Who is going to buy all the Condos, (Part II)

[Charlotte_native]

Have we heard any success stories from these investors who got in early in the Charlotte market? I think the folks who bought the places to live in and are in it for 5-10 years will come out okay - the market will shake itself out over that time.

There were some that made a good bit of money early into the uptown building boom -- consider the projects that were built in the very late 90's and in 2000, 2001, and 2002. The developers at that time were far more modest in pricing their units. since the market was unproven they priced units to sell and sell quickly (and construction costs were less). People that bought early at Gateway, Silos, areas of 1st Ward and 3rd Ward did well selling a year or two after they bought. Of those I know that did this, though, they didn't buy with the intent to sell for high profit, it just worked out that way when they moved on. Jump to projects announced after that time -- many had heard of these high profits and made an assumption that it would somehow be guaranteed and investors increased with uptown projects.

The reason it happened to be very profitable at the early part of the boom is the projects weren't all top-heavy with investors, those of late have been. When you have a small percentage come back on the market it might work, supply isn't higher than demand, but jump to Courtside, Avenue, Trademark and upwards of 20 - 30% of the units come back on the market the day after they close marked up enough to cover commissions, some carry costs, closing costs, and desired profit, supply is suddenly very high as is the large price bump. Combine that with the developers of each of these projects have units they still need to let go of -- and they can price them much cheaper than the flip units...

Developers lately have also priced their units at the beginning more in line with anticipated future value unlike the early projects. Each of the recently announced projects, and completed projects of the last year or two, have been priced at 'current' pricing so when Avenue is completed and priced at $300/foot, yet other units all over uptown are that price also, it is hard to sell a flip unit in the building for over that price.

[palmetto75]

The difference between the downtown boom of the last 2-3 years vs. earlier times was that this boom was in large part due to a nationwide trend that few understood. This is evidenced by the number of rentals and number of out of town and even out of state mailing addresses on the deeds. Many thought it was simply people wanting to live in a more convenient urban setting, but few outside of maybe Miami and Las Vegas understood the true magnitude of speculation in the market.

My opinion is that the worst (maybe much worse) has yet to come for the uptown condo market. The amount of "phantom" inventory that is currently being rented out at prices that only cover 60% of the holding has yet to have a true impact on the market. As these out of town flippers turned landlords continue to stomach large losses in their respective home markets they will be forced to liquidate their negative cash flow holdings regardless of whether they are in a "strong" market or not.

[monsoon]

The difference between the downtown boom of the last 2-3 years vs. earlier times was that this boom was in large part due to a nationwide trend that few understood. ....

Actually there was never a boom prior to what we have seen over the last 4-5 years. The 1990 census placed the downtown population (first 6 census tracts) around 6010 if my memory is correct. In 2000 it was 6032, so 22 people in a decade. In 2006 the downtown population was estimated about 9,000. Despite this, around the end of 2006 there was the equivalent of 6000 condos announced in various projects around and near downtown. So I agree completely with you that something unreasonable and not seen in modern Charlotte before was happening, and is now most likely coming to an end.

[atlrvr]

While I don't disagree that their is a large amount of inventory being rented at below carry-cost, I'm not sure that I buy the argument that they will be "forced to liquidate". Why would they be forced? Sure, some can't afford the carry, but most will hold on because, a) their debt is higher than the resell price and literally can't afford to sell, b)not willing to take the foreclosure hit to their personal credit, c)pride, and d) it's a deduction for personal income taxes, so a sizable portion of the true "loss" is recaptured, e) the longer someone holds on, the greater the incentive they have to stay in

The truth is, the speculative bubble has popped in that no one with any common sense is buying properties with the intent to flip them in any newly announced towers. This means supply will dry up relatively soon. With the decline in rental properties entering the market (and lending standards getting tougher), rents should begin to increase in a couple of years, which should bouy those holding.

I can be convinced that we haven't seen the worst yet, but I think that time is very close. Investors have for the most part stopped closing on places like Avenue (much better to walk away from $10k with no debt than to knowingly enter a bad business plan under the current market conditions). We will have some foreclosures and people willing to pay to get out, but the bulk of that occurs sooner rather than later to the initial purchase. In perhaps a year, things should have turned the corner and we will have a much better perspective of the true market.

[mshook]

Shouldn't we also take into account the changes in the desires/demographics of a younger generation than what we had in the 70's. A generation that A) is generally more educated, B) has higher incomes, C) isn't marrying/having children until their 30's, D) Wants/Desires to live near city's center. I would say there are a ton of "New" Charlotteans who want to live in the city center.

[monsoon]

^I am not sure that I buy into those generalizations. As a whole the US population is generally less educated now, (look at the dropout rate), and real household income has not risen since 1979. I do admit there is a lot more credit than there was in the 1970s which gives the illusion of wealthier times, but there is the basis of the problem, it went too far. There is the fact that wealth is more concentrated in fewer hands now but I am not convinced these people are beating the trail to actually live in a small condo.

But in any case, if the demand was there, these projects would not be getting canceled.

[palmetto75]

I buy all the arguements for people not being forced to sell, but will add a few more that say they will be or at least will want to:

1. Late last year the govmt changed the IRS rule to allow short sales with no tax penalty. Previously if the bank forgave a portion of the principle balance (short sale) the amount of forgiveness was taxable as income. This being no longer has given homeowners in distress to get out with only blimished credit and not a full foreclosure. This tactic is in wide use in the bust areas now especially condos. It works well for people who generally have strong income and good credit. Kinda an "opps I made a mistake" gift from the govmt and the lender.

2. The other arguement is the loan itself on the property. Many of these "investments" were bought with 2-5 yr ARMs that will adjust in the coming years. The negative carrying cost will become even greater as these adjust absent of a tremendous drop in long term rates. Then you have the infamous Option ARM wich is a possibly much more horrific beast than the plain jane ARM.

I must emphasis that most of this is based on other markets and I have only anecdotel evidence that shows it occuring in Charlotte itself, but some of it is quite strong. For instance I know of several buyers in a few of the buildings being pushed to use Option ARMs when it came to closing time and they realized interest rates had shot up over 100 pts from the time they reserved the unit. Also, Wachovia was the 3rd highest originator of Option ARMs (1st Country wide, 2nd WaMu). Some of those had to have been condos in CLT.

[CorgiMatt]

I'm a johnny come lately on this topic, but a better question would be who's going to have any choice but to buy condos when gas is $7 per gallon by 2010 according to economists's predictions on CNN?

[monsoon]

I'm a johnny come lately on this topic, but a better question would be who's going to have any choice but to buy condos when gas is $7 per gallon by 2010 according to economists's predictions on CNN?

I never really understood the concept of purchasing a $250,000 (low end) - $500,000 downtown condo in order to save some gas money. And that's assuming that you actually work there which most people in this metro don't. And the monthly fees in some of these places would also purchase a lot of gasoline even at $7/gallon. It's better to get rid of the SUV and purchase a small car that gets 35mpg - 50mpg.

[atlrvr]

I'm certainly not an expert at Option ARMs, but don't these actually make it easier for an investor to "hang on". They can reduce their monthly loss at the expense of a negatively amortizing mortgage. Agreeably a horrible investment strategy, but one that would possibly allow someone to "afford" holding the property.

[VistaLakes01]

I never really understood the concept of purchasing a $250,000 (low end) - $500,000 downtown condo in order to save some gas money. And that's assuming that you actually work there which most people in this metro don't. And the monthly fees in some of these places would also purchase a lot of gasoline even at $7/gallon. It's better to get rid of the SUV and purchase a small car that gets 35mpg - 50mpg.

Is downtown Charlotte in the exact center of the metro making it more convenient to live downtown as people move from job to job in different parts of town? Is it a desirable place with lots to do within reach of walking, bike, or scooter? Is it the most beautiful part of town? On the map it looks kind of to the north end of town instead of in the center. Here there is very much a desire to live downtown because you can drive to any suburban employment center equally and less distance than driving accross town, and downtown is a beautiful place to live with lots to do. It is just very expensive. If the new condos in Charlotte don't fill up (don't be fooled by the 70% occupied claims) then the prices will fall as people pull out with their deposits, some will become rentals, some that haven't got off the ground yet re-announce they are building a hotel instead. Then after some time they will begin to fill up. I wouldn't count on any projects that haven't gotten off the ground to be built until the recession or whatever we are in is over. But then again Florida real estate has always been boom or bust, the state caters to developers. North Carolina is kind of the new Florida though, as this state is so over crowded and people opt for the beauty of the mountains and still have the beach. In the past couple of years we have been slammed with ads for "cheap land in NC and Tennessee" and "live the Carolina lifestyle" much like Florida in the past.

[uptownliving]

Maybe the reason that Charlotte real estate has been doing better than the Nation as a whole is due to our local market condition. In Charlotte the population is more educated. There are more people here with college degrees than in decades past. Also real household income has been rising here. Greater wealth is not just an illusion in Charlotte...compared to decades past it is reality. All real estate is local and looking at national stats and expecting a local market to follow them without regards to local market conditions is not very smart in my book.

So far this year avg prices for downtown properties listed on the MLS are down 3% compared to 2007. I would be surprised to see local price decreses in the 20%+ range that we have seen in other large markets in the USA.

Edited June 30, 2008 by uptownliving

[SmellyCat]

around the end of 2006 there was the equivalent of 6000 condos announced in various projects around and near downtown. So I agree completely with you that something unreasonable and not seen in modern Charlotte before was happening, and is now most likely coming to an end.

6,000 announced, but how many have/will actually come to fruition? Surely much fewer than that, no?

[monsoon]

6,000 announced, but how many have/will actually come to fruition? Surely much fewer than that, no?

Oh for sure. In just the projects that have been mentioned on this site, there are dozens that simply disappeared. Most were lower rise type buildings, but expensive never the less.

[monsoon]

..... Also real household income has been rising here. Greater wealth is not just an illusion in Charlotte...compared to decades past it is reality....

Actually if you go to the US census site, and compare the per capita income, or house hold income, or family income, and adjust for inflation, you will find that it has dropped significantly in Charlotte from 1999 to 2006. You can use any measurement they have and you will get he same result. (It's actually $1,000s lower than where it should be) The whole myth of great economic times has been created by an unsustainable run up in real estate prices that has been leveraged to finance a lifestyle that really shouldn't exist.

It's not just a Charlotte problem, but it has come home squarely to roost in Charlotte's economy too the fall of the finance industry. And industry that helped create the above situation. And let us not forget that Charlotte is a huge distribution center (presently 6th largest in the USA) that depends heavily on fossil fuels. There are more than just bankers being laid off here.

[uptownliving]

And also looking at that same data from the Census there are 30,000 more households in Charlotte in 2006 making $50k+ a year compared to 2000. There is that job growth that you were looking for that is helping to sustain the local real estate market.

[Raintree21]

Actually if you go to the US census site, and compare the per capita income, or house hold income, or family income, and adjust for inflation, you will find that it has dropped significantly in Charlotte from 1999 to 2006. You can use any measurement they have and you will get he same result. (It's actually $1,000s lower than where it should be) The whole myth of great economic times has been created by an unsustainable run up in real estate prices that has been leveraged to finance a lifestyle that really shouldn't exist.

It's not just a Charlotte problem, but it has come home squarely to roost in Charlotte's economy too the fall of the finance industry. And industry that helped create the above situation. And let us not forget that Charlotte is a huge distribution center (presently 6th largest in the USA) that depends heavily on fossil fuels. There are more than just bankers being laid off here.

That can easily be explained by the fact that people have moved here for service jobs that pay less. These jobs support the wealthier people who have moved here as is explained by Uptownliving below. There is still a ton of people with higher incomes that have moved here.

And also looking at that same data from the Census there are 30,000 more households in Charlotte in 2006 making $50k+ a year compared to 2000. There is that job growth that you were looking for that is helping to sustain the local real estate market.

[monsoon]

And also looking at that same data from the Census there are 30,000 more households in Charlotte in 2006 making $50k+ a year compared to 2000. There is that job growth that you were looking for that is helping to sustain the local real estate market.

Certainly I don't deny there has been population growth, but $50K year is actually $9K less than the median, and $19K less than the 1999 median once adjusted. My guess is that if we had the 2008 estimates we would see even more of a fall. The local real estate market is now falling and there are two partially built condo towers in downtown Charlotte that are apparently in deep financial trouble. Your point is that people are making more now, which they aren't and the market is doing well here, which is doesn't appear to be at this point.

[uptownliving]

Certainly I don't deny there has been population growth, but $50K year is actually $9K less than the median, and $19K less than the 1999 median once adjusted. My guess is that if we had the 2008 estimates we would see even more of a fall. The local real estate market is now falling and there are two partially built condo towers in downtown Charlotte that are apparently in deep financial trouble. Your point is that people are making more now, which they aren't and the market is doing well here, which is doesn't appear to be at this point.

Your stats dont jive with Census.gov figures.

Median 2006 Household Income for Charlotte is $48,670

Median 2000 Household Income for Charlotte is $46,975

Even accounting for inflation the numbers you cited are way off.

Anyways the 2 condo towers you cite are sitting dormant because of mismangement by the developers. If those were the only 2 condo towers currently under construction then I would probably be just as pessemistic about the local real estate market as you are. However as we all know those aren't the only condos under construction....in fact those 2 towers make up a minority of units currently under construction downtown. I would note that the 2 condo towers that are stalled were by the 2 developers that had no previous high rise condo experience. I think it was more than market conditions that has caused their problems.

I can also speak from experience since I live in a condo downtown. Even in the current market downturn units simliar to mine are selling for prices well above what I paid in 2004. And the prices are holding. No 20%+ price drops here.

But prices and market conditions aside. There isn't a day that doesn't go by that I am glad I don't live in the suburbs of Mecklenburg anymore. And that is something you really can't put a price on.

[monsoon]

Your stats dont jive with Census.gov figures.

Median 2006 Household Income for Charlotte is $48,670

Median 2000 Household Income for Charlotte is $46,975

Even accounting for inflation the numbers you cited are way off.

$46,975 would equal $56,843 in 2006. (-$8,000) difference. You may check it at this governmental site

[palmetto75]

I'm certainly not an expert at Option ARMs, but don't these actually make it easier for an investor to "hang on". They can reduce their monthly loss at the expense of a negatively amortizing mortgage. Agreeably a horrible investment strategy, but one that would possibly allow someone to "afford" holding the property.

Funny as soon as logged off here last night I had this popup in my alert.

http://www.charlotte.com/business/story/693937.html

You are right in that it does allow them to hang on, but for only a finite period of time. I don't know all the options, but most I had heard of allowed for 2 yrs of "minimum" payments. Then the payments go to a full principle & interest payment and the new higher loan balance. In many cases these paymenst are up to twice the minimum payment amount. These loans were great for the self employed people they were designed to help whose income varied month to month. Of course the lenders had to take it one step further and provide it as the loan dujour to the cash strapped masses.

Since the Golden West deal was what really brought Wachovia into this market I would surmize the large part of this lending in Chralotte took place in 2006 or after. Hmmmm?????

[Charlotte_native]

Here are some simple facts from living and working in the uptown market based on those I know and have met that live there. Regardless of stats from the gubment, the age and demographics range as far and wide as the city as a whole. This doesn't include the ultra low income (other than the public housing elements in 1st and 4th Ward) and only a bit of the ultra high-income. (**and i can already see this becoming a side-track issue for my whole post**not saying pro or con, just an 'is').

Most people I know aren't worried about the current real estate issues unless they bought as an investment. Of those they are renting their spaces and renting a place downtown is very easy right now and rents have risen in the last two years. The majority of property owners I know that live downtown moved here from elsewhere, only considered an urban environment where a car isn't necessary on a daily basis, and owner-occupy their property. Since prices haven't fallen uptown yet, no one seems that worried, but even if they do drop, if you intend to occupy your property for a few years this is just part of the normal real estate cycles -- same for any part of town. One should assume that buyers are not stupid and make their choices based on something that is personal to them (again, I'm not talking about investors) -- they weren't duped somehow into buying downtown. There are people who abhor living in the outskirts of town just as there are those that would hate uptown. Thankfully the percentage of living space in Charlotte makes the number of units in uptown miniscule to the number of housing units as a whole, so only a small percentage of Charlotteans need to want to live uptown to sustain the number of options there. Most people in my building work within a couple blocks and walk to work.

A few years back there were over 30 foreclosures in The Peninsula but that area rebounded in a year and prices jumped all over again. Chicken Littles always freak in the midst of a downturn, but forget all about it when the pendulum swings again. Large numbers of foreclosures are bad, for sure, but they don't mean the death nell for entire neighborhoods or areas as a given.

As for why many projects in uptown have been cancelled, it isn't so simple as to assume it was because of lowering demand. 210 Trade and 300 S. Tryon both sold over 70% of their units, far above the previous bar of 50 - 60% sales to secure financing. Unless we ignore the financial woes across the country and across the board for lenders, financing is a b*tch to get right now -- that is why many projects all over are being cancelled. One Charlotte had no demand, but otherwise sales and pre-sales have been fine, finacing for the developer and for the buyer has been a major factor in the changing build environment uptown.

There are currently 331 active listings in uptown, including some for buildings going up so they won't be able to close for some time. There have been 129 closings since Jan. 1 this year for condos in uptown. There are 92 units under contract right now set to close. Those numbers all actually fit into a healthy market -- you want a ratio of at least 30% of the number of properties available to be under contract (92 divided by 331 = 28%), this ratio right now is just barely below that number and considering the general market and the lending world right now, dropping a couple % points less than 30 is nothing to be too concerned about. Having a ratio in 6 months of 39% closed properties to active inventory is actually a bit higher than one would hope for.

If uptown is about to nose dive numbers don't show it yet. If demand has somehow slowed the numbers don't prove that either. New projects being cancelled are probably a good thing for these numbers above -- all isn't bad in a downturn...unsustained growth isn't a good thing unchecked. As it is, in 1 - 2 years we won't be flooded with too many new units.

As for whether gas prices will move people uptown, I don't buy that. Changing living habits, smarter routing and combined trips in the car, maybe moving a bit closer to work, but not a full swing into the middle of the city for most.

[monsoon]

......

As for why many projects in uptown have been cancelled, it isn't so simple as to assume it was because of lowering demand. 210 Trade and 300 S. Tryon both sold over 70% of their units, far above the previous bar of 50 - 60% sales to secure financing. Unless we ignore the financial woes across the country and across the board for lenders, financing is a b*tch to get right now -- that is why many projects all over are being cancelled. .....

That is not entirely accurate. Financing is not based on % of units sold. It's based on total $ sales against a % of the financed amount. In other words 10 units worth $1M each is equivalent to 100 units worth $100K. It's obvious in some of these cases, the developer did not have enough $ sales to hit the percentage despite reaching 70% unit sales. Either the units were priced to low or they didn't sell the right mix and/or costs where a lot higher than anticipated. This is why in the ones that did get built, they "cheapened" the building to get it built.

Financing is not hard to get, even in these days, as long as one sticks to traditional lending rules. The problem is that when this is done, there are not many who can afford or justify a skyscraper in the middle of Charlotte, NC. The base economics don't support it, because, fundamentally, there are no land shortages and extreme population pressures here.

[Andyc545]

That is not entirely accurate. Financing is not based on % of units sold. It's based on total $ sales against a % of the financed amount. In other words 10 units worth $1M each is equivalent to 100 units worth $100K. It's obvious in some of these cases, the developer did not have enough $ sales to hit the percentage despite reaching 70% unit sales. Either the units were priced to low or they didn't sell the right mix and/or costs where a lot higher than anticipated. This is why in the ones that did get built, they "cheapened" the building to get it built.

Financing is not hard to get, even in these days, as long as one sticks to traditional lending rules. The problem is that when this is done, there are not many who can afford or justify a skyscraper in the middle of Charlotte, NC. The base economics don't support it, because, fundamentally, there are no land shortages and extreme population pressures here.

Land shortages.... there aren't land shortages all over America asides from NYC. It has to do with a desirability in living as close to the city- where most work and where all of the action is. This is the case all over, including Chicago. You can live out in the suburbs of Chicago where there is space just as Charlotte's suburbs have. Charlotte's urban core is just on a much smaller scale. I still don't buy the land shortage argument, at least here in America. Maybe that holds true in some Asian and certain European nations, but there is plenty of space in America, and I think it comes down to desirability to live in a highrise versus a forced nature where there really is limiting room and a huge population.

On what was said about no residential should be built over 25 stories in Charlotte because people don't want to pay 1 million dollars to live that high for the various reasons described... again, I direct you to the residential supertowers that are going up all over the world (Dubai, Europe, Asia, America) where they are selling at a premium (keep in mind these towers aren't as big as they are because there is no room, it's because land is priced high and there is a market). How is desirability any different here in Charlotte?

[monsoon]

^Yet said projects are also being canceled all over the United States including Charlotte. Since you cited various cities, how about Miami, Las Vegas, and Chicago that you mentioned (where one of the largest proposals in the world was canceled) and countless others. Specifically about Charlotte, one can live in and near the center city without resorting to a 50 story highrise. A stand by my position that these things are totally unnecessary here, and what they are doing in Dubai has little relevance here.