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Wednesday, August 9, 2006

CoOp Boards as Saviors of the Housing Market?

That's the interesting thesis of an article in today's New York Times.  The basic argument is as follows:

(1) New mortgage products like Option Arms and zero-down mortgages greatly increase the likelihood of a market crash because they encourage people to buy houses that they really can't afford.  This seems to me to be absolutely correct.  Many of these mortgage products are designed to have low initial payments or to have payments that increase dramatically if interest rates increase.  (I've discussed some of the problems with these mortgages before).  If interest rates go up at the same time housing prices are in decline, people with this type of mortgage (especially those with little or no equity in their homes) will be forced to sell.  This in turn will put downward pressure on the market, increasing the likelihood of a crash.

(2) By imposing strict financial qualifications for buyers, New York Co-Op boards protect the New York housing market by making sure that buyers aren't getting in over their heads.  I think there is a lot of truth to this -- you can't buy a New York Co-Op with zero down or if you aren't making enough money to be able to afford the home.

The downside of Co-Op boards is that they have a tendency to be arbitrary and annoying.  For those of you who have never lived in New York and haven't heard the horror stories, suffice it to say that one of the big selling points of my Condo building in New York was that it wasn't a Co-Op.  It seems to me, though, that a lot of the protection offered by the Co-Op boards could be achieved without all of their irritating qualities simply through covenants that can be enacted by any type of common-interest community -- Co-Op, Condo, or your basic suburban housing association.  A simple requirement of 80% or 90% financing would help at least a little bit.  Prohibition on option-ARMs or interest-only mortgages could also work.  Or a combination of the two:  you can only have an option-ARM or interest only mortgage only if you have X% equity in your home.  Of course, this type of restriction limits the number of potential buyers for a home, which could depress the price of the home.  I could see certain markets, though, where many buyers would be attracted by the protection to home values in a declining market offered by the covenants.

Ben Barros

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