Freeing up space for others

Katherine Gregor at the Chronicle covered the opening of the 360 condos in downtown Austin last week.  Embedded in the ogling coverage of the "thirtysomething lovelies" was this interesting fact:  75% of 360's buyers are Austin residents.   360 has 430 units, which means that Austin residents have taken around 320 of the units.  

This confirms a point I have made before.  It's a counter-intuitive point, I admit, but then it's usually taught only in courses on quantum mechanics -- and, in fact, was  confirmed just last year after exhaustive high-energy particle experiments at the Fermi supercollider:  Downtown condos buyers don't vanish into another dimension when they can't get a loft downtown. They remain corporeal.  They continue to occupy space.  They live somewhere else. 

For 320 of 360's buyers, that "somewhere else" has been Austin.  Where in Austin?  We don't know for sure, but my guess is that condo buyers who can afford $300,000+ condos and condo association dues of $0.33/s.f. probably haven't been living at the Bachelor Arms.  Given their their proven willingness to pay for being near the action, most probably haven't been living in the 'burbs.  More than likely, they are vacating housing in central Austin.   

The new supply 360 has brougt on line will open up at least 320 other units in the Austin market, either owner-occupied or rental.  That is a lot of new housing.  If you want something to measure that by, there were fewer than 300 home sales in all of central Austin in March 2008 -- and that includes 10N and 10S, which most people don't consider "central" Austin.

The best thing you can do for young families is to give their competition -- the affluent singles and couples without kids -- options for other housing.  That automatically gives families with children a better shot at getting into central Austin. That's a better strategy for getting families into central Austin then mandating affordable housing in condos that cost several hundred dollars per square feet to build.   Thus, even if the sight of a thirtysomething hipster makes your leg twitch and triggers an autonomic sneer, recognize that these condos help the housing market (unless you think housing should be more rather than less expensive).  Welcome the condos.  Don't bash them. 

PS:  I know there are plenty of singles and couples who want a single-family home and would never, not in a million years, not with a gun to their heads, ever consider buying a condo.  That's OK.  Really.  This isn't a criticism of individual preferences.  I'm talking about aggregate effects.

Comments

[natrius]

Well said. Can you print this out and wallpaper every polling place with it? Or at the very least, get it more exposure by submitting it as a letter to the editor?

[hlowe]

Very well stated!

[Dog]

I've enjoyed reading the DAA's research on condo occupancy. The who's, why's, and where's are very fascinating. And I agree with your post, even though I'm somewhat biased against the rate of condo development in downtown Austin (I'm definitely not anti-condo, per se).

DAA and the condo developers try to dispel the rumor (or myth?) that non-Austin folks are buying up all the condos. The factoid above lends some credence to that. But the question that I naturally ask is: considering the influx of out-of-state folks to Austin for the last 5 years or more, what qualities define an Austin resident? Is it someone who moved to Austin a year or two ago from an overheated real estate market, set up residence in a temporary home in town, and then bought an expensive condo once it was available? Personally I'd say that's not an Austin resident. But I realize that opens a can of worms...

[AC]

Dog, I'd say it doesn't matter. Frankly, it doesn't even matter whether they were already Austin residents. All that matters is that they were moving to Austin anyway and would otherwise have bought or rented housing in central Austin.

As I see it, a given condo units has no positive effect on the local market only if:
(1) the buyer would not have moved to Austin if the condo tower had not been built;
(2) the buyer would have lived in the suburbs if the condo tower had not been built; or
(3) the buyer is buying the condo strictly as a vacation/2nd home.

[DRM]

You've written down a lot of words but I'm not sure they were all necessary. In sum, we can say, increased supply of housing (new downtown condos) equals overall increased housing supply. Also, holding all other variables in the equation equal, increased supply of housing leads to reduced housing prices.

I am skeptical about the claim that only 18 percent of the buyers are investors. There's no documentation in the article about how they obtained that figure - or the 75 percent Austin residency claim, as well.

Finally, a lot more of these half million dollars and up condos are going to be ready for occupancy in the next 2 years. Many people are skeptical that enough buyers are going to end up signing on the dotted line and accepting ownership. What will happen then and how happy will Austin be to have a lot of unoccupied, expensive real estate sitting downtown?

[M1EK]

DRM, if worse comes to worst, a lot of rental property will be hitting the market (or resales), and you get your affordable housing that way. Individual investors are less likely to leave these properties unoccupied, IMO.

[DRM]

M1EK - purchasers don't actually commit to buying a unit until the project has neared completion. In order to get financing, before the credit crunch hit, all a developer needed was a minimum number of reservations with deposits. Once the developer has a sufficient number of deposits in hand he can take them to his lender, which has already committed to financing the construction, to start drawing financing and get the dirt turning. That's where the developer recovers his upfront costs. He has every incentive to break ground just as soon as those deposits are in hand. And because he has a contract in place with a lender, the lender can't just walk away even if they're not happy with the deal in hindsight.

When it comes time to finalize the sales contract next year or the year after, there could be a situation where many buyers will walk away from their $2 or $5 thousand deposit because the appraised values don't come close to the sales price.

Here's an interesting article.
http://www.nytimes.com/2008/05/15/business/15condo.html?_r=1&ei=5087&em=&en=7383c98d5e999351&ex=1210910400&pagewanted=all

Even if only one unit owner falls into bankruptcy all the other unit owners in the building can suffer because of unpaid HOA fees.

If someone who meant to flip their unit has to rent it out instead, that leads to a downward spiral for a condo building. Renters typically are not as responsible neighbors as are owners and there are too many renters a building typically falls into disrepair or draws occupants who are "not quite" what all the original owners would have expected. Also worrisome is that if a building exceeds a certain renter to owner ratio (typically 20 or 30 percent renters) many lenders will not lend to people who want to make the condo their primary residence.

I don't know that Austin's condo market will be a bloodbath in the next 2 years but I would bet there's a pretty good chance of it.

[heyzeus]

I'm curious what % of the 360 buyers are using it as a second home/investment property. But just the same, you have to assume they would have purchased a second home elsewhere but for the 360. More supply really is more supply.

[M1EK]

DRM, I'm well aware of the implications - I was suddenly told I had to up my down payment to 25% from 20% when I bought my Clarksville condo in 1997 after they found out most units were being rented. But it's far from insurmountable (and, by the way, since then the complex has gotten more, not less, expensive to rent in - and some units which were previously rented are now owner-occupied).

So this is the type of story that sounds like a problem for real estate investors and especially lenders, but not necessarily for people living there (I know the other tenants in the building didn't care about my extra 5% down - they were enjoying being able to walk to Fresh Plus).

But again, the fact that 360 was sold out so early makes it very unlikely your bloodbath scenario could unfold. Other buildings (Milagro, Shore) are the ones you should be focusing on, I think.

[DRM]

M1EK - in my first post I specifically referenced the downtown condos that will come online in the next couple years but my language was indelicate. I am absolutely speaking of buildings that have yet to be complete but which will add a huge new number of condo units downtown. Certainly if the whole market goes south the buildings that are already there will have an advantage. Unlike your situation though it seems to me that the market situation in 2 years time for downtown condos won't involve increased sales values.

[AC]

I lose no sleep worrying that condo developers have made a bad bet.

Oh, and developers don't rush to build once they have deposits in hand if they think the market is going south. Lenders require 20-40% equity from the developer (or the developer's hedge-fund partners). The upfront marketing and design costs are trivial compared to the tens of millions they have to sink into the project before the lender opens the vault.

Developers misjudge the market sometimes. So do lenders. The fact that the Four Seasons and the W started construction despite the credit crunch makes me think they'e confident in their numbers.

But, again, that's their problem and their buyers' problem if they're wrong.

[M1EK]

Yeah, the key here is that the investment required from the developer for one of these high-rises is gigantic compared to how much they need to 'invest' for a suburban spec house development. Lenders learned in the 1980s that they need to keep an eye on condos; but none have learned (yet) to do the same with cul-de-sac land.