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Entering Homeownership, Apartment Style

person handing keys to a couple (detail).
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The night my wife and I got married was the first night we slept in our new (to us) co-op apartment in a suburb of New York City. Thus began a life of homeownership that today spans several properties in multiple states, accommodating our personal wants and my professional needs.

But before we could build this mini-portfolio of property, we had to take that first step into the homeownership market. With some help from my wife’s parents, we were able to put 20% down on an 840-square-foot, one-bedroom apartment in a 10-year-old building in Yonkers, New York. The total purchase price was $56,000.

We stayed in that unit for six years, the last three of which involved sleeping in the living room while our newborn daughter took the bedroom. By the time we finally traded up to a two-bedroom, two-bath unit, our first apartment had doubled in value. That meant we had enough to get a loan on the second apartment, with cash left over for the down payment on a Florida vacation home that we still own (now fully paid off) 30 years later.

Climbing onto the real estate carousel wasn’t easy, even back then. As I mentioned, we got some help with that first down payment. But young adults today have it much harder, burdened as they are with student loans, a limited inventory of starter homes and correspondingly sky-high prices.

In some places and situations, as in ours, starter homes are not actually homes in the sense of being a single-family house. A co-op apartment technically does not even involve the purchase of real estate. Instead, the buyer becomes a shareholder in a corporation that owns the apartment building. Share ownership includes what amounts to a perpetual lease on the apartment, giving the shareholder the right to occupy it. But to buy shares, or to sell them later, you typically need the approval of a board of directors consisting of some of your neighbors. They can, and frequently do, deny such permission for almost any reason (save discrimination prohibited by law), or for no reason at all.

Co-ops are a homeownership arrangement that is almost entirely confined to the metropolitan New York region, with a few outliers in places like South Florida that have attracted ex-New Yorkers over the years. Condominiums, in which you actually do purchase real estate in the form of a dwelling unit in an apartment or town house complex, are much more common in America. These high-density housing units may be all that is physically or financially accessible to young adults who want to live in urban core areas, rather than spread-out suburbs where private houses and personal yards are more the norm.

So it is noteworthy that the federal government is trying to make it easier for first-timers to use condos to get into the housing market. The Federal Housing Administration recently announced that it will make many more condo units eligible for loans with lower down payments.

An FHA-backed loan is designed to help new homeowners enter the real estate market. The agency insures the loan, which allows buyers to proceed with smaller down payments, and sometimes with reduced closing costs. In some cases, the down payment may be as little as 3.5%. FHA-backed loans also do not require as high a credit score as conventional mortgages typically do. However, borrowers must meet a variety of criteria to qualify. For first-time home buyers with their eye on a condominium, this has long included restricting their search to properties the FHA deems eligible. Most FHA loans have been used to buy single-family homes, especially since the agency tightened lending standards in 2008.

The updated rules expand the supply of eligible condominiums. The agency estimated that it could insure as many as 60,000 additional condo loans annually under the new guidelines. As of Oct. 15, the FHA will consider loans for individual condo units, even if the entire building has not been certified in advance. Such loans will only be approved if no more than 10% of the building’s units are held by FHA borrowers. In condominium buildings with fewer than 10 units, no more than two units can be FHA-insured. The agency is also extending the deadline for recertification for approved buildings from two to three years. And the FHA says it will insure more mixed-use projects that combine commercial and residential spaces.

There is no denying that allowing buyers to acquire property with as little as 3.5% down carries significant risk. Even a slight decline in property values puts those homeowners underwater, which means owing more on the unit than they can get back by selling it. Most of us remember how badly this turned out during the housing bust of a decade ago.

It is also true that homeownership is not an automatic ticket to rapid gains in wealth. Housing values do not always appreciate quickly, if at all. Money homeowners spend on loan interest is money that they can’t spend or invest elsewhere. On the other hand, the mere act of paying down and ultimately paying off a mortgage is a form of forced savings, as the equity built up in the home increases even without a rise in the home’s value. Property ownership also is good for building a credit rating – the better to get advantageous borrowing terms for future transactions. It provides collateral for borrowing, too.

That first step into the housing market is the hardest. The buyer has to take it carefully and thoughtfully, and ideally in a community to which he or she is prepared to make a long-term commitment. After all, hoped-for short-term windfalls do not always pan out. But homeownership is overall a good thing. Making it more widely accessible in a thoughtful way will do more good than harm.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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