The Financial Times has a good story today on a new twist in the mortgage market. Namely, banks have stopped offering mortgages in buildings that haven't already sold a sufficient quantity of units. In one case, a buyer with "stellar credit" and a 25 percent downpayment couldn't get a mortgage because the luxury development she wanted had only sold three of 46 units.
This is not, on the bank's part, a crazy argument: Developments that don't sell sufficient units have massive problems. The water stops working because the pipes freeze. The heating bill is unpayably high. The units fall into disrepair. The developer defaults and can no longer pay maintenance costs. Eventually, the residents who have bought homes walk away from their mortgages. For a pretty good look at this dark cycle, check out this "This American Life" episode.
But it becomes a chicken-and-egg problem. If you can't get mortgage financing to sell the first homes in a development, you can't sell the rest of the homes in a development, either. Some banks are insisting that they won't offer mortgages for developments where less than 70 percent of the units are sold. Worse, analysts say that 12,000 new units will be completed in New York before year's end, so it's not as if there's any shortage of unoccupied developments coming on market. But if the units can't be sold, then the developers will go bankrupt. And if the developers go bankrupt, the units will fall into disrepair and become less sellable. And if they're less sellable, then...
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