? Stuck in the Middle |
| Housing Markets Are Stable ... Until They're Not ?
September 20, 2005
Apartments converting to condos/co-ops
One of the reasons why many people argue that high-priced city apartments are immune from housing bubbles is that there is often a lack of buildable land. The reasoning goes: How can a city fall prey to a real estate bubble if there isn't room left to build enough supply to outstrip demand?
Well, there is a way to add to the supply of homes for sale in cities that has nothing to do with constructing new buildings.
All you have to do is convert apartment buildings into co-ops or condos. I see this happening all over Manhattan, and according to Jack Farrar, public relations manager at Re/Max, it is also a hot trend in Phoenix. One of the firm's top agents in that market, Dean Selvey, predicts 5,000 buildings will be converted this year and 10,000 next year, Farrar emailed me recently.
Dan Boone, portfolio manager of the Calvert Social Investment Equity Fund (CSIEX ) is worried that -- thanks to a ton of conversions -- the supply of condominiums is already outpacing demand in places like Florida and the California Coast. For that reason, he is avoiding stocks in regional banks, or any lenders with a lot of real estate exposure.
For more on the potential for mortgage woes to slam banks, see "The Mortgage Trap," BW, 6/27/2005). The story is a few months old, but it reads like it was written yesterday.
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I have heard of renters joining together to buy the building they rent which may make some sense, but as for condo conversions, these are nearly impossible in core urban areas if the buildings were not constructed with this purpose in mind. Older apartment buildings simply aren't up to snuff to handle the changes and code requirements. Newer buildings in the suburbs are frequently built with this in mind, to be rented until the time is ripe for conversion and are zoned as condos. I would be wary of condo purchases in these locations as the amount can change rapidly.
Posted by: Lord at September 21, 2005 02:56 PM
In the affluent area I live in, there are three apartment complexes in close proximity (the only three in the neighborhood). Two of the three have converted to condos. (I live in the one that has not - and will not with any luck).
Of the two conversions, the nicest one went to condos back in Jan 04. The complex is newer but has the feeling of being in a hotel. The 1-bedroom units were $107k which I thought was outrageous for 750 sq. ft, but the going price is now over $180k in the local news leaflet. The rental price for this unit was $739 two years ago when I almost moved there.
The other complex is 20 years old and was the crummiest complex of the three, commanding rents about $850 a month for a two bedroom unit, which is now selling for a hefty sum of $170k.
Meanwhile, I'll keep paying my $800 a month for a 850 sq. ft apt. I know the mgmt at my complex is having a hard time keeping tenants. I've seen specials for two-bedroom units as low as $850 over a 12-month lease.
Let's do the math here. $850/mo for a rental unit or $1500 a month to own it. It amazes me that some people believe there is no housing bubble...
Posted by: Wes at September 27, 2005 03:00 PM