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FHA Policies Discourage Density

At a time when people are flocking to cities, federal policies still heavily promote single-family homes and make it harder for people to buy condos.

After decades of suburban flight, the city is king again. Economists view it as essential for sparking innovation and growth. Environmentalists consider it key to getting people out of their automobiles. And urbanites, many of whom suffered through decades of decline in their cities, view it as a symbol of long-anticipated revitalization. 

But a key part of cities -- their density -- hasn’t always been encouraged by the government, particularly not at the federal level. In fact, many of today’s land use policies hail from the post-World War II era, when planners thought that decentralizing cities would generate middle-class prosperity. This led to policies that directly encouraged sprawl. But perhaps the most pronounced set of policies against density are those pushed by the Federal Housing Administration (FHA).

Since its 1934 inception, the FHA has insured mortgages for more than 34 million properties, facilitating mass homeownership over several generations. But only 47,205 of these plans have been for multifamily projects. This is due to longtime provisions that make it harder for condos to get FHA certification. As late as 2012, 90 percent of a condo’s units had to be owner-occupied and only 25 percent of its space could be for businesses.

Two years ago, some of these provisions were loosened. The owner-occupancy requirements were reduced to 50 percent, and the maximum space allowed for businesses increased to 35 percent. But these reforms still aren’t particularly friendly to condo construction. For example, the 35 percent cap on business space discourages development that often features ground-level retail beneath several residential stories. The owner-occupancy requirements also rule out many condos altogether, namely in expensive markets that rely heavily on tenancy and outside investment. Finally, a provision that forces condo owners to renew their certification every two years is a lengthy and expensive process not required for single-family homes.

These policies mean that, although practically every single-family home can be FHA-insured, only 10 percent of condo projects nationwide qualify. This makes condos less affordable, since prospective buyers seeking private financing without FHA backing face higher borrowing costs and typically must make 20 percent down payments rather than the 3.5 percent typically required of FHA-backed mortgages.

The FHA’s strictness toward condos stems from the assumption that they carry greater foreclosure risks. But this concern is unfounded, according to the National Association of Realtors, which lobbies for easing condo standards. In 2013, the organization sent a letter claiming that delinquency for recent condo projects was substantially lower than for FHA-insured mortgages. By unnecessarily discriminating against condos, says spokeswoman Megan Booth, the FHA squelches a viable homeownership option. “Condos,” she says, are “often the most affordable homeownership in the community.” These policies, she continues, discourage high-rise, mixed-use buildings at a time when so many federal policies promote density.

A journalist who focuses on American urban issues. He can be reached at or on Twitter at @sbcrosscountry.
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