Condo Crazy
Construction is frenzied, and prices are going through the roof. Is it too much, too fast?
Many of those buyers will never step foot in their purchases, much less Florida. Nearly 25 percent of home sales nationwide last year were made by people who had no intention of living in them. Others will flip their units the day a building opens. And it will be the same story in Las Vegas, along the Gulf Coast, and in cities such as Philadelphia; Portland, Ore.; Seattle; and Washington, D.C. Some investors are even planning to rent out their condos at a loss, counting on making their money on rising prices instead.
All telling signs, says Robert Shiller, an economist at Yale University and author of Irrational Exuberance, which foretold the late '90s stock market crash and has been updated to include a chapter on the current real-estate mania. "You can't tell when the real-estate bubble will pop, but it will, and history isn't on the new investors' side," he says. Although Shiller acknowledges that there is a fundamental difference between real estate and stocks--you can actually live in a house, and you're unlikely to "panic sell" just because your neighbor is selling his--he's worried. "People think that investments can't go bad, that they will make you rich, that you are stupid if you're not in the game, and that home values will just keep going up," he says. "But they aren't asking how or why."
Insulation. If they were, Shiller might not be able to tell them, as even he admits he doesn't know when doomsday will be here, if it comes at all. Whatever happens, builders and developers have gotten a lot smarter about protecting themselves and aren't likely to end up as part of the carnage. At KB Home and several other large builders, for instance, only projects that are substantially pre-sold get built. If the bottom falls out of the market, it will be the individuals who bought the properties, not the builders, who will suffer.
Some builders have also instituted antiflipping rules that discourage buyers from selling their units within less than a year or 18 months. But they can be difficult to enforce and have done little so far to dampen speculation. Some markets like Las Vegas have attracted so many real-estate investors that avoiding them has become a buying criterion. For Robert and Angie Douglas, having owners as neighbors was a big part of their decision to purchase a condo in the Sandhurst, a new Las Vegas tower--priced from $250,000 for a one-bedroom to $3 million for a penthouse--that won't be completed until 2006. "We wanted a building where people were more likely to live than invest," says Robert. What makes him think he got that? The building has attracted a lot of young professionals like the Douglases who want to be close to their jobs. It has a no-flipping clause, and the developers have been very vocal about wanting the units to be occupied by owners. In the end, Robert knows it will probably be impossible to tell who owns and who rents. Nonetheless, he'll be on the alert for any moving vans.
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