Condos and the Housing Overhang

Sometimes I think I'm plenty gloomy about housing.  Then I read more bad news I hadn't considered.

Today's Wall Street Journal has an article about condos (subscription required) that adds more gloom to the housing picture.  Condos may take a year or two to build.  At the beginning, the developer signs sales contracts with buyers, then starts building.  Now that the buildings are complete or nearly complete, the buyers are either backing out because they perceive the condos as overpriced in today's market, or the buyers cannot get financing because the appraisals are coming in too low.  So the developer doesn't get his money from the buyers, and the developer's bank doesn't get repaid on the construction loan.  This is also happening with condo conversions, where a company bought an apartment building with the idea of spiffing it up and selling individual units.

The single family home sales information that I discussed recently does not include condos, so this is an additional problem.

Many of the condo units will either be sold at low prices, or be converted into rental units.  They add to the excess supply on the market.  Keep in mind that with these long-lead-time projects, new supply keeps coming onto the market even after the market has weakened.  Back when these projects were started, the market didn't look so weak.

Business planning implication:  this is just another reason for no optimism about the housing market.

Comments

[Shane Milburn]

I appreciate the updates you post on the housing market. Good stuff.

Anecdotally, I have friends at work who state it was common practice to build condos on the gulf with the full expectation of selling them prior to completion for a handsome profit - never the intent of keeping them. Actually the intent of starting another as soon as the current condo was sold.