We all hear stories like this. I have a friend (woman) in the Pearl District in Portland, Ore, it's a classy in vogue condo type neighborhood downtown.
portlandor.about.com
Of course you hear the coulda woulda stories about how so and so bought in 99, and has 100% plus profits. So now you have people paying $350 plus/ sf for new construction, and a glut of it coming on the market, deposits being paid, etc. And yes, there are plenty already for sale, for a price:
hoytstreetrealty.com
Then when they finish, the buildings get sold out, and stand half empty as these folks already own a home (or two) and who is going to pay $1500 mo (less than 2.5 cap rate) to live in $400k condos (the cheap "rental" ones), as the vacancy rate on rentals in PDX is 10%, and the job market rather poor? Besides just about everybody who can afford $1500 a mo already has a condo (or two?). And INTC hasn't exactly been a huge winner in the stock market cycle either, so no instant millionaires. So you get this very bizarre speculative climate of a fine neighborhood with most off the lights of at night. And it feels strangely empty all the time. In fact I was down in the underground garage one evening, and it was only a third full. I've met to go down there at 4:00 in the morning some time just to double check if the residents are "late night party people". I suspect not.
Then you find out how people finance this speculation, typically with real aggressive ARMs, often interest only. Earlier this year the six month LIBOR is below 2%, there is a 1.5% margin, and they only pay 3.5%, so the interest is a mere $1,165/mo, free money to speculate on "hot" 400K condos. Now the 6 LIBOR is 2.9%, so the new rate is 4.4%, that interest payment is up to $1,465 a mo. Starting to become annoying, but is it enough to discourage this behavior? Even if they have a renter, it's still cash flow negative after expenses like property management, association dues, depreciation on the unit and appliances. This district was subsidized on a 10 year tax hiatus, but many of the earlier projects expire in 3-5 years, then they get drilled big time on taxes as PDX is broke, but whose discounting that now? So what level of rates makes them cry Uncle Ernie? 4.75%? 5.00% (adds another 14% to the payment, so you need 20k appreciation to make it up on a 400k unit, not counting "other" expenses)? If the unit price isn't appreciating rapidly (over 8% a year I'd say just to break even) they are entering a Black Hole even rented, and especially unrented, which is obviously all too common. |
