- The Washington Times - Wednesday, March 16, 2005

If you have tried to buy a home recently — especially inside the Beltway — you’ve probably found it challenging. There just aren’t a lot of homes available, and the ones that are for sale usually sell very quickly. The market has been like this for several years now, driven by low unemployment, population growth and inexpensive financing options.

Area home builders are aware of this, of course. They are building homes as quickly as they can.

And these days, they are often building condominiums.

Condos are affordable enough to appeal to a large number of home buyers, and they require only small parcels of the region’s scarce land.

“Land is the driver of it all,” says Chuck Covell, president of Bozzuto Homes. “Land is very difficult to get ahold of, and it is very expensive.”

The high cost of land is also causing a shift in the way land is used.

Converting apartments into for-sale condominiums has become popular among builders because land for new construction is expensive, while demand for condos is extremely high and the rental market is soft.

“Nationally and locally, condo demand has been very strong, while apartment rents have been weak,” says Bernie Markstein, director of forecasting at the National Association of Home Builders.

“As a result, many new apartment buildings — intended to be rentals when construction began — are being converted to for-sale condominiums before they are completed,” he says.

One reason rents are down is low mortgage interest rates, which have allowed many would-be renters to buy homes instead.

Reduced demand for rental units means lower profits for apartment owners, who are now more willing to sell their existing apartment buildings for conversion to condominiums.

“For the past 18 months, most new condo sales are coming from conversions, not from new construction,” Mr. Covell says.

Although the shortage of available land restricts condominium supply, the demand for condos is tremendous. Many buyers are considering condos for the first time because they simply can’t afford anything else, particularly inside the Beltway.

Living inside the Beltway is extremely popular because the District is the economic center of the region and the area’s traffic makes it so hard to get there. As a result, home prices get higher with every mile you move closer to the city.

Last year, the median sales price for a new detached single-family home in Arlington was $1.1 million. The median for condos was a much more affordable $440,000, which is one reason why 90 percent of new homes sold in Arlington last year were condos.

Alexandria and the District posted similar figures last year. No single-family homes were built in these jurisdictions last year, and the vast majority of new homes sold there were condominiums. Median prices were $436,000 in the District and $245,000 in Alexandria.

All this means builders today have an excellent opportunity to provide more condos for eager buyers.

Just a decade ago, there were few buyers eager for condos. Back then, condo prices were depressed. It was so hard to sell a condo that many buyers took a loss or held onto them and rented them out.

This may be one reason why builders seem to be a little behind the market in generating sufficient condo supply.

“The condo business is tough,” Mr. Markstein says. “If the market gets out of whack, if interest rates get too high, the condo business could suddenly drop off. There tends to be larger swings in the condo market, and it is rather hard to pull back on a condo project if you sense the market changing.”

However, builders seem to have some years ahead of them before they need to worry about a slowdown in the condo market.

“The market continues to be hot because of two demographic groups: the baby boomers and ‘echo boomers,’” the offspring of baby boomers, Mr. Covell says. “The first are moving out of big homes into condos because it is a simpler lifestyle.

“The second group is just starting out in life, and they often want the affordability and urban lifestyle of a condo.

“These are the groups driving the condo market today,” Mr. Covell says, “and they will continue to have this influence on the market in the coming years.”

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