Condo Crazy
Construction is frenzied, and prices are going through the roof. Is it too much, too fast?
In Los Angeles, a builder unveils plans for a new condominium development, and more than 2,000 people sign up for the chance to buy one of the 135 $500,000 lofts that will be built in 2006. In Naples, Fla., frantic real-estate investors close on not-yet-built condos in the morning and resell them for 10 to 15 percent more that afternoon. Along Mississippi's Gulf Coast, buyers reserve new waterfront units at $350 per square foot, only to be told on contract-signing day that the price has climbed to $500 per square foot. They pay up without hesitation.
Condomania is back.
While the nation has been focusing on the white-hot single-family-home market, condos have been staging a pretty impressive run-up of their own. The median price of an existing condo in the United States jumped 17 percent in 2004 to $193,600, compared with a gain of 8.3 percent to $184,100 for a single-family dwelling. And that was the fourth year in a row that condos, co-ops, and townhouses have increased in value faster than their single-family counterparts. Some 15 years ago, homeowners feared that condo values wouldn't hold, but today, says Bruce Karatz, CEO of Los Angeles-based KB Home, "People are a lot more confident these days that the value of a condo is solid."
Maybe too confident. With prices climbing so high, so fast, and with new construction moving at such a frenzied pace, some experts warn that the sizzling condo market--indeed, the entire real-estate market--could start to fizzle. David Lereah, chief economist for the National Association of Realtors and author of the new book Are You Missing the Real Estate Boom? is not among them. "There is not going to be a bust," he says, although he concedes that prices will most likely level off in some overheated markets. "The economy is healthy, and sometimes you just have to say it: It's the demographics, stupid" --a reference to the baby boomers, millions of whom are in their peak earning years or heading into retirement, with a tremendous buying power to acquire bigger homes, smaller homes (often condos or townhouses), second homes (ditto), and investment properties (double ditto).
Also fueling the boom are the so-called echo boomers, who are reaching first-time-buying age and want to be closer to work and play. Then there are a growing number of single parents, young couples without children, and particularly new immigrants, who may be priced out of a single-family home or are eager to trade a shorter commute and more convenience for a smaller place and a condo fee. "We're looking at a whole generation of people who may never own a single-family home," says Jerry Starkey, CEO of WCI Communities, which builds luxury condos and single-family homes.
Although condo prices have been rising rapidly, low interest rates have helped dull the pain. The average interest rate on a 30-year, fixed-rate mortgage has stayed below 6.5 percent since mid-2002, and though rates are inching up, most experts agree with Lereah that rates would have to take a pretty big leap (to as high as 8 percent) to really put the brakes on. And many baby boomers and retirees, who are sitting on fat nest eggs, are buying their new nests with cash.
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