From Homescape

With more than 4,000 new condominium units expected to be completed in metro areas like Atlanta and Phoenix this year, cities across the country are bracing for a flood of new supplies. Many of these new units are a result of developments that were created during the height of the housing boom and are now coming to a completion. According toThe Wall Street Journal, developers in Miami and Fort Lauderdale, FL, “are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos.” San Diego, another hard-hit region, will add 2,500 units, according to estimates provided by Reis Inc., a New York-based real estate-research firm.

Supply and no demand
The U.S. finished 2007 with a supply of condos large enough to absorb 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999, the Journal reported.

While developers may not be thrilled by the overstock, condo buyers fishing the market may have a wider net to cast with significant price cuts on the newer units. This latest flood of inventory will come at a hefty cost for most lenders across the country. Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months — between the third and fourth quarters of last year — the delinquency rate rose to 10 percent from 5.9 percent, according to the Oakland, CA, research firm.

While it may seem surprising that anyone would want to add supply to a market whose troubles have been well-publicized for several months now, the Journal reports that the economics of condo building encourage developers to bring half-finished projects to completion, even when prices and demand are plunging. Developers usually put up their own money for a project first, then spend borrowed funds. Once developers have spent their money and have commitments from lenders, they have a strong incentive to keep building to finish the project.

Going rental
Driving around Chicago, I’ve noticed some developers have turned their condos into rental units for the time being. They probably figure they could make more money selling the units after the inventory goes down and the housing market regains its footing. But going the rental route will only work if you’re smart about it.

When I was walking my dog this weekend, I noticed a condo down the street from me that had been on the market for over six months, now had a for rent sign posted outside. The condo was a for-sale-by-owner, and last time I checked, the owner had already reduced the price of the unit by $15,000 from the original asking price. But I guess the price cut failed to lure any buyers. The rental price for the 2-bed, 2-bath condo is $1,895 per month not including utilities. The average 2-bedroom, 1-bath apartment in my neighborhood is going for $1,200. I don’t know about you, but I’d rather share the single bathroom if it means saving me $700.

I’m sure the owner of the condo wants to earn enough money to pay for property taxes, condo assessments and possibly make some extra cash on the side, but his asking price in no way fits within the surrounding rental market. If you can afford $2,000 in rent a month in Chicago, you probably can afford to buy (or you’re renting a luxury high-rise apartment downtown that has a private doorman and gym). Know your market, do your homework and be realistic when you come up with your rental price, otherwise, it will just be another bad investment choice.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.