Spring Real Estate 2009

Publication Date: Friday, April 24, 2009

Condo market bottoming out?
Competitive pricing, incentives encourage sales

John King, a broker associate with Alhouse King Residential in Palo Alto, wants to be honest about local condo markets.

"We all want it to be a rosy picture, but the reality is that right now our communities are experiencing the difficulties the rest of the nation has been facing," he said.

That doesn't mean that Palo Alto, Menlo Park, Mountain View and Los Altos aren't terrific areas where people will always want to live, he added, describing the local real estate market as "last to fall, but first to rise."

While projections for this year's closing sales paint a dismal picture, realistically priced units are likely to push the market back on track, he said.
Unsold condo listings are at the highest level since September 2002 when the market bottomed out from the dot-com bust. In 2006, there were about 830 townhomes and condos sold in the cities of Palo Alto, Menlo Park, Los Altos and Mountain View. By 2008, that number had dropped to about 520.

Based on the 50 units sold in the first quarter of this fiscal year, King estimates condo sales for 2009 at around 300, or about one-third fewer sales than last year.

The reality is that the condo market in these seemingly untouchable communities is along for this economy's bumpy ride. But the good news is the bottom is beginning to show. Appropriately priced properties are beginning to sell at around their 2004 price levels.

"As offers based within people's actual means begin to constitute market level, the housing market will come into equilibrium," King said. But he also made clear that, like the downturns in the early 1990s and early 2000s, this is a period of market transition. This downturn differs because it's not just an issue of value but accessibility to financing, he said.

This translates into units in Santa Clara County lingering on the market four times longer than in 2007. It also means the number of pending (sold) condos have decreased significantly.

Sales of condos in Palo Alto, Menlo Park and Los Altos are slow, but steady. In early April, 54 units were on the market in Palo Alto and nine sold; Menlo Park sold five of 48, and Los Altos nine of 30 listed condos. With roughly twice the condos and townhomes as surrounding cities, Mountain View sold 32 of its 97 listings.

But even amidst these record lows, there are still exceptions: A few weeks ago, one of John King's townhome listings in Mountain View sold over asking price with three offers. "It was priced at levels from 2004," King said. "We know where the market can sell and we now know where the bottom is."

King estimates that about 20 percent of the condos and townhomes in these communities are comprised of new building developments. The other 80 percent are old units.

Sales figures for new developments are hard to come by, since most are not listed on www.mlslistings.com. Developers may put a few units on the database to show various floor plan options and bait the market, but it's unclear how many units remain unsold.

King estimates that about 20 percent of the condos and townhomes in these communities are comprised of new building developments. The other 80 percent are old units.

What is known is that new developments offer strong incentive packages to sweeten the deal for buyers. Sellers sometimes pay the buyer's homeowner's dues for certain periods of time. Gables End, a Regis Homes of Northern California development in Mountain View, has adjusted closing costs to reduce the amount of money needed to get in and offers flooring upgrades.

Rob Parker, vice president of sales and marketing at Regis Homes, said energy-efficient utilities with tight-seal windows and doors and the latest in heating, cooling and water technologies are key components that help push the sale of new condos. There is a 10 to 15 percent premium for new versus resale condominiums, he said. New condos attract buyers because they don't need renovations and energy-efficient utilities save money.

A triple-whammy troubles the condo market, according to King. First, developers built too many condos and there is a tremendous oversupply, much of which is difficult to track because it's not listed on MLS. Sellers are struggling to get developments sold and droves of people who purchased condos in the last three to four years face difficulty in paying mortgages.

Secondly, monthly homeowner dues have been steadily increasing with the cost of running an organization. When 30- to 40-year-old associations haven't collected enough money over the years to pay for maintenance and upkeep, they need to either increase dues to finance improvements or design special assessments that are attached to the dues. Many homeowners' association dues are up 20 percent this year, King said.

The third whammy, according to King, is that lenders are scrutinizing the condo associations to be sure they are funding associations that are up to snuff. Lenders review financial documents to verify that the association's reserves are in good form and they confirm that the owner-occupancy ratio (owners who live in the units) is between 70 to 80 percent.

"Condos are usually viewed as an affordability option," King said. He predicted that the market will stabilize later this year with lower price points.

Though this market is one of the strongest in the country, the communities are beginning to see the affects now. "We're in the midst of it now and it's just one week at a time," King said. "The flip side is that we recover faster, but we still have to go through the process."