January 1, 2009 – 400+ condos for sale in Zone 10
December 20, 2009 – 180 condos for sale in Zone 10
Didn’t see that one coming, did you? I am not sure anyone did.
What happened? Who bought all these condos? What does this mean for the future? We will talk about each of these one by one.
1. What Happened? Sometime in late April, after the market had literally been dormant for about 9 months, the first wave of people began to stick their toes in the water. The development community finally found the holy grail of financing, FHA, and began to get their projects approved by the federal agency. This provided the most important aspect of recovery, available AND realistic financing.
The fallout of the crash which helped lengthen and deepen the adjustment in values, was the inability to get anything financed. The lack of available financing led to a decrease in demand which caused property values to fall which caused fear which caused less willingness to lend which….you see the pattern. Once the developers caught on to the need for FHA and understood what was needed to get these projects approved, FHA provided the safety net that was sought – market rates and higher leverage. 96.5% loan to values and good rates and all of a sudden, the buyer showed up.
Later in the game, the local banks that had financed much of the construction also began to show up with programs to allow the end users to get financing for properties where FHA was not available. These projects, which had been struggling only for a lack of available financing, now with the financing barriers removed, began to sell….albeit at prices lower than projected during construction…..but they began to sell.
We are now entering the 2010 market with interest rates in upper 4% to lower 5% range, a ‘normal’ level of inventory, little-to-no new inventory being added, an expanded tax credit, Dow 10,000 and a stabilization of employment. Hmmmmm…….
2. Who bought all of these condos? People with the following characteristics: they live in an apartment, have a good salary and stable job and an advanced degree or skill set, they do not have anything to sell and either a little savings or a parent with some cash. When you combine all of these factors, you end up with a buyer who has the ability to buy up to a $250,000 condo with 3.5% downpayment and a 5% interest rate who gets $8,000 back from the government for doing so! In other words, a $0 transaction. Who wouldn’t want to take advantage of that?
By far and away, the buyers of 2009 were the young professionals of the world who elected to become owners instead of remaining renters. They absorbed the majority of the condo market and saved us all. If they bought early, they may have overpaid by 1-3% relative to those who came later, but they also probably got the better units. They will look very sharp in about 3-5 years…..
3. What does this mean for the future? It means recovery. As long as there was as much excess inventory in the market as there was (which can also be argued that the reason for the excess was a result of lack of financing instead of lack of demand, bit I digress) there was never going to be a recovery. With demand returning to a ‘normal’ level (think 2003), we are now heading to a normal market, with one new problem…no one is building anything right now! At the current level of absorption of condos, we will be out of inventory by middle-to-late 2010, which means moderate price increases and the recovery of the resale market. Once we free up the system to allow for move-ups, the middle and upper end of the markets will recover as well.
In summary, understand that the USA should build about 1M houses per year (historic number of housing starts in normal markets.) In the height of the bubble, we were building about 1.6M. Right now, we are building about 300k new housing units and this has been going on for the last 24 months. The pending lack of supply SHOULD mean a slight, but sharp, increase in values sometime in 2010 and a decrease in marketing time required to get a home sold. Until the banks feel safe about lending to the builders, it could take quite a while to get back to production levels necessary to put demand and supply back in balance.
