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[Getting Graphic] DC Is For Speculators, By George

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Source: NYT

In Vikas Bajaj’s excellent Page One piece titled Buyers Scarce, Many Condos Are for Rent [NYT] [1], he explores whats happening in the DC market and it’s not pretty.

I recall last year about this time, when everyone was impressed with the +90% increase in Manhattan inventory over the previous 18 months, Washington, DC inventory had increased well over 200% in DC during the same period. The DC condo market had been built for speculators. The absence of investors/flippers is what saved Manhattan and other markets during this housing boom, something also experienced in Manhattan about 20 years ago. Vikas contrasts DC with the situation in Manhattan.

That’s a bubble

Based on the stats, presented in the article, there were about 24,000 condos listed for sale during 4Q in DC. With about 600 units sold in 4Q there, that means it would take 40 months for the current supply to be absorbed by the current pace of sales. More supply is coming on, although slowing down and demand is not expected to surge. It’s likely that 6-7 months is the norm for absorption in DC, like in many markets.

Getting lucky

While the article makes an important point by illustrating the wide void between supply and demand, I was struck by how lucky the one investor interviewed was who couldn’t get what he originally paid for his unit nor would the rental value cover his mortgage. Not only had his broker stopped him from buying several more units to begin with (the broker must have seen the writing on the wall early) but the owner has actually received a range of offers for his unit. He didn’t accept any yet because they were about roughly 10% below his break even. With the significant amount of overhang in this market, I am surprised he received any offers. With the tremendous disparity between supply and demand as well as the weakness of the rental market, it would appear that a 10% discount off the original purchase price would be very generous. Is this yet another bad decision on his part?

Falling rents

Based on the article and what I have read elsewhere, it seems likely that inventory will remain at high levels or even continue to rise in DC as a flood of investors will look to remain whole by renting their units. The excess supply could drive rents down further.

This is also complicated by stalled condos being converted to rentals. The developers interviewed seemed somewhat calm about the conversion as an option. Their tone seemed to be: yes, it provides less of a return because condo construction is higher, but it’s an alternative. The problem is that this type of thinking doesn’t consider the large amount of competition from other condo developers in the same boat.

The one thing DC has going for it is a strong economy with significant employment potential over the next several years. There is an economic theory that correlates investor speculation with optimism over future job growth which will cushion the blow of oversupplied condo markets. That’s seems to be the case in the primary speculative markets like DC, Miami, Las Vegas and San Diego and maybe that’s why no one seems to be in a panic, or perhaps the euphoria still hasn’t worn off?