Focus on Condos

I've been writing a lot here lately about how our market is stabilizing, and that we might be seeing the beginnings of some small amount of price appreciation in some segments. Condos are a real mixed bag here. We have a couple of complexes that have been holding up pretty well, but some of our larger ones are struggling, for reasons that I'll lay out shortly. On the whole, it looks like our condos sold for around 5% less in the third quarter this year than in did in the second quarter. If you read my last condo post in June, you might remember that I noted that it looked like we'd actually seen the price per square foot of condos jump about 20% from the previous quarter. I said at the time that it was a very small sample size, and it still is. That number is going to fluctuate too much to read much real meaning into it when we're looking at numbers this small.

Let's take a look at the current condo numbers: We have 12 active units on the market today. Of those, 2 are REO's, 7 are short sales, and three are traditional sellers. We also have 12 contingent units, 3 of which are REO's, 8 short sales, and one traditional seller.

We had some pretty good condo sales activity in the last quarter with 17 sales. 11 of those were REO's, with only one short sale, and 5 traditional sellers in the mix. In a market that saw a bit of a drop in overall sales from the same period last year, we actually had a modest increase from the 14 condo sales in 3Q 2008.

As I mentioned above, we have a couple of our larger complexes that are suffering a bit for price. Lompoc Village and Cypress Woods in particular are not holding their value very well at this point. Both of those complexes, along with a few smaller ones around town, are getting to be more and more difficult to buy with financing. Lending guidelines have tightened across the board, but this is especially true with condos. When we started to see the effects of the foreclosure market, a lot of these associations started to have problems with delinquent dues. Underwriters want to know that they are writing loans on properties that will likely be maintained, and when a significant number of owners aren't paying their HOA dues, it gives them pause.

Another reason that condos are getting to be tougher loan candidates is that some complexes have become too investor heavy. There are some tightening loan guidelines out there on owner occupancy ratios, and we're starting to see some of these complexes become nearly impossible to qualify for financing. As a result, we've begun to see an increasing percentage of cash purchases for these units. 7 of the 17 units sold in the last quarter were cash transactions. Cash usually means investor, meaning that at least in the medium term, the ratios aren't likely to get any better.

There's another factor that I think is likely to retard any immediate price appreciation for most condos. One of the truisms in our business is that buyers don't live in the price, they live in the payment. Houses have become so affordable that most of our first time buyers have started to opt for those instead of condos. Think about it this way - most of our larger, nicer condos are probably in the $180K range right now. But they have HOA dues that are usually in the $200-250 range per month. So when you tack that onto the monthly mortgage, you're looking at a payment that would get you into a $200-210K house. That's a pretty decent house these days, so there's a smaller market for condos.

Because of the affordability of houses and the financing issues, I expect the condo market to lag significantly when we do start to see prices move back up. That's not to say that they aren't still a good value. If you're looking to own but don't want all the maintenance that comes with a house, or if you're looking for a good cash investment but you're limited to the $100K range for that investment budget, condos are still a good option. And even though they'll come back more slowly than the rest of the market, rest assured, they will come back.