By Martin Wolk
updated 8/26/2005 6:15:25 PM ET 2005-08-26T22:15:25

Even in the soaring housing market of the past several years, condominiums have stood out as particularly hot properties, but there are early signs that the condo boom is beginning to lose its punch.

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The National Association of Realtors reported this week   that the inventory of condominiums and co-op apartments rose in July to 5.3 months of supply, up sharply from 4.1 months in June. It was a figure that raised eyebrows even as other data showed the housing market remains strong, with new-home sales rising to hit yet another record .

“Our view is that we are starting to see some slowing on the condo side,” said Doug Duncan, chief economist of the Mortgage Bankers Association.

To be sure, any slowdown in condo sales merely would bring the market down from a stratospheric level. The national median price for condominiums, at $219,000, has risen 54 percent over the past three years, compared with 38 percent for existing single-family homes and about 21 percent for new homes.

“The condo market has been the high flyer over the past few years, clearly outpacing single-family homes in sales and price appreciation,” said Lawrence Yun, an economist for the National Association of Realtors. “It was bound to slow down. The pace was unsustainable.”

While a slowdown may be expected, the condo sector is watched closely as a potential canary in the coal mine of a housing market reaching dangerously overheated levels in the view of some analysts. Even Fed Chairman Alan Greenspan has warned of “froth” in some local housing markets, and on Friday he reiterated his concern about economic imbalances caused in part by the housing boom.

Condos are vulnerable to any pullback in part because they traditionally attract strong interest from investors, with 30 percent or more of all units made available as rentals.

And condo towers tend to be located mainly in the big urban areas on both coasts where housing has been hottest, including California, South Florida, New York and the Washington, D.C., area.

“There are no condos in Peoria,” said Lawrence Yun, an economist for the National Association of Realtors.

(Actually, there are condos in Peoria, Ill., and plans to build more, according to an article in the Peoria Journal Star this week. But Yun's point is well-taken — condo activity is largely concentrated on the coasts where housing prices are high and land is scarce.)

There are some good fundamental reasons why the condo market has been so hot. As single-family homes have become increasingly unaffordable in many large metropolitan areas, condos represent an attractive alternative for first-time buyers who want to get a foothold in the marketplace. And for single people and couples without children, condos offer an appealing urban lifestyle, often close to core downtown areas and mass transit.

For Anne Kimber, a financial analyst for a government contractor in Washington, condo living offers “a very urban existence without living in the city.” She recently bought a one-bedroom condominium in Arlington, Va., just a few stops  by subway from the Pentagon, the National Mall and downtown Washington.

“I prefer condo living,” said Kimber, 51. “They take in your packages, and you don’t have to clean the gutters.”

Kimber paid $450,000 for her one-bedroom condo when she bought in the spring, and she felt fortunate after losing bidding wars on three other properties. “The market was really, really hot when I was buying,” she said.

But since then, the market seems to have hit a plateau, with buyers more reluctant to get into bidding wars, said Thomas Meyer, president and owner of Condo 1, a brokerage in Falls Church, Va.

“It definitely seems to me that there is a slight softening in the market, although in all fairness when (the weather) gets very hot that does happen sometimes,” he said. “But we have been expecting some kind of correction for some time.”

He said the increase in prices in his region has been “astonishing,” with prices doubling over the past five years.

In San Diego, another of the nation's hottest markets, there is no sign yet of any condo sales slowdown, said Ann Throckmorton, broker with Century 21 Award. So far this year condos in San Diego County have sold in an average of 44 days at 98 percent of their listing price —figures that are about the same as last year, she said.

The key factor to watch, according to industry executives, is a flood of supply that is coming onto the market as developers scramble to cash in on the condo boom.

Last year builders started construction on 120,000 multifamily housing units intended for sale as condominiums or co-op apartments, up from 87,000 in 2003. In the first half of this year the figure was 65,000, up nearly 40 percent from last year’s pace.

“There is still a lot of momentum in terms of starts,” said Michael Carliner, an economist for the National Association of Home Builders. “There are going to be a lot more (condo units) entering the market.”

At the same time thousands of apartment units are being snapped up by developers for conversion to condos, especially in hot-market states including California and Florida. About 300 apartment complexes with nearly 80,000 units have been purchased for conversion this year alone — more than in all of 2004, according to Real Capital Analytics, which tracks the trend.

“We have seen no evidence of a slowdown,” said Dan Fasulo, director of market analysis for the firm. But he said some clients “have started to take pause” because of the growing pipeline of condominiums entering the market.

“Especially in southern Florida, where there are a lot of units in the pipeline, it’s going to be interesting how the market accepts all this supply in the next couple of years,” he said.

If condo prices flatten out, investment interest could taper off in a hurry.

“If the inventory builds up, even at a reasonably brisk sales rate that may still lead to price weakness, and that starts changing the economics of the condo market,” said Mark Obrinsky, chief economist National Multi Housing Council.

While many people buy condos as an alternative to renting, others have been drawn to the market by the rapid price appreciation, and those buyers will disappear if condo prices go flat or decline.

“There is still a view out there that a condo isn’t just a place to live, it’s also an investment product,” said Obrinsky. “So long as people view condos as a good investment there will be people willing to pay a price that is awfully high compared with just a few years ago.

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