June 27th, 2011, posted by Brandon
The best I can tell from some quick internet research, financing your home became possible in the United States in the early 20th century, primarily through your relationship with your local banker. We have come a long way since 1900 in the home financing market as buyers today are able to finance purchases with as little a 3.5% down payment thanks to the FHA option. Values have also come quite a long way since 1900 in part because of our ability to leverage other people’s cash based on our ability to pay it back over time.
What would happen to values however if financing wasn’t available at all? This may seem like a farfetched idea, but the reality is this is happening right now in certain segments of today’s market place – namely mixed use residential and commercial buildings.
During the real estate “boom” years of the early 2000s may projects were developed as mixed commercial and residential dwellings, particularly in popular urban areas across the country. The concept of living where you work/play was (and still is) very popular leading to a number of residential buildings with large commercial components.
The problem is Fannie Mae adapted a rule that says no association can have more than a 52% commercial component and since most banks follow Fannie procedures, many of these mixed use buildings are not financeable on the standard mortgage market. This is forcing cash sales in these buildings and cash buyers usually want a big discount to use their cash – which is pulling the values down for everyone else in the building.
I currently have a listing in one of these buildings and my client is forced to wrestle with the question – how much is his condo worth when the purchase is restricted to all cash?
I suspect we are about to find out.