- The Washington Times - Wednesday, March 1, 2006

Last year was good to Washington-area builders, with a welcome increase in new-home sales after several slow years. With the resale market cooling, however, and demand for condos seemingly on the wane, what can builders expect out of 2006?

“There is some indication that the housing market is slowing down,” says Bernie Markstein, director of forecasting at the National Association of Home Builders. “Now, the demand seems to be in better balance with the supply. Prices are not moving up as fast as they were, and units are slower to sell.”

In terms of overall sales, 2005 was a strong year for area home builders. Some 25,277 new homes were sold in the Washington metropolitan area — 11 percent more than in 2004.

That’s not a record, by any means. In the 1990s, a typical year saw 27,000 to 30,000 new home sales. However, as land on which to build became scarce, builders began putting up homes in distant Virginia counties such as Fauquier and Orange and even in Jefferson County, W.Va.

Demand for land caused an increase in land prices.

“But in those outer markets like Jefferson County, I expect to see land prices plateau,” says Scott Plein, 2005 president of the Northern Virginia Building Industry Association and chief executive of Equinox Investments. “We aren’t going to see land prices rising at ridiculous rates like 20 and 30 percent per year anymore, but they won’t drop, either.”

The movement of building farther from the District has been going on for years. In 1991, 53 percent of new-home sales occurred in these jurisdictions close to the Beltway: Fairfax, Arlington, Montgomery and Prince George’s counties, Alexandria and the District.

That percentage fell every year thereafter. By 2002, just 36 percent of new homes were sold in those places. The rest went to the outer circle of counties: Frederick, Howard, Anne Arundel, Charles, Spotsylvania, Stafford, Prince William and Loudoun.

That 11-year trend began to reverse, however, in 2003. A surge of activity caused sales in the “inner” counties to rise. New-home sales there jumped from 38 percent of the market in 2004 to 46 percent in 2005.

It seems it all was because of condominium sales.

Just 332 new condos were sold in Alexandria in 2004. Last year, 1,261 were sold there, according to data from Hanley Wood Market Intelligence.

In Fairfax, condo sales more than doubled, going from 1,214 to 2,697.

The largest increase in condo sales was in Montgomery County. Sales there shot up from 126 in 2004 to 1,638 in 2005.

Overall, condominium sales in the Washington area more than doubled last year. A total of 8,631 were sold in 2005, versus 4,039 in 2004.

Here’s the nagging question: If overall home sales are slowing, how much demand will there be for condos in 2006 and 2007?

“There is some concern about overbuilding, but Washington is still a popular area with strong job growth,” Mr. Markstein says, “so we may only see a flattening of the market. I don’t expect a downturn.

“There are markets with prospects worse than ours,” he says. “We have a real concern about Miami, for instance. There is a lot of supply there already, yet builders aren’t pulling back. If there is a problem here, and I emphasize ‘if,’ then it’s really just a return to a more balanced market, with more balance between supply and demand.”

That is what has happened in the resale market, which is enjoying a relative balance between buyer demand and the supply of homes. It’s certainly a much saner market than the one this region experienced during the past several years.

The difference between the resale market and the new-housing market, however, is time. If the resale market slows, a seller can just take his home off the market.

Builders, however, rarely stop construction of a 350-unit condominium complex simply because the market slows a bit.

And a lot of condos are under construction. Some people wonder if the number of new condos is more than the market can handle.

“I compare today’s condo situation to what happened with office space in the late 1980s and early 1990s,” Mr. Markstein says. “Back then, everyone had seen a shortage in office space, so they began building a ton of projects. Many of them were 60 percent pre-leased, and the developers expected to lease the other 40 percent after the building was completed.

“Well, what happened was that a whole bunch of buildings were completed at the same time, all of them with 40 percent vacancies, and there was just too much supply,” he says.

On the other hand, the Washington-area economy is one of the nation’s strongest, with an expanding job market that could absorb the additional housing stock.

“The concern is well overstated,” Mr. Plein says. “The statistic we really need to be looking at is job creation. Just the other day, I heard [professor] Stephen Fuller from George Mason University say that he expects 65,000 jobs to be created each year over the next three years.”

If Mr. Fuller is right, and he typically is, that means a lot of people will be looking for housing in the next few years — and that’s the time frame that condominium builders consider.

“I think everyone is bullish about the market, particularly when they look beyond a six- to twelve-month horizon,” Mr. Plein says. “Builders think about a three-year process. They don’t make their plans based on what’s happened over the past three or four months.”

Even if builders have too many condo projects in the works, the rental market might absorb the excess. In recent years, many apartment buildings were converted to condominiums.

Now, a lot of people who bought new condos as investments are placing them on the market as rentals.

“In general, a pretty substantial number of new condos wind up in the rental market,” says Michael Carliner, an economist at the National Association of Home Builders.

“So we can probably expect that a good number of the condos in development in this area today will end up on the market as rentals before long.”

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