MY READERS IS SMARTER THAN I: GLOOMY BANKS EDITION.

An informed reader writes in.

Ezra,

A few quick notes on your housing market post. I’m in the affordable housing realm—mostly rental, occasionally ownership-- so I’d like to think I know something.

1.) This isn’t as crazy as it sounds. A lot of developers of large projects will offer their own financing or partner with a specific lender for the first units in the building. A solid developer should’ve included this in their budget. If they’re creditworthy enough to have access to construction financing, they should be creditworthy enough to afford origination costs and servicing of the mortgages in the short term. Once the building fills up, they’ll probably sell the mortgages off to a secondary market buyer.

2.) This is a way of keeping the developer honest. If I were on the banking side of the equation, and my odds of being paid back are affected by the ability of 70 other unit owners to pay their mortgage and condo fees, I would want the developer to have some concern about the creditworthiness of their buyers.

3.) I think this says more about where banks think the condo market is going than anything else. If they won’t finance loans for buildings under 70% occupied, it means they have serious questions about the absorption rate for units. Further, to qualify for prime rates, a new buyer needs 25% down these days. This suggests that bank’s estimates for future housing prices aren’t so rosy, and might be worse than the Fed’s own worst case scenario.

I agree with all of that, and the final point is particularly important. The banks are not behaving as if they think we've turned a corner.

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