Calculated Risk has a post showing that single-family houses were greatly overbuilt for several years. Based on my research for and the experience of several of my clients, things are even worse for condo complexes than single family structures.
The percentage of buyers who are unable to complete their purchase agreements has gone through the roof in the past 6 months from already high levels.
To take a typical example, a 400 unit tower in San Diego or Miami would sell out in 2006, but as closing time approaches 20-60% are unable to complete the agreement, either because the decline in value greatly exceeds their deposit, or because financing is next to impossible for non-owner occupied condos.
Even in the city of San Francisco, the single strongest market in California (which is not saying much), banks that “pre-approved” people with steady jobs in 2005 and 2006 are now asking for 30% and 40% down payments on condos. Many people who can afford big down payments, if they previously prequalified with stated incomes and/or stated assets, are being rejected because those loans barely exist now.
This means (1) condo sales were overstated in 2004-2007 to the extent buyers who signed purchase agreements pre-construction are counted as sales (2) there is a huge inventory of new condos that the builders have not sold and have not listed.
Since building a condo high-rise normally takes 2-4 years, the next year is going to get worse as huge numbers of buildings are completed with half or more of committed buyers not closing, and few buyers able to obtain financing to replace them. The buildings sold in 2004 are only somewhat underwater and closing rates are generally fairly high. But the 05-07-started buildings are generally more cheaply made, were sold at higher prices, and not as well located. Builders are also trying to force closings on buildings before construction is completed on all floors and on amenities like pools and gyms, further encouraging people to default.
Why do I say condo buildings started in 2005, 2006, and 2007 are more cheaply made than older buildings?
(1) There was a “gold rush” mentality these years, and construction was rushed forward as everyone tried to cash in on the boom.
(2) Financing was so easy some fairly shady or completely inexperienced people were able to get bank loans to build condos.
(3) The market wasn’t so white hot in 2001-2004, so generally these complexes were built by experienced developers who knew what they were doing and were able to obtain prime locations in the weak real estate market of 1995-2002.
(4) The raw materials developers need for building: concrete, wood, metals, ceramic fixtures, glass, etc, all shot up in price from 2002 to 2007. This meant there was a lot more corner-cutting, and buildings built in this period were simply less “substantial” than older buildings.
(5) The market for construction labor was extremely tight during the boom years, often meaning shoddy construction by inexperienced illegal immigrants. With buildings going up everywhere, quality construction labor was stretched extremely thin.
(6) Perhaps worst of all, construction delays in some recently completed buildings could cause serious problems down the line, including toxic mold. I have heard some horrible anecdotes from contractors here in San Diego on how some new condo buildings here had drywall exposed to outdoors for months because of financing issues caused unplanned delays in construction.