Saturday, August 25, 2007
Condo market is in trouble
--The condo market, while tied to the housing market overall, behaves differently under stress. While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now.
--Typically, condo developers are required to pay off construction loans shortly after construction is completed. But with sales stalled, more developers are defaulting, creating headaches for banks and real-estate funds that financed the projects.
--The percentage of bank construction loans overall that are in default has risen to 2.3% in the second quarter of 2007 from 1.0% at the end of 2005 .
--One of the biggest condo lenders, Chicago's Corus Bankshares, has seen its $3.7 billion portfolio of condo loans deteriorate.
--Underlying the defaults was a loosening of lending standards. In the past, wary of the high risks posed by condo sales, lenders such as commercial banks would give money to condo projects with the understanding that if the condos didn't sell, the developer could rent them and still repay the loan. That would limit the amount banks would lend, because the cash from renting units is slow and steady and can cover a smaller amount of debt than the amount generated by selling all units within a year of completion, as most condo projects aim to do. But in the latest boom, a host of nonbank lenders began throwing cash at condo projects, allowing developers to pay prices for land and buildings such that they could pay back the loans only if the units sold at high prices.
--
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment