A Condo Shortage by Next Year?

• July 1, 2009
• 13 Comments

by Will Smith

Could it be that DC’s condo market has corrected so rapidly in the last couple years that it has, in fact, over-corrected? The Washington Business Journal is reporting on a recent report from local real estate research firm Delta Associates which predicts there will be a shortage of condos by sometime next year.

How can that be? It seems like just recently people were worried about the glut of new condos — and now they’re worried about a scarcity?

Delta says that the number of new condo units currently for sale has fallen to its lowest point in five years. Since condo development has come to a standstill, the supply will dwindle even further as units are absorbed by the market but no new projects replenish the pipeline. The result? Sometime next year the available inventory will fall low enough that prices start to rise.

But don’t expect developers to start putting up new condos anytime soon. First, many of those new condo projects that were forced to convert to rentals will convert back to condos. New construction will not occur in force until the 2012 timeframe, says Delta, when it is clear that the market has truly returned.

It is the boom-and-bust cycle often witnessed with new construction: strong demand leads to over-building and a glut, which is followed by years of under-building and scarcity, which is followed by strong demand and over-building, etc.

The takeaway for anyone contemplating buying a new condo is that, if Delta is right, prices won’t go much lower than they are right now.

For the full article from the Washington Business Journal, click here.

This article originally published at http://dc.urbanturf.com/articles/blog/a_condo_shortage_by_next_year/1091

13 Comments

1. Bruno said at 3:45 pm on Wednesday July 1, 2009:

   It seems like the writer was paid by DC developers and real estate agents to write about some thing that is unreal. I know that I won’t be buying a condo this year and so is so many other young professionals. How exactly will there be a condo shortage when no one is buying?

1. Benji said at 3:57 pm on Wednesday July 1, 2009:

   You may not be buying a condo, but other people certainly are. With low interest rates and relatively low prices compared to the last few years, people are seeing this time as a good time to buy. I recently bought a condo at 4.9 percent over 30 years. Two years ago, I would’ve been paying close to 7 percent.

1. Will Smith said at 4:12 pm on Wednesday July 1, 2009:

   Hi Bruno,

   We are not being real estate boosters here, just reporting on the objective findings of a research firm. While the idea of a condo shortage in this economy might be counterintuitive, the logic of Delta’s prediction makes sense. And as I noted in my post, it follows the pattern of developers building too much as the market rises, then building too little as the market softens.

   In answer to your question: There will be a shortage because more new condos will be purchased than constructed, which will bring down supply and push up prices.

   Will

1. Lauren said at 4:37 pm on Wednesday July 1, 2009:

   While there might not be as many *new* condos on the market right now as there were a few years ago, there are plenty of *existing* condos, i.e. resales (or foreclosures). Not everyone needs to buy a brand-new condo.

1. Georgetowner said at 5:30 pm on Wednesday July 1, 2009:

   to Benji- how much was your downpayment?

   Because while interest rates are low, I’ve been told that there is no financing available unless you put down 20%. 

   Now, I don’t know about you… but I don’t know too many people who have $60-100K saved up who would be interested in buying 1 bedroom condows.

1. Georgetowner said at 5:41 pm on Wednesday July 1, 2009:

   I should also mention that it’s even harder to get financing for a new condo.. until so many units are sold. 

   From what I understand, if fewer than 50% of the units are sold, then you can’t get a regular loan only a construction loan.  You can’t do FHA either, because a specific percentage of the units have to be owner occupied.

   Someone should correct me here if I’m wrong.

1. Eli said at 7:29 pm on Wednesday July 1, 2009:

   Many new condo buildings are now getting FHA approval.  CityVista, CityScape, Union Row, and Solea are those that easily come to mind.  You can search here: https://entp.hud.gov/idapp/html/condlook.cfm.  Even if the building itself isn’t approved, I’ve heard of a number of people who have gotten spot approval.  With an FHA loan, only 3.5% down is required, and rates are competitive.  Moreover, since the conforming loan limit has been raised to $729k for DC this year, you can get some nice condos with FHA loans.  I locked in a rate of 5.5% on a $700k condo last week.  Of course, I probably could’ve gotten 5% a month and a half ago, but 5.5% is still a good rate in even recent historical context.

1. Georgetowner said at 9:26 am on Thursday July 2, 2009:

   that spot approval process is a mess. 

   Here are the requirements: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/96-41ml.txt

   Here are the most important parts (that trip people up)

   - At least 90% of the units in the project must have been sold.
   - At least 51% of the units in the project must be owner-occupied.
   - No single entity may own more than 10% of the units in a project.

   Finally, I think that if there are too many units in the building that are already FHA, you can’t get an FHA loan for your unit. 

   I don’t know about.. but I don’t know too many lenders willing to do the work required for FHA spot approval for a building with hundreds of units.

1. vahoya said at 10:35 am on Thursday July 2, 2009:

   Georgetowner,

   You’re misinformed.  As Eli said, there are several new condo projects that have what’s known as “project approval” from FHA.  This process was designed for new buildings and makes for a very streamlined process for loan application - as most of the application work has already been done by the developer.  The spot approval process is designed for existing buildings that have sold out. It is not that difficult to navigate despite what the requirements say - you just need a competent loan officer.

   I just sold my condo to my tenant who received spot approval from FHA.  It took two weeks - not that much harder than a Fannie/Freddie loan approval.  Some communities will not be eligible if they have too high a concentration of FHA loans or if less than 51% are owner occupied, but many will.  To put it in perspective, my unit is located in Clarendon 1021, a building that was sold in 2004 at the height of the boom and it still qualified.  Most older communities and many recently completed ones should be fine.

   Also, there are some lenders that can still do 90% LTV, although you will have to pay mortgage insurance.  The reason that available financing for condos was capped at 80% was because no one would offer mortgage insurance on condos.  That is starting to change.  There are other programs out there as well (DC Bond, HPAP, etc.).

   Finally, regarding the condo glut, supply is dropping every week.  Most of the existing new construction buildings - including those that are advertised on this site - will be sold out at this time next year.  You can choose to believe it, or not, but these buildings are selling houses every week and will run out of inventory soon.  Now, I’m not saying that we’ll be in a severe shortage and that prices will spike, but a significant percentage of the real estate market is made up of new homes.  When that inventory goes away the resale market will get a lot tighter- it’s simple supply and demand.

1. Georgetowner said at 11:36 am on Thursday July 2, 2009:

   I understand perfectly the difference between “spot approval” and what you call “project approval.” 

   If a condo is not on the approved list (https://entp.hud.gov/idapp/html/condlook.cfm) .. then the only way you can get an FHA loan is through “spot approval.”

   My point was merely to point out that the “spot approval” process was a mess.  I have friends in the mortgage business, and it’s not just about having a competent loan officer.

   I can see how easy it would be to figure out the percentage of owners vs tenants.  I think you can get this info from the condo association.

   On the other hand, I don’t think condo associations keep track of how a condo is paid for and by whom (you can correct me here if I’m wrong).. So a lender interested in getting spot approval would have to go through each condo and find out whether that condo was obtained with an FHA loan.  I don’t know the mechanism for this.  Public records? 

   I seem to remember asking a loan officer friend whether you could just call HUD and get a list of FHA loans they have at a given building and that didn’t seem to be possible.  He made it seem like the process was very painstaking for a building with hundreds of units. 

   Maybe that loan officer friend was incompetent or lazy, but I doubt it.

   As for 90% LTV loans.. yes, I also understand that it is possible to get those loans if you get mortgage insurance.  The problem is that it’s incredibly hard right now to get mortgage insurance.  I’m not sure what the latest policy of PMI companies is… but I know that several months ago, it was impossible to get PMI unless you put 20% down for a condo you want to purchase in DC or Arlington, as those places were considered “declining markets.”

   Any mortgage brokers her?  Care to chime in?

1. vahoya said at 12:28 pm on Thursday July 2, 2009:

   The condo association can sign the certification on owner occupant percentage, which is not hard to do.  As for the percentage of FHA loans, you’re definitely right, that’s where things get sticky. It is available in the public records, so in my case, the loan officer had to check all 416 of them. Yikes.

   My understanding is that FHA is in the process of streamlining the application process for condos.  Changes are supposed to take place in October.  That should hopefully help things.

   My broader point was to show that it is not impossible to get loans for condos right now.  The lending environment, in general, is just more difficult than it used to be and any buyer/lender has to put in more work to get a loan approved..  There are several financing options for condos though and my company, which specializes in selling condos, has seen sales pace increase substantially over the last few months as things have stabilized.

   The real estate and condo markets are by no means all sunshine and rainbows, but the never-ending doom and gloom messaging out there is a bit excessive.  My experience has been that things are never quite as good or quite as bad as they appear in the media.

1. Jackson said at 3:14 pm on Thursday July 2, 2009:

   the developers worked that PR pretty well by selling the Delta Associates “report” to the Washington Business Journal. Of course, WBJ is an easy sell, as its readership and advertising base are those same developers.

   Now, if they can only trick others into buying that lien a bull…

1. vahoya said at 12:00 pm on Friday July 3, 2009:

   Delta has been putting out this report for years.  It’s nothing new.  On a quarterly basis, they track every new condominium project in the area, how many units they’ve sold and what price they sold at.  They confirm this information by surveying the developers, sales teams, checking the regional MLS and local tax records.

   It’s not easy information to gather, compile and distill.  And it is more insightful and specific information than is provided in Case-Shiller or other regional real estate indexes that you may see reported in the national news media. 

   Before dismissing it as PR or “bull”, I recommend reading the report and understanding the methodology used to gather the data.  Their predictions may not be spot on, but the claim that inventory is falling is a reality.

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