Nashville Condo Market Debate Continues

Recently, an educated rebuttal was posted on my 5 year condo analysis article. This rebuttal had some great points that I have posted in their entirety below. My answers/thoughts follow each point in blue.

“An interesting analysis, but I respectfully disagree with your conclusion that now is the best time to buy a condo in Nashville. I believe prices will continue to decline for the following reasons:

1. The market for condos, generally, is considerably smaller than the market for other housing. This is indeed true – the Nashville condo market has averaged between 16-17% of the market for homes over the past 3 years.

2. Most people who really want a condo have already bought one. There is not a way to prove this assertion. I tend to disagree from the experience of working with dozens of potential buyers who are still holding off on a purchase in an effort to time the bottom of the market. There is a lot of capital that is waiting to go back to work and the condo market will benefit as will the single family home market.

3. The expectation, as evidenced by your own survey (79 out of 100 not affiliated with the real estate industry think the condo market is about to crash) that prices will drop further. These folks are your buyers; do you think they’re going to buy now if they think prices will drop further? I don’t. This is incorrect. I polled everyone from grocery store clerks to the EVP of the Bank of Nashville. I purposefully did not poll any buyers or sellers of real estate as their opinions are obvious.

4. The oversupply of condos, both in the Gulch and elsewhere, e.g., 5th & Main and Rolling Mills, among others. I agree that there is currently an oversupply of condos in downtown, but that is only a small portion of the Nashville condo market. I have also agreed that developments with excess developer owned inventory will experience price decreases as they sell off their excess inventory. These projects also happen to be some of the most expensive condos in the city and will look disproportionately overpriced.

5. Tighter credit conditions and more stringent underwriting requirements. The tighter credit restrictions and more stringent underwriting requirements actually help the condo market by not allowing unqualified buyers to flood the marketplace. This is a welcomed change that was longer overdue. In the same breath, as soon as lenders and banks begin to feel their oats, these restrictions will ease again (probably about the time that the Nashville condo market is underserved by a lack of new construction and inventory).

6. Higher interest rates at the slightest hint of inflation. You and I both know that the Obama administration will continue to artificially hold interest rates down long enough to burn through our excess inventory in downtown. I don’t agree with this policy, but it is and will continue to happen.

7. The expiration, in April 2010 (unless extended), of government incentives. This will mostly only affect the first time buyer market. The end of this program also coincides with the beginning of our typical “real estate buying season”. Should the national foreclosure epidemic not be near a conclusion, look for the Obama administration to continue with this program or create a new way to prop up the US real estate market.

8. The universal expectation, and likelihood, that taxes will increase. Insignificant. This is a scare tactic that is not relevant to the Nashville condo market. In fact, most appraisers are predicting lowering these condos’ tax assessed prices which will lead to lower taxes.

9. The uncertain, dare I say unstable, economy. Only affects those who feel that their job, stocks or retirement funds are in jeopardy. Most economist agree that the US exited a recession some number of months ago. This morning Greenspan predicted that joblessness would fall to 8.3% by the end of next year – a nearly 2% drop from current levels.

10.The fact that it’s cheaper to rent comparable housing than buy it. Depends on how much money you put down, doesn’t it? Also presumes that you are not looking at interest write offs, future value of that money spent, available tax credits for new purchases or the possibility of future appreciation. If you are only considering the next 12 months, you are correct. If you are looking at a longer time horizon, I believe that you are not.

11.The public’s lack of faith in government and its ability to get us out of this mess. Again, insignificant. I don’t buy into any conspiracy theories in this age of information. It is not up to the government to get us out of this mess, it is up to individuals. If you are waiting for gov’t to swoop in and solve all of your problems, you are in the wrong country. Private business has always been a much larger contributor to the bottom line of individual American economic security.

12.The lowered appraisals of condos once the Terrazzo and West End closings occur. This is both true and not true. Each individual building does not wholly affect another even though it might be right next door. If this were true, then the two recent short sales in the Bristol on Broadway would have disallowed the 3 more than $400/ft sales at the Adelicia. That being said the liquidation sales at the Terrazzo and the West End will slightly lower the expected resale prices at other condo developments. Most everyone understands that a 1 day liquidation sales are not the same as a typical sale. If you were to sell all 100 of your Rolex watches in 1 day, you would not get as much as you would if you sold 1 each day for 100 days.

13.The refusal of condo developers to recognize current market conditions. This action is actually artificially propping up prices, but is slowing down sales. Think about it, these developers are paying the carry on a vacant condo instead of liquidating into market. This practice is keeping prices and inventory levels higher.

I could go on, but I’ll stop there. I should say I’m not associated with the real estate industry in any way, but I think I understand how markets work. I own my home, two condos (in Florida), the building where my business is housed, and a vacant lot at a Center Hill development (which I paid too much for-I bought it at the top of the market, in the spring of 2008). In May of this year, I paid $217 PSF cash for a 1,230 SF 2-bedroom developer closeout 17thfloor condo (in a 24-story building) with a large deck and beautiful view of the Gulf at Miramar Beach, FL (adjacent to Destin). Yet, here in Nashville, except for Terrazzo, developers are pricing units, some no larger than a standard hotel room, at $300 PSF or higher. I looked into buying at the Terrazzo auction and was close to bidding before the developer stopped the auction when prices were rapidly declining. So what does Terrazzo do? They advertise auction pricing, but are pricing units near the average price of the units they allowed to sell. To my mind, that’s not auction pricing. Auction pricing is when you sell all the units you advertise and take into account whether the latter units sell at a higher or lower price than the earlier units. I inquired whether the “auction prices” were negotiable and was informed they were not, so I didn’t bother to make an offer, although I am interested in a unit there. I shouldn’t pick on Terrazzo, however, because my experience with Icon was even worse. The units there were smaller and far less upscale than Terrazzo, but the developer wasn’t interested in selling anything for under $275 PSF. I enjoy your blog, but I’ll wait until interest rates rise and developer’s “get real” before I try to buy a condo in the Gulch. Only time will tell who’s right.

I am surprised to read that you bought a vacation condo in Destin and think that is a better investment than buying in a city that has a year round economy. Comparing $217 a foot in Destin to $300 a foot in Nashville would be like me comparing your $217 a foot in Destin to the $64 a foot in Gulf Shores for a brand new high-rise beachfront development. Different markets completely, but similar in that those two locations are vacation homes in a vacation driven market with virtually no other fundamentals other than middle class America’s desire to visit the ocean (I also own a condo off 30A – I believe it to be more of a lifestyle purchase than an investment).

Neither the Terrazzo nor the Icon are ready to accept vulture prices with the lure of fast closings. Isn’t that a good sign? If the banks who loaned money to these developers where really pushing these guys, don’t you think that your low ball offer would have been accepted?

All of that being said, I will reiterate that I believe that condo prices in the downtown condos with excess inventory will continue to fall slightly as they burn through their excess inventory. I NEVER advise my clients to pay these developers’ asking price. Instead, there is a strategic negotiation of both price and other incentives that will allow buyers to buy at a net price that will beat the bottom of the price market. If you plan on owning this condo for more than 2 years, I believe this to be a sound purchase with a low and acceptable risk of short term loss, but a much greater chance at medium term appreciation. I am not telling anyone that they will double their investment or make a million dollars flipping, those days are over, but I am saying that buyers can expect a reasonable amount of appreciation over the next 2-5 years. Not only that, but now is the only time in history that primary residence condo buyers can lock in a rate less than 5% for a 30 year fixed interest loan. This will not be the case in 12 months.

Thank you very much, aynrand2009, for your comments and I appreciate the opportunity to respond to your concerns!

  • anyrand2009

    To respond to some of your comments:
    “6. Higher interest rates at the slightest hint of inflation. You and I both know that the Obama administration will continue to artificially hold interest rates down long enough to burn through our excess inventory in downtown. I don’t agree with this policy, but it is and will continue to happen.” Obama isn't in charge of interest rates-the Fed is, and they're not remotely interested in Nashville's excess condo inventory. Ben Bernake has made it abundantly clear he's not going to let inflation get out of hand and they only way to do that is raise interest rates. The question is not whether he will do so, but when.
    “8. The universal expectation, and likelihood, that taxes will increase. Insignificant. This is a scare tactic that is not relevant to the Nashville condo market. In fact, most appraisers are predicting lowering these condos’ tax assessed prices which will lead to lower taxes.” I was not referring to real estate taxes, which are actually decreasing, but rather income taxes. Increased income taxes will adversely affect everyone and reduce disposable income.
    “9. The uncertain, dare I say unstable, economy. Only affects those who feel that their job, stocks or retirement funds are in jeopardy. Most economist agree that the US exited a recession some number of months ago. This morning Greenspan predicted that joblessness would fall to 8.3% by the end of next year – a nearly 2% drop from current levels.”I believe the number of individuals who feel their job, stocks, and retirement funds are in jeopardy is quite high, at least if you believe the opinion polls. As for Greenspan, we know in retrospect what a swell job he did. I don't think you're going to see a significant reduction in unemployment until banks start lending again and businesses feel confident enough to start hiring. Count me among those who don't see that happening soon.
    “11.The public’s lack of faith in government and its ability to get us out of this mess. Again, insignificant. I don’t buy into any conspiracy theories in this age of information. It is not up to the government to get us out of this mess, it is up to individuals. If you are waiting for gov’t to swoop in and solve all of your problems, you are in the wrong country. Private business has always been a much larger contributor to the bottom line of individual American economic security.” The government's incompetence in the last decade is monumental. It has facilitated, if not encouraged, creation of the economic mess we're in now. Let me ask you this: do YOU have confidence Social Security's going to be there for you when you retire? I didn't ask the government to confiscate about 15% of my income (I'm self employed) for SS and Medicare taxes, but having taken my money for 30+ years, I damn sure expect the government to fulfill its obligation re: Social Security to me. If you think political instability doesn't affect investment decisions, you may want to look at South America. I forget which country down there has an inflation exceeding 100%. That's how I see the government solving its massive economic problems: inflate the currency and pay off its obligations in “dollars” worth pennies on the dollar. Call me a cynic.
    Regarding your questions to me: I bought a condo near Destin as a second home–I don't rent it out, although I am renting out the condo I bought about 10 years ago but used as a second home until I bought the one near Destin. As for me making a low-ball offer, I didn't make ANY offer once I was informed the Terrazzo developer wasn't accepting anything less than the published prices, revised of course after the auction. I did make what I considered a FMV offer for a unit at Icon, but it was rejected–we were about $60K apart, an impasse too great to overcome. Hey, if Icon and Terrazzo or any other developer can move product at the prices they're charging, more power to them. I'll be the first to admit I'm wrong. But I'm under the distinct impression that units aren't exactly flying off the shelves. As for the banks, I don't think they're pushing the developers YET, particularly after the auctions. At some point, however, something will have to give.
    I think we may have a different perspective: I'm a potential cash buyer looking for a low, but reasonable price. The low interest rate is no inducement for me. However, an individual needing to finance a large part of the purchase price may well find it in his or her best interest to pay more for a unit if he or she can obtain financing of favorable terms, and I will grant you that it's unlikely you'll see any better terms than exist now. I want to be the one buying when interest rates increase, no government incentives exist, and unemployment remains high. At that point, I think you may see developers reduce their prices significantly. As long as the market's on life support, I see no pressing need to buy unless you just have too.

  • TommyAnderson

    I look for the Real Estate Auction Market to heat up in 2010, as lenders scratch their heads amongst piles of REO files and pressure to clear ever mounting inventory. I look for our attorney friends to take more high profile projects into receivorship as 2010 unfolds.Liquidation…What an interesting word.Auctions produce CASH in a timely manner. Talk a little about the state of our fiat currency and whether or not inflation will reappear as in those great 70's years of Jimmy Carter. I am only 46, but remember the local Real Estate Auction Market.here in Nashville..The greatest auction market As it fed, clothed. and educated me and my 4 siblings.Grant… Do you feel many of these developers were counting on out of town buyers of affluence wanting a Nashville unit to add to portfolios of NY,Chicago,LA etc.?

  • http://www.granthammond.com/ Grant Hammond

    Hi Tommy, no the developers were not counting on out of town investors to buy these condos. In fact, the story is quite the opposite of that. The lenders who where onboard to finance the successful bidders were expecting local, primary residence buyers. When local investors bought, that caused one, Met Life, to pull out of that commitment two days after the auction.

  • http://www.granthammond.com/ Grant Hammond

    Hi Tommy, no the developers were not counting on out of town investors to buy these condos. In fact, the story is quite the opposite of that. The lenders who where onboard to finance the successful bidders were expecting local, primary residence buyers. When local investors bought, that caused one, Met Life, to pull out of that commitment two days after the auction.

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