August 28 — If you have been thinking about buying a retirement condo a recent news item in the Wall Street Journal might give you some pause. It seems that the condo market is now experiencing troubles as speculators default on their mortgages or fail to execute their purchase contracts. As banks and developers are forced to unload properties in a distressed market prices are falling, causing underwriters to lower appraisals and make loans harder to get. Feeding the fire is a rapid growth in newly built units – construction of new condos increased 145% in 2006, the highest level since 1985. It appears that new condo projects and condo/hotel conversions are the properties experiencing the most difficulty. Obviously most of these properties are not being built as retirement condos or in retirement communities – but the bad news in general markets is not without an effect on the active adult retirement market either.
Just a few years ago speculators in hot markets like Miami, California, and Washington, D.C. were lining up for the right to purchase an apartment in the future. Many bought more than one in the hope of flipping them for a big profit. Others took out adjustable mortgages with artificially low interest rates. Now, just as the bottom is falling out of the market these loans are coming due at either un-affordable rates, or unavailable at any price.
The result are defaults and pain -and not just for individual buyers and their banks. The builders of some of these condominium projects are defaulting on their loans too. Typically when a new project is built the construction loans must be paid off. But if too many buyers back out of their contracts the developer is put into a squeeze, forcing the entire building into foreclosure. That in turn causes major problems for the apartment owners who did honor their purchase commitments.
A related New York Times article (August 25) highlighted the case of a luxury Miami condo conversion that appears to be entering foreclosure – the Savoy Hotel on Miami Ocean Drive. The project was selling apartments at prices from $700,000 to $7 million. Meanwhile the National Association of Realtors announced yesterday that the total inventory of homes at the end of June climbed to a 9.6 months supply – more bad news for the distressed housing market.