Condo Market Shakes Out
It's a great time to look for a condo -- but it's likely to get better in the months ahead.
Whether you're looking for a vacation home or to downsize your primary residence, the surplus of condos in some of the nation's hottest regions clearly makes this a buyer's market. That includes places like San Diego, Phoenix and Las Vegas, where both builders and investors are trying to unload properties into an already soft marketplace.
Of course, if you wait until later this year, you might land even get better deals. That's particuarly true in southern Florida, where the shakeout in condo prices isn't over.
“The pressure on developers to sell will continue to grow, not decline, over the next few quarters because there will be more and more new inventory coming onto the market,” said Ron Witten, founder of Witten Advisors, a Dallas-based multi-family market research and advisory firm.
Indeed, as one of the most speculative areas during the housing boom, many developers started condo projects just as the market peaked. Now, those units are set to hit the market this year and next, which is why some experts are advising buyers to bide their time. In fact, some 200,000 new units will be completed by 2008, according to Bernard Markstein, senior economist for the National Association of Homebuilders.
“From a buyer’s perspective, there would be more risk in buying today rather than buying nine months from now or something in that range,” Witten added.
Builders won’t be the only ones looking to sell. Speculators who rushed in and bought condos by the handful in hopes of flipping for a hefty profit later on will also be looking for buyers, as will many of the lenders themselves. Foreclosures are on the rise because many individuals bought homes when credit came easy, often with enticingly low introductory interest rates or little money down.
“The poster children for excess construction generally reside on the coasts in markets where home price appreciation have boomed,” said Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research firm, which expects further price declines throughout 2007. “That includes Florida - especially Tampa, Miami and Orlando - Chicago, Las Vegas, Palm Beach and San Diego.”
While the ripple effects of the boom are apparent across the country, prospective condo buyers need to closely evaluate their local markets before deciding to hold out or take advantage of the relative deals on the market now. For instance, in some markets like Washington D.C., developers are already properties off the market and renting them until the market shows signs of stabilization, real estate consultants said.
Florida Looking Vulnerable
A closer look at each of those markets reveals varying conditions among cities, even neighborhoods. Florida, where prices were artificially inflated by rampant speculation, has yet to see the full effects of the housing downturn: some towns on the west coast have already seen price declines upwards of 20%, but it might pay to wait to buy a condo in Miami-Dade County.
Indeed, about 20,000 new condos are set to hit the Miami market by the end of 2008, compared with about 11,000 new units built and sold in 2004 and 2005. While the median condo price has dropped about 8% there over the past year, some experts believe prices will fall considerably more.
“Florida is perhaps the state that has seen the most speculative real estate purchases and that’s why it could be subject to the largest price decreases,” said Jack McCabe, housing analyst and chief executive officer of McCabe Research & Consulting in Deerfield Beach, Fla. “The market hasn’t bottomed by any means. If there are four gears, we are really only hitting the second.”
That said, if you’ve found an affordable piece of paradise with an ocean view – and you plan to stay for a while – don’t automatically pass it up. “If you are thinking about living in it as a primary residence, and you expect to stay put for five years or longer, it might not be a bad time to buy because there are some incredible deals out there,” McCabe said. “But it’s our belief there might be even more incredible deals in the next 18 months ahead.”
In addition to bargaining power, buyers can expect a variety of incentives, from paying down points on mortgage rates to a two-year lease on a Mercedes. “I’m sure we’ll see even more creative gimmicks next year,” he added.
Sellers are offering incentives on condos in Washington D.C. equivalent to about 5% of the purchase price, whether it’s a free parking space or assistance with closing costs. “They have become more frequent than a year ago,” said William Rich, vice president of Delta Associates, a real estate research and advisory firm in Alexandria, Va.
With about 21,500 new condo units on the market – that includes D.C., as well as the municipalities of Arlington and Alexandria, Va. – he expects prices to remain stable or decline by as much as 5% and begin appreciating again in 2008. “There’s still quite a large number that are unsold and being marketed right now,” Rich said, adding that a number of projects have converted to rental properties, a trend he expects to continue.
Buyer’s Market in Las Vegas
Luxury condos will continue to hit the market in Las Vegas as speculators attempt to flip properties. In fact, there's more than 11,000 units under construction that have been pre-sold - largely to investors – which means they’re likely to come back onto the market. There are another 12,000 units planned and being marketed now, according to Brian Gordon, principal of Applied Analysis in Las Vegas. “Projects actively seeking buyers are seeing some challenges given the slowdown in the pace of sales the rise in potential supply,” he added. “That’s making it challenging for many of these to go forward with construction.”
While several projects have been cancelled in recent years, “there is still a lot of inventory to burn through,” says John M. Restrepo, a real estate consultant in Las Vegas. “Don’t be afraid to make a lower offer. There is a lot of product out there.”
Lower-rise condo developments in suburban areas have seen price declines, while new luxury high-rise unit prices have only flattened given high construction costs, experts say. The impact of foreclosures has on pricing remains to be seen, though Nevada has been registering the highest rates in the nation. In February, foreclosures rose 77% from the year prior with one foreclosure for every 278 households, or three times the national average, according to RealtyTrac.
Should buyers take the plunge now? “If they’re looking for housing options short-term and don’t expect to be in the market long-term, it might be worth waiting,” Gordon said. “But if your planning on being in Las Vegas beyond 2008, we would expect appreciation to return to more normal levels beyond 2008.”
Phoenix, San Diego
In the suburban areas of Phoenix, such as the Tempe-Chandler area and the North Black Canyon Corridor, condos are facing steep competition for buyers with single-family homes. While those areas have seen a decline in prices, markets with more amenities have seen a drop in sales versus last year, though prices have remained steady. Those markets include the Cambelback Corridor (including Scottsdale Fashion Square and Biltmore areas), as well as downtown Tempe.
“The big concern is there are so many projects under construction or planned that if a lot of this inventory hits, even in these highly desirable areas (including downtown Phoenix), we may see prices soften,” said Steve Pritulsky, principal of Southwest Growth Partners, a real estate consulting and development company in Phoenix. “It hasn’t happened, but it seems like we are on the verge of that happening. It depends on how many of the planned projects actually come on line.”
In San Diego, the volume of unsold homes is up 38% from last year, with 6,300 units on the market; 84% of unsold units are condos, according to PP&R. During the boom, San Diego also saw nearly 70% of borrowers use adjustable rate mortgages with low introductory rates; many of those are on the verge of adjusting to higher rates. “Rates are still low, but relative to the introductory rates, the readjustments will be significantly higher,” P&PR’s Mulvee said. “Now that credit standards have tightened up, getting refinanced is really difficult now. That’s really troubling.”
Stellar Properties Will Sell
Remember, timing the real estate market is as tricky an endeavor as timing the stock market. As with all investments, individuals need to do a fair amount of research. If you’re looking to buy a condo that’s yet to be developed, check the builder’s credentials with their lender and the Better Business Bureau.
“You have to assess your own tolerance for risk,” added Blanche Evans, editor of trade publication Realty Times. “Can you tolerate possibly paying a little more while the market continues to go down? Nobody buys at the lowest price and sells at the highest price.”
And some properties in coveted locations will do well, regardless of market conditions, especially in fast-growing cities with favorable demographics and healthy economies.
“In most markets, you are going to see a softening of pricing simply because the supply demand balance is in favor of the buyer right now,” said Ron Brock Sr. of Pierce-Eislen, a Scottsdale, Ariz.-based real estate research firm specializing in commercial apartments.
“But there is always the anomaly – the property that sells because the location is so good that it sells anyway.”