pre-sale requirements for early buyers. Not long ago there were lots of lenders willing to offer mortgages for condos that didn’t meet these guidelines, no matter how much they had available for their down payment. We still have lots of condo financing sources, but now lenders are pulling back. With less buyers able to qualify for financing, this means that there are fewer buyers, period.

The article picked up on this trend in the city, but the same thing is happening throughout the suburbs, too. I know of one large apartment complex in Naperville that converted to condo last year, but now has a sign offering condos for rent. The real estate market is slow right now, and the added units keep prices down until the supply of units is absorbed by new buyers, or possibly renters. New construction for single family homes has already ground to near a halt. With less new properties coming on the market this will help reduce the supply and this will act as a kick start when the real estate market starts to pick up again. It won’t be the same with the condo market. When the market for single family homes is on the upswing, condos will still be behind the curve.