After a Dismal Year, Condo Market Remains Shaky

By Nancy Trejos
Washington Post Staff Writer
Saturday, March 24, 2007

For almost anyone selling a condo, 2006 was a bleak year. Condos bore the brunt of the housing slump: Inventory was high, sales were down, buyers pulled out of contracts, and prices in most places either stagnated or dropped.

The first two months of 2007 have been promising, though, real estate agents across the region say. For instance, according to the Greater Capital Area Association of Realtors, there were 277 settlements on condos and co-ops in the District last month. In February 2006, there were 192.

But does that mean that the worst is over for the condo market?

Probably not, analysts say.

Gregory Leisch, chief executive of the Alexandria real estate research firm Delta Associates, said the slowdown in sales activity will probably continue through the second half of 2007. There are 21,523 units under construction or being marketed, according to Delta's first-quarter 2007 report. There are another 20,469 units planned over the next three years.

At the same time, sales volume has dropped as investors have fled the market. After selling more than 3,000 new condos each quarter of 2005, developers in the Washington area sold 1,629 units in the first quarter of this year. At that sales velocity, it would take about three years to get rid of that inventory, Delta's report said. Condo resale prices were flat metro-wide in 2006, though suburban Maryland fared better because there were fewer new condos built there.

Leisch's prediction: Prices will continue to drop by about 5 to 10 percent before leveling off at the end of the year and then gaining traction in 2008.

Leisch said excess inventory will be absorbed as developers cancel projects or convert them to rentals. Prices will eventually start to climb, he said, because the economy remains strong, jobs are being added and interest rates, for now, are relatively low.

"People need a place to live," he said. "Buyers can stand on the sidelines for only so long and not buy."

Lisa Fowler, a researcher at the Center for Regional Analysis at George Mason University, said the market could even start rebounding by the middle of the year.

"We're kind of at the bottom of things shaking themselves out," she said.

Fowler said condos took a heavy hit because so many investors bought them, then tried to unload them once the market weakened. At the same time, many developers were too far into the building process to terminate their projects.

"You go up faster and you have farther to fall," Fowler said.

Still, Fowler said, condos are less expensive than most single-family houses and will continue to appeal to first-time home buyers and retirees looking to scale down.

"The condo market is not dead by any means," she sad.

That's what many real estate agents are counting on. They were encouraged by the sales volume in January, typically one of the slowest times of the year. But they acknowledge that the spring market will be crucial.

"I still think the condo market has a ways to go just because of the stigma that was attached to them in 2006," said Craig Mastrangelo, a real estate agent at Re/Max Distinctive in Arlington.

That's why sellers will probably continue to offer incentives, such as paying a buyer's closing costs or condo fees for a time, real estate agents said. But ultimately, what sells a property is the price. Many asking prices last year still reflected the double-digit appreciation of the early part of the decade. Now, sellers have to be more realistic, agents said.

"They're still saying my neighbor sold his for $500,000 two years ago and why can't I sell it for that now," said Nelson Mendes, a loan officer for First Horizon in Arlington. "You have to educate them. You can ask for any price you want but are you going to attract buyers? Probably not."

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