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Will condo wave swamp market?

By Matt Goyer October 22, 2007

This past Sunday the Seattle PI had an article on the condo market, Will condo wave swamp the market?

Interesting quote:

Half of the approximately 1,600 condos Gardner expected to hit the market in 2010 still are looking for financing. Scaling back projects actually would lower the risk of overbuilding and help prevent Seattle from becoming the next Miami, he said.

The decrease in potential competition is one reason why downtown’s high-end ESCALA building will increase prices 5 percent as of Dec. 1, said John Midby, a principal of developer LEXAS Cos. Midby cited a 40 percent increase in construction costs in the past 18 months, a relative lack of places to build in-city condos and Seattle’s strong economy.

I think the market is now fairly balanced. The days of specuvestors getting a free ride is over and there is enough inventory to give buyers selection but not enough to give them the bargaining power they’d like.

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32 responses to “Will condo wave swamp market?”

Jason says:

October 22, 2007 at 3:30 pm

Perhaps in downtown there’s an opportunity for growth, but in First Hill / Capitol Hill there are new buildings and conversions going up everywhere. As they compete with the growing inventory of existing condos that are slowly trickling down in price (e.g. a Pike Lofts unit I saw recently has been slashed from $425 down to $385 and now $375: http://www.redfin.com/stingray/do/printable-listing?listing-id=643845 ) I think we’ll see some projects revert to apartments or go down in price before they even find buyer #1. Owners seem eager to cash out while buyers are less and less likely to speculatively buy condos as investment properties around here — the reason for the boom in the first place.

Then again, that light rail station comes online in just two years. Mass transit tends to have a very positive effect on property values. Decisions, decisions!
Jason says:

October 22, 2007 at 7:30 am

Perhaps in downtown there’s an opportunity for growth, but in First Hill / Capitol Hill there are new buildings and conversions going up everywhere. As they compete with the growing inventory of existing condos that are slowly trickling down in price (e.g. a Pike Lofts unit I saw recently has been slashed from $425 down to $385 and now $375: http://www.redfin.com/stingray/do/printable-listing?listing-id=643845 ) I think we’ll see some projects revert to apartments or go down in price before they even find buyer #1. Owners seem eager to cash out while buyers are less and less likely to speculatively buy condos as investment properties around here — the reason for the boom in the first place.

Then again, that light rail station comes online in just two years. Mass transit tends to have a very positive effect on property values. Decisions, decisions!
jo says:

October 22, 2007 at 4:59 pm

the article speaks about escala capping the investors at 5%, how exactly is this enforced there?
jo says:

October 22, 2007 at 8:59 am

the article speaks about escala capping the investors at 5%, how exactly is this enforced there?
CG says:

October 22, 2007 at 6:52 pm

Jo: That’s a good question. The least Aubrey Cohen could have done in his report is describe just how the limit is achieved and how it is enforced. I’ve seen some contractual language to that effect that, to my layperson eyes, seems more wishful thinking than binding contract. I think this may be another area where the developers/marketers claim one thing, but then do another.
CG says:

October 22, 2007 at 10:52 am

Jo: That’s a good question. The least Aubrey Cohen could have done in his report is describe just how the limit is achieved and how it is enforced. I’ve seen some contractual language to that effect that, to my layperson eyes, seems more wishful thinking than binding contract. I think this may be another area where the developers/marketers claim one thing, but then do another.
Dan L says:

October 22, 2007 at 11:17 am

At Escala, as I imagine is similar to other projects limiting investors, you’re required to declare your intent to resell the unit at signing. In the contract it states the specifics for investor resales: in short, 50% of the net profit will be split with the developer. I can’t speak to how enforceable this language will be, but I’d imagine they’ve worded it carefully to hold up in court. It’s not in a developer’s interest to compete with flippers should they complete the building with 50 units left to sell.
Dan L says:

October 22, 2007 at 7:17 pm

At Escala, as I imagine is similar to other projects limiting investors, you’re required to declare your intent to resell the unit at signing. In the contract it states the specifics for investor resales: in short, 50% of the net profit will be split with the developer. I can’t speak to how enforceable this language will be, but I’d imagine they’ve worded it carefully to hold up in court. It’s not in a developer’s interest to compete with flippers should they complete the building with 50 units left to sell.
mhays says:

October 22, 2007 at 7:56 pm

Schnitzer has some fairly tough language at Gallery (where I’m buying) and so on. But the real barrier to “investors” is that flipping makes no sense right now. Nor does buying for the sake of renting out. If you’re buying, you’re probably doing it to live there.

I expect the market to remain moderate for a while, but it’ll be fine. So we’ll get a few thousand units over a period of three years…it’s not the massive wave certain cities have faced, and it’s not happening all at once.

Why isn’t First Hill included in the article’s definition of “Downtown”? If you’re a few blocks from Two Union Square you’re much more part of Downtown than someone living at the north end of Belltown, as I do.
mhays says:

October 22, 2007 at 11:56 am

Schnitzer has some fairly tough language at Gallery (where I’m buying) and so on. But the real barrier to “investors” is that flipping makes no sense right now. Nor does buying for the sake of renting out. If you’re buying, you’re probably doing it to live there.

I expect the market to remain moderate for a while, but it’ll be fine. So we’ll get a few thousand units over a period of three years…it’s not the massive wave certain cities have faced, and it’s not happening all at once.

Why isn’t First Hill included in the article’s definition of “Downtown”? If you’re a few blocks from Two Union Square you’re much more part of Downtown than someone living at the north end of Belltown, as I do.
christiangustafson says:

October 23, 2007 at 5:42 am

Mark my words, the downtown Seattle condominium market is going to be a MAJOR DISASTER, with empty buildings and partially-completed, abondoned, construction sites. No investors? I’m sorry, I consider IO ARM buyers like you to be rampant speculators. All of you will wash out, and the banks will be stuck with it, it will be quite a spectacle. But RE only goes UP UP UP, LOL.

If you don’t understand credit expansion and the effects of extending 100% mortgages for the past decade, you can’t be helped. You will be wiped out in the collapse of RE (at least 40% off in Seattle alone). DON’T YOU PEOPLE UNDERSTAND THAT SAN DIEGO has tech jobs, too? San Diego is our future.

I tell my friends that I plan to buy a SFH in Wallingford for $250K in a couple of years — if I still have a job — and they think I’m nuts.

This is the adjustment that is coming. This is harsh reality. Are you ready?

Are you ready?
christiangustafson says:

October 22, 2007 at 9:42 pm

Mark my words, the downtown Seattle condominium market is going to be a MAJOR DISASTER, with empty buildings and partially-completed, abondoned, construction sites. No investors? I’m sorry, I consider IO ARM buyers like you to be rampant speculators. All of you will wash out, and the banks will be stuck with it, it will be quite a spectacle. But RE only goes UP UP UP, LOL.

If you don’t understand credit expansion and the effects of extending 100% mortgages for the past decade, you can’t be helped. You will be wiped out in the collapse of RE (at least 40% off in Seattle alone). DON’T YOU PEOPLE UNDERSTAND THAT SAN DIEGO has tech jobs, too? San Diego is our future.

I tell my friends that I plan to buy a SFH in Wallingford for $250K in a couple of years — if I still have a job — and they think I’m nuts.

This is the adjustment that is coming. This is harsh reality. Are you ready?

Are you ready?
EconE says:

October 23, 2007 at 6:13 am

Matt…are you able to do a further breakdown of that chart and let us know what condos they are referring to for 2006-07? When you look at the %’s sold it seems to paint an overly rosy picture as there are many that are still being held back in the 07 buildings such as the plethora of Cosmo Penthouses that are no longer listed on the MLS…not to mention the flippers…a unit that is held by a flipper…or a flipper turned “accidental landlord” can not really be considered an “absorbed” unit in my opinion. I mean really…isn’t it obvious that no one is buying any more as the flippers are out of the game? Look at the % sales for Trace North. Look at Gallery and how many units they still have available. The builders seem to be doing the flippers a favor by raising their prices as they seem to be doing in some cases but in the end, the developer will win in the game of price reductions and incentives offered and at the price point where the flipper is completely underwater…even with 5% down…the builder can undercut them by a large margin and still turn a profit…albeit a smaller one.
EconE says:

October 22, 2007 at 10:13 pm

Matt…are you able to do a further breakdown of that chart and let us know what condos they are referring to for 2006-07? When you look at the %’s sold it seems to paint an overly rosy picture as there are many that are still being held back in the 07 buildings such as the plethora of Cosmo Penthouses that are no longer listed on the MLS…not to mention the flippers…a unit that is held by a flipper…or a flipper turned “accidental landlord” can not really be considered an “absorbed” unit in my opinion. I mean really…isn’t it obvious that no one is buying any more as the flippers are out of the game? Look at the % sales for Trace North. Look at Gallery and how many units they still have available. The builders seem to be doing the flippers a favor by raising their prices as they seem to be doing in some cases but in the end, the developer will win in the game of price reductions and incentives offered and at the price point where the flipper is completely underwater…even with 5% down…the builder can undercut them by a large margin and still turn a profit…albeit a smaller one.
Eric K says:

October 23, 2007 at 8:12 am

christiangustafson – your friends are right, you are nuts to think you can buy a SFH in Wallingford for $250k.

While I agree that a decline in prices is likely, you need to think about the relative price of a condo when measured in other commodities, not simply in dollars. Condos are built with steel, concrete, copper, glass, and a lot of expensive labor and fees. While the Fed may devalue the dollar to keep the financial system solvent, other countries will continue to buy commodities to fuel their economies.

The scenario you describe would be _worse_ than the Great Depression, since the average SFH in Wallingford is about $750k now, and even at the depths of the Great Depression the decline for desirable areas was only about 50%. And that’s the Great Depression.

Ben Bernake’s claim to fame is his study of the Great Depression, and you can bet that he will do everything possible to prevent it from happening again. As an academic, he even proposed dropping dollars from helicopters to prevent the kind of deflation that occurred in the Depression.

So he will most likely keep cutting interest rates, which will allow banks to pay out less on their deposits, while continuing to bring in some interest on their loans (including mortgages.)

The declines over the next few years will be much worse in real, inflation-adjusted terms. In other words, home prices won’t drop as much as the value of the dollar.

At least if you’re going to be such a housing bear, you should put your money into something that will hold up as the dollar continues to deflate.

What, exactly, are you doing with all of the money that you are saving up by not buying now? I’m bearish on real estate over the next few years, but I’m also realistic about how much new construction costs. While I do already own a condo, I’m shorting the financials because I believe that we’re only in the beginning of the great unwind.
Eric K says:

October 23, 2007 at 12:12 am

christiangustafson – your friends are right, you are nuts to think you can buy a SFH in Wallingford for $250k.

While I agree that a decline in prices is likely, you need to think about the relative price of a condo when measured in other commodities, not simply in dollars. Condos are built with steel, concrete, copper, glass, and a lot of expensive labor and fees. While the Fed may devalue the dollar to keep the financial system solvent, other countries will continue to buy commodities to fuel their economies.

The scenario you describe would be _worse_ than the Great Depression, since the average SFH in Wallingford is about $750k now, and even at the depths of the Great Depression the decline for desirable areas was only about 50%. And that’s the Great Depression.

Ben Bernake’s claim to fame is his study of the Great Depression, and you can bet that he will do everything possible to prevent it from happening again. As an academic, he even proposed dropping dollars from helicopters to prevent the kind of deflation that occurred in the Depression.

So he will most likely keep cutting interest rates, which will allow banks to pay out less on their deposits, while continuing to bring in some interest on their loans (including mortgages.)

The declines over the next few years will be much worse in real, inflation-adjusted terms. In other words, home prices won’t drop as much as the value of the dollar.

At least if you’re going to be such a housing bear, you should put your money into something that will hold up as the dollar continues to deflate.

What, exactly, are you doing with all of the money that you are saving up by not buying now? I’m bearish on real estate over the next few years, but I’m also realistic about how much new construction costs. While I do already own a condo, I’m shorting the financials because I believe that we’re only in the beginning of the great unwind.
Dan C. says:

October 23, 2007 at 3:14 pm

Eric,

You are correct in your assumptions, but by assuming the current course of Fed action is correct, you are very wrong. By continuing to cut rates (and deflating the dollar) the Fed is actually increasing long-term interest rates, which most ARM’s are adjusted to. Short-term rates have decreased, which only helps the banks in their overnight lending practices to each other. Joe Consumer is still stuck holding the bag and still getting screwed on their liar loans, but the Banks profit. Shorting financials is smart, but I wouldn’t hit it too low, the government will bail them out (just like the airlines) at the expense of the general population.

When you talk about real inflation, it is not actually “real”. The CPI, the marker the Fed uses as an economic indicator, does not include food or energy prices. Have you checked the receipt of your groceries or gas compared to six months ago? Bet you see a 15-25% increase. By continuing to cut rates, the Fed will singlehandedly lead us into a dollar collapse as they don’t take into account REAL inflationary pressures on current wage increases.

On RE prices: I don’t believe existing homes will take much (25%). A commodity with readily available supply, many alternatives and high prices has a very elastic demand curve. Developers will have to undercut their profit lines right into bankruptcy/auction.
Dan C. says:

October 23, 2007 at 7:14 am

Eric,

You are correct in your assumptions, but by assuming the current course of Fed action is correct, you are very wrong. By continuing to cut rates (and deflating the dollar) the Fed is actually increasing long-term interest rates, which most ARM’s are adjusted to. Short-term rates have decreased, which only helps the banks in their overnight lending practices to each other. Joe Consumer is still stuck holding the bag and still getting screwed on their liar loans, but the Banks profit. Shorting financials is smart, but I wouldn’t hit it too low, the government will bail them out (just like the airlines) at the expense of the general population.

When you talk about real inflation, it is not actually “real”. The CPI, the marker the Fed uses as an economic indicator, does not include food or energy prices. Have you checked the receipt of your groceries or gas compared to six months ago? Bet you see a 15-25% increase. By continuing to cut rates, the Fed will singlehandedly lead us into a dollar collapse as they don’t take into account REAL inflationary pressures on current wage increases.

On RE prices: I don’t believe existing homes will take much (25%). A commodity with readily available supply, many alternatives and high prices has a very elastic demand curve. Developers will have to undercut their profit lines right into bankruptcy/auction.
Dan C. says:

October 23, 2007 at 3:16 pm

Last paragraph was screwy:

Existing homes won’t take much of a cut (>15%). New condos and Snoqualmie Ridge homes will take the greatest hit (25%+). These developements are a commodity with readily available supply, many alternatives and high prices which creates a very elastic demand curve. Developers will have to undercut their profit lines right into bankruptcy/auction.
Dan C. says:

October 23, 2007 at 7:16 am

Last paragraph was screwy:

Existing homes won’t take much of a cut (>15%). New condos and Snoqualmie Ridge homes will take the greatest hit (25%+). These developements are a commodity with readily available supply, many alternatives and high prices which creates a very elastic demand curve. Developers will have to undercut their profit lines right into bankruptcy/auction.
EconE says:

October 23, 2007 at 4:55 pm

Matt…

are you able to breakdown the charts above into complex or do you still want to consider your unsold condo “absorbed”?
EconE says:

October 23, 2007 at 8:55 am

Matt…

are you able to breakdown the charts above into complex or do you still want to consider your unsold condo “absorbed”?
mattgoyer says:

October 23, 2007 at 5:27 pm

I would like to do some more analysis. As always though my 60+ hour/work week job prevents me from spending the time doing so. The other thing that prevents me working on it is that I don’t have a couch so I don’t really have any where to sit and work when I’m at home.
Matt says:

October 23, 2007 at 9:27 am

I would like to do some more analysis. As always though my 60+ hour/work week job prevents me from spending the time doing so. The other thing that prevents me working on it is that I don’t have a couch so I don’t really have any where to sit and work when I’m at home.
mattgoyer says:

October 23, 2007 at 5:28 pm

And I think I would consider a condo unit that is being rented as absorbed.
Matt says:

October 23, 2007 at 9:28 am

And I think I would consider a condo unit that is being rented as absorbed.
mhays says:

October 24, 2007 at 7:44 pm

Bubblies keep talking about San Diego and Miami as if they’re relevant to Seattle.

San Diego’s prices are much higher than ours (even now), and extremely out of whack with incomes. Also, they’ve built far more units than we have.

Miami is simply building 10 times the number of condos we are. Or something like that.

Seattle has stagnated and might even decline a bit. But even the national analysts are projecting that we’ll hold up far better than those other two cities, and possibly better than any other city (per Forbes’ projection the other day, which projected slow growth to 2008).

Seattle has a fairly fast-growing population and a reasonable total number of units getting built (thanks to growth management in part). Rentals are getting tight and will get tighter (and pricier) until 2009 when new inventory starts to fill demand.

Meanwhile, construction prices are up 50% in the last few years alone. The value of any RE investment is always tied (via elastic) to its replacement value. When demand falls (with a population decline for example) the rubber band can stretch downward, but in a growing market, prices rise until new supply is built, and new supply is always priced over replacement cost. Construction prices are still rising.

Will prices fall by 40%? Not a chance in hell, unless Microsoft leaves and interest rates rise to modern-day highs, both of which are farfetched. Bubblies can wait for that day, while the rest of us can take reasonable risks and ratchet up in the world.
mhays says:

October 24, 2007 at 11:44 am

Bubblies keep talking about San Diego and Miami as if they’re relevant to Seattle.

San Diego’s prices are much higher than ours (even now), and extremely out of whack with incomes. Also, they’ve built far more units than we have.

Miami is simply building 10 times the number of condos we are. Or something like that.

Seattle has stagnated and might even decline a bit. But even the national analysts are projecting that we’ll hold up far better than those other two cities, and possibly better than any other city (per Forbes’ projection the other day, which projected slow growth to 2008).

Seattle has a fairly fast-growing population and a reasonable total number of units getting built (thanks to growth management in part). Rentals are getting tight and will get tighter (and pricier) until 2009 when new inventory starts to fill demand.

Meanwhile, construction prices are up 50% in the last few years alone. The value of any RE investment is always tied (via elastic) to its replacement value. When demand falls (with a population decline for example) the rubber band can stretch downward, but in a growing market, prices rise until new supply is built, and new supply is always priced over replacement cost. Construction prices are still rising.

Will prices fall by 40%? Not a chance in hell, unless Microsoft leaves and interest rates rise to modern-day highs, both of which are farfetched. Bubblies can wait for that day, while the rest of us can take reasonable risks and ratchet up in the world.
Dan C. says:

October 24, 2007 at 8:19 pm

Not worth arguing about for the 100th time…BUT

“Bubblies can wait for that day, while the rest of us can take reasonable risks and ratchet up in the world”

So you are telling me that by owning material things such as homes and cars, I can “ratchet” myself to a higher spot in society than someone else? Especially those people who have opinions other than my own? I HAVE to get on this gravy train!
Dan C. says:

October 24, 2007 at 12:19 pm

Not worth arguing about for the 100th time…BUT

“Bubblies can wait for that day, while the rest of us can take reasonable risks and ratchet up in the world”

So you are telling me that by owning material things such as homes and cars, I can “ratchet” myself to a higher spot in society than someone else? Especially those people who have opinions other than my own? I HAVE to get on this gravy train!
mhays says:

October 24, 2007 at 8:47 pm

Home ownership has traditionally been the #1 route to financial security for middle-income people. Personally I think that will remain true for the mid-term future.

I didn’t say cars. Cars lose value the instant they’re bought, and can even rachet your financial status down, not up. I don’t have one.
mhays says:

October 24, 2007 at 12:47 pm

Home ownership has traditionally been the #1 route to financial security for middle-income people. Personally I think that will remain true for the mid-term future.

I didn’t say cars. Cars lose value the instant they’re bought, and can even rachet your financial status down, not up. I don’t have one.

Will condo wave swamp market?

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