December 7, 2007

Too many condos in Seattle? Think again

  • The next four months could be the best time to buy since 2003.
    O’Connor Consulting Group


    The condominium market is not dead. Values are not falling and we are not over supplied. So what is wrong? What is going on? We have a loss of confidence among condominium consumers. Buyers are uncertain. Nobody wants to buy if, maybe, values are going to fall.

    Everyone is in a wait-and-see mode.

    The national housing story is upstaging our local market story. The greater Seattle area has solid employment growth and net migration, unlike other major U.S cities. The foreclosure rate is up slightly, but not much as compared to the nation. Wage growth is healthy, interest rates are more than reasonable and prices are level. Sounds good right?

    Buyers are caught up in the psychology of the market place. Which way is the herd moving? Granted some caution is a good thing, but caution is trumping opportunity. The next four months could be the best time to buy since 2003. By spring of 2008, the fog of uncertainty will begin to lift and product will move and the good deals may be history.

    Why do I think this way? Take a good look at the data. King County’s closed sales as reported by the Northwest Multiple Listing Service show total sales down since July. Wow, this is normal! Sales volume always spikes in mid-summer and then begins a slow decline till about March. King County’s sales prices show the same old familiar volatility as we have seen in past years.

    What really has dropped is the sales velocity at new condominium buildings. Over the last few years we have seen a sales velocity rate of eight to 12 units per month as a typical pattern. Of course, there have been highly publicized stories of sales of 200 units in one weekend, but that was anything but normal.

    Now we are seeing sales velocities at new buildings at two or three units per month. That’s why builders have offered sales concessions such as pre-paid dues or closing costs. However, there is no fundamental reason for this rapid decline in new condo sales. The market is not overbuilt and traffic (potential buyers) is still showing up to kick tires.

    For example, everyone likes to point at downtown Seattle as a case of too many condos under construction. Let’s take a close look. We track all condo and apartment supply very closely. There are 3,765 units under construction in the greater downtown area. This includes South Lake Union, lower Queen Anne, parts of Capital and First hills, Belltown and the CBD.

    This figure sounds like a whole lot of units, however 2,203 of them are considered sold, leaving 1,462 unsold. Compare 1,462 unsold units to the 2007 annual demand number of about 1,200 to 1,300 units. The demand number during 2006 was nearly 1,900 new units.

    The market really appears to be in balance in terms of simple supply and demand.

    It takes a finer analysis to determine if the demand for 2007 or 2008 is similar to the demand of years past. I suspect it’s not quite the same. Given the changes in the credit markets, buyers do not have such easy access to money. That means the first-time buyer and the highly leveraged buyer may not be able to afford the same condo as they once did.

    I believe that condo demand has declined somewhat because of the mortgage market, but not enough to throw our market into turmoil. Condo sales velocities of 10 or 12 units per month are expected to decline to a historic “normal” of five or six per month. Prices will hold steady because the supply and demand of units is basically in balance.

    It’s true that inventories are rising. Active listings of all condos in King County have been increasing since January 2006. However, listings relative to sales are now returning to a pattern that was common back in 1995-96 and 2002-03. We considered those markets to be normal at the time.

    Perhaps my biggest concern over the future of the Seattle housing market, both single-family and condominiums, is affordability. When the condo market was at its hottest, about 2005-06, interest rates were extremely low, thereby lowering the monthly cost of housing. I believe we will see wage pressure along with some inflation during 2008 and 2009. The declining value of the dollar (20 percent since 2005) is reason alone for inflation. However, for anyone who can remember the late 1970s, inflation was a demand driver for real estate.

    Brian O’Connor, MAI, is the principal of O’Connor Consulting Group. O’Connor has been a consultant in the Seattle market for more than 20 years and is recognized as a housing specialist. O’Connor’s firm performs appraisals and market studies for all types of commercial properties located though out Washington.

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