The most troubled real estate sector, the one that will fall first and fastest, is the condominium market.
Typically cheaper than houses and easier to buy, sell or rent out, condos are catnip for investors. Yet even as speculators flee, developers keep throwing up condos at a breakneck pace, in part because if they have already bought the land and poured the foundation, they have no choice but to finish the project.
Unsold condos are piling up. Builders don't have the luxury of waiting out a slump; they need to sell for what they can get. At first, they hold the line on base prices by offering incentives, from free pools to flat-screen TVs. Then, as unsold units collect, they move merchandise with huge discounts.
Delinquencies are already rising rapidly for those who have to bail out. They include not just investors but also owners who stretched their finances to buy the condo or house. Since early 2005, delinquency rates have jumped almost 14% to 2.5% for prime mortgage loans. "The banks will be forced to take back a lot of properties and sell them for the amount of the loan," says Mark Zandi of Moody's Economy.com. "That will add to the already huge supply on the market."
Source: FORTUNE, May 15, 2006
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