Condos have had a rough go of late in Greater Phoenix and nationally, and it is worth considering the multiple headwinds that are buffeting this sector of the housing market. The first behind-the-scenes factor is that many condo complexes were built to be heavily amenitized in order to attract buyers. While that is a benefit on the lifestyle side of the equation, the costs add up quickly. Utilities, labor, equipment, management, and maintenance expenses and master insurance premiums are all up—along with HOA dues and special assessments. Although the Federal Reserve held rates steady at the July 29 meeting, they reiterated their commitment to bring inflation back down to the 2% target, which could indicate a future rate hike and no relief on mortgage rates. The market is already reflecting this uncertainty, and rates for 30 year mortgages are currently 6.75% – 6.88%
Although luxury-tier condo owners may be able to absorb those additional costs, the same is not true within the lower/middle market, since buyers may have already stretched their budgets to make a purchase and are struggling to keep up with inflation. As a result, the condo dynamic reflects the bigger affordability dichotomy in the market: Entry-level and move-up are flat, while luxury demand and prices continue marching upwards.
As if it wasn’t already difficult enough in the condo market, sellers and buyers may find financing gets tougher in the coming months. On August 3, Fannie Mae and Freddie Mac will begin implementing numerous guideline changes to their condominium underwriting standards that were announced in March. The first is a new “Full Review” process that requires lenders to examine financial and structural aspects of a condo—and to get documentation from the association—rather than just focusing on buyer qualifications. Next, on January 4, 2027, associations will need to increase their allocation of their annual budget to a replacement reserves account from 10% to 15%. Those are the funds dedicated to maintaining infrastructure components through their usable life, whether elevators, pools, tennis courts, sidewalks, etc. Associations with recent, qualifying reserve studies and funding levels may be exempt; for those that do not, another HOA fee hike can be anticipated.
Originally shared via roiproperties.com. Click here to read the full newsletter.