The increasingly troubled downtown condo market

well I would think that one problem at play here is the plight of the empty nesters. The way it has been working the past few years is that the big suburban house gets unloaded for a killing and the downtown condo is purchased. That's not happening right now. You need the first part to help the second become a reality. I would imagine that overbuilding is starting to be a problem as well. Nothing new about that.

A quick refresher course on the anatomy of a market crash following a bubble:

Step 1: liquidity dries up as a “showdown” develops between sellers and buyers
Step 2: prices slowly begin to fall as savvy sellers take relatively small losses and exit the market
Step 3: panic sets in and prices plunge as liquidity is restored through capitulation selling
Step 4: there is a return to fundamentals/mean

Real estate that is not being propped up with your tax dollars through FHA lending (i.e. most condos, commercial property, high-end residential property that is above FHA lending limits, etc.) is somewhere between steps 1 and 2 above. Steps 3 and 4 will follow shortly, and it will be ugly.

I'll take a place at FP3 (1200 sq. ft./1.5 bath) for no more than 350K. I think that's a fair offer. Think they'll go for it?

I agree with Lance (above). However, prices may easily decline through what fundamentals support, just as they went through them on the upside. I think the only thing that would change this, is if people get back into the "real estate as an investment" philosophy again sooner than we think. This is unlikely, but could happen. That would put the day of reckoning (for real estate prices) further into the future.

I would like to point out that FP3 closed on three (3) residences in July and three (3) residences in August. Activity and interest has been solid. I am concerned that the Primetime report, which lists FP3 as having 89 units ( The property consist of 92) is not accurate. Furthermore, I do not believe that this marketing firm has ever represented a downtown Boston property. Without having qualitative or quantitative data, or a comprehensive understanding of each properties financial framework, it is bold to predict a universal solution.

Lance:

There's a real problem with step 3 in this housing market. Unlike a stock bubble, everyone in the housing market is leveraged to the hilt, and there are no margin calls when your asset values fall too low. Add in the fact that it's relatively easy to delude yourself into thinking your house is worth more than it is (unlike a stock, you can't just look up the price in the morning paper), and a lot of homeowners won't even THINK of selling for market reasons until they're too far underwater to be able to sell.

Sure, there are lots of forms of mortgage modification available (short sale, principal cramdown, interest rate reduction, etc), but they all require the bank's cooperation and ruin your credit. If you can't get the bank to cooperate, or you can't afford the hit to your credit, capitulation sellers need to pony up some serious cash, which they may or may not have.

In short, there are lots of people out there who literally can't afford to sell their house. Which could mean that instead of seeing phase 3, we see huge numbers of accidental landlords.

Investing in a cube of space in the air never did strike me as a great investment. I have over 4 acres in a great town, a barn for gardening, a basement for woodworking, and thousands of square feet of living space for the cost of one little cube of air in Boston. Sorry, I just find downtown Condos to be a terrible deal. And then you got to deal with all that noise, crowded placed.. ugh, Im stressed just thinking about it.

It would seem to me that Lance's "step 3" of the market crash kicked in some time ago.

IMO, we are entering step 4 now or soon will be.

James, we're not really going to see huge numbers of accidental landlords, because we already have a huge enough number to saturate the market. Apartment vacancies are at record highs while household formation is plunging. Going forward, most of the people with delusions of renting out are simply going to lose their houses.

James:

You make a good point. However, it applies only to a narrow pool of owners. That is, people who overpaid/refinanced during the bubble and who can afford to service their debt indefinitely. I agree with you, these people will probably not be forced sellers. They will be stuck.

Now let's look at the rest of the market... What about people who have significant equity or own their property free and clear (think: baby-boomers looking to downsize)? What about people who cannot afford to keep servicing their debt? What about speculators that can afford to take a loss? What about “jingle mailers” who walk away from underwater mortgages? What about banks unloading REO? What about foreclosures?

Depending on whom you believe, between 1/3 and 2/3 of transactions occurring today involve some sort of seller distress. Factor in the growing inventory of REO that already exists on banks' books and foreclosures in the pipeline and it's clear that distressed selling will continue to dominate the market. This is the essence of capitulation.

Prices are headed much lower.

kz said "Investing in a cube of space in the air never did strike me as a great investment. I have over 4 acres in a great town, a barn for gardening, a basement for woodworking, and thousands of square feet of living space for the cost of one little cube of air in Boston"

Ahh the good old urban vs suburban vs rural debate. kz, its all a matter of opinion. I grew up in the Berkshires and while I love the outdoors I have become a complete urban-life convert. At first I hated it - but you really gotta try it to judge it. How many conveniences can you walk to from your 4 acres? Think about how many times you need to get in your car and drive just to leave your house.

Urban life can actually be SIMPLER than city living. There are many very quiet streets in the city and surrounds. Once you learn to walk or bike or take the trains, there is very little traffic to deal with. I personally walk and bike to almost everything I need. I have a small quiet yard that is big enough but doesnt require me to spend a whole weekend maintaining it. And get this - when I was visiting my parents place in the Berkshires last week I was noting how noisy it was! Why? The neighbors spend the whole weekend mowing and weed wacking their yards and you have to listen to it all day. In my Porter/Davis Square neighborhood everyone uses manual push mowers. Ahh urban peace and quiet.

Now dont even get me started on what happens when you get used to walking to good, non-chain restaurants every week, instead of driving to the local strip mall for Olive Garden.

kz --- we can argue all day about lifestyles. It all comes down to personal preference. Some people crave the activity and the amenities available in a city. I don't live right downtown (although I would like, too), but I'm sure I could sell my fairly modest house close to downtown and move to a place like yours way out somewhere for the same money. But, I would go out of my mind out there. Give me peace and quiet when I'm dead. Supply and demand dictate price so it would seem that many more people prefer cubes of space rather than 4 acres.

yes, we've been predicting this for years - see previous discussions with Sunshine and Lollipops (who we haven't seen recently for some reason... )

Central Boston is a jumbo market. Jumbos are in horrible shape - most of the movement lately has been in the govt subsidized part of the market - 8k credits and FHA loans. What happens when those govt subsidies go away?

Whoever goes to auction first will lose the least.The tactic of dealing from false strength has been worn out.

REmaven:

"Whoever goes to auction first will lose the least."

You hit the nail on the head. Well said...

Er, I can't get the numbers to work.

According to the PrimeTime Communities' report, there are 558 units listed for sale, right now. They estimate that, on average "each of the communities sold 1.03 units per month". If 13 of the 558 units are selling each month, then doesn't that come out to 43 months, or approximately 3 1/2 years, of supply? That doesn't equal 100 months or eight years. And, eight years is not "almost a decade" unless 20% variance is acceptable.

Anyone independently verified these numbers? Reporter? Anyone??

Well said REmaven. I think RE market is highly localized, and in the case of Central Boston condo, there are just well too much supply. Also, Boston is not really a metro cities like New York/London/Tokyo, where urban condos can sell even if local economy is doing poorly, since these cities attract foreign buyers.

The reason why urban condos can charge a premium, besides the city convenience, is the scarcity value (i.e. opportunities are limited in city that are already built out). Yet we currently just have way too much condos and I do believe a lot of them have to lower the price substantially to sell.

Without accurate data, how can anyone draw conclusions?

My analysis shows a different picture of the downtown market. Not ten years of supply but 3 years, and even that as a result of a market where no one was buying; the market increased during July and August, including under agreements that took place after Memorial Day, the typical end of the spring market.

Please independently verify the data you all rely on! (And, that means my data, too.)

REmaven: I couldn't agree with you more. For example, The Clarendon is still trying to push units at full asking price. What are they thinking? In this economy, the only thing they are going to accomplish is infuriating the few serious cash buyers out there. Let's see what they do once those beautiful "W" units fully hit the market!