Multifamily builders worry about weakness in condo market

WASHINGTON – Nov. 22, 2006 – Builder confidence in the condominium housing market eroded in the third quarter of 2006, according to the results of the latest NAHB/Fannie Mae Multifamily Condo Market Index (MCMI), released by the National Association of Home Builders.

“Many of these condo communities are large, urban projects or high-rise communities in resort locations, and as such, they take a long time to plan and build compared to a single-family home,” says David Seiders, NAHB’s chief economist. “As a result, multifamily developers cannot simply turn off the supply overnight, so it is going to take a little while before we work through the large overhang of inventory in this sector.”

The component of the MCMI that tracks current condo supply conditions fell markedly to 19.7 during the third quarter, compared with 47.1 at the same time last year. The scale is from 0 to 100, and a rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.

The index tracking builder expectations for the condo market over the next six months was also down, sinking to 27.9, compared to last year’s third quarter number of 55.3. Meanwhile the index tracking demand, based on the volume of traffic by prospective condo buyers, stood at 23.7.

In a series of special questions for condo developers, almost half of the respondents – 49 percent – reported that they had reduced prices on their condo units in order to boost sales. The majority of these respondents reported cutting their sale prices on units by 5 percent to 7 percent.

“With prices adjusting and interest rates still low, we are seeing increased affordability on many of these units,” says Seiders, who notes that condo market really needs time to come back into equilibrium after the buying frenzy of the past several years. “With supply starting to be constrained, the market will have a chance to improve,” he says.

In 2002, NAHB created the MMI, a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about current market conditions as well as their expectations for the next six months, tracking builder confidence in both the for-sale condo market and the rental apartment market. To more accurately gauge both segments of the market, NAHB has separated the indexes into versions that are released separately: The Multifamily Rental Market Index (MRMI) tracks multifamily rental conditions while the Multifamily Condo Market Index (MCMI) tracks market conditions for condos.

© 2006 FLORIDA ASSOCIATION OF REALTORS

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