You might have seen this article recently. It’s an interesting read. Filled with quotes and bold statements. You might have also seen my recent article about the actual number of dwellings in Downtown Austin. As your loyal Downtown Austin Realtor (plug!), I thought I would dissect this article and give you the scoop from the trenches of Downtown Austin Real Estate.
I’m going to cut/paste a handful of quotes from the article, and then explain if that quote is, generally speaking, true or false. Let’s begin…
“If people are waiting for the crash to come and for people to give away condos downtown, it’s not going to happen,” Spring developer, Perry Lorenz
Know the truth after the jump!
True. Perry is right about this. The sky is not falling as some local papers would have you believe (cough, ***tesman). Yes, it is a buyers’ market, but it has been for a while. From September 1st through October 31st, the average discount from list price was 5.63% (pdf, source MLS for Area DT).
“People love to say that the condo market downtown is overbuilt. The ones that are built are sold. There aren’t empty condos hanging over the market.” Spring developer, Perry Lorenz
False. I could be misinterpreting what Perry is saying but, according to Mark Sprague who also appears in the article, we have 30 (thanks to Mark for contacting me with updated info!) 15 months of inventory. The bottom line is that each building has a handful of condos available to purchase. A healthy number is 10% of the total units in existing buildings are for sale.
“The next project to hit the market, 360, has 90 percent of its units under contract and more than 98 percent reserved” writer, Mark Collins
True-ish. 360 was, at one time, completely sold out. However, by the time the units were ready for move in, many 360 buyers could no longer obtain a mortgage. Today I am aware of about 15 units back on the market.
“As the next three major projects come online — Spring, The Austonian and The W — more than half of the condominiums have already been presold, despite the fact that they won’t be ready until 2010.” writer, Mark Collins
2/3 True. Spring and The W are more than half presold. The Austonian is notorious for not releasing sales data. My educated guess is that they are around 20% presold. (btw, if anyone has better information please send me an email).
“It is healthy to get everything absorbed and then have another [condo] product come to market. But the thing is, there isn’t another building coming to the market.” Broker, Kevin Burns
True. If it’s not already under construction, then we aren’t likely to ever see it built.
“…these condo developers all have hired attorneys to write their contracts for them, and obviously those contracts are written to protect the developers instead of the buyers,” real estate agent Mike Doerr said. “It ties the buyer into the contract price, regardless of how the market shifts.” Agent, Mike Doerr
True. Developers’ purchase contracts tend to favor the developer. (Does this really surprise anyone?). Developer contracts are typically used when buying pre- or mid-construction. Once the building is complete the buyer has more control over the terms of the contract.
“Some contracts also allow an increase of anywhere from 5-10 percent of the original price.” Writer, Mark Collins
Maybe. I’ve never seen a clause like this, nor have I heard of it happening. It is plausible, however. If anyone can substantiate this please send me an email.
“…a third of the people are walking away from contracts,” … “That is another condo that has to go back on the market, and the value of that condo is 20 percent less than what it might have been when the market was robust.” Agent, Mike Doerr
Possible, but misleading. Since developers aren’t inclined to release that data, it is impossible to say for sure. We are limited to rumor and word-on-the-street information. I didn’t see 360 condominiums lose 133 buyers. It’s statements like these, which cannot be supported with real data, that fuel misinformed media coverage. Conversely, can I empirically back up my claim that his statement is false? No, because the actual data is held in confidence by the developers. Buyer fallout was less acute than 1/3 in my observation.
“The real way to have affordable housing is supply, supply, supply. Developers will overbuild to the point that they wreck their own market. I’m not predicting a crash, but there will be some containment. Ultimately, the rich guys will get tired of their 10-year-old condo and want to move up. The natural occurrence is the older stuff will become cheaper,” Spring developer, Perry Lorenz
True with a caveat. Cheaper doesn’t imply loss of value. The older stuff becomes relatively less expensive. Over time, construction costs increase, thus new developments are more expensive.
“Having retail just for the sake of having retail doesn’t make it better. It has to be retail that people want,” … “Our downtown has to grow into being a real downtown that has everything you need within walking distance. We are still not willing to give up our cars.” Banker, Eddie Safady
True. Until recently Downtown Austin was pretty homogeneous in its use of real estate – offices and bars. Whole Foods is the anchor. 2nd Street has plenty to offer [albeit expensive]. Congress Ave recently added Patagonia and Jos. A Banks. Royal Blue Grocery is outstanding. We have a CVS. We have dry cleaning. We have the Alamo Drafthouse. We have so much more than before. Yes, I still use my car, but only a couple of times each week. The mix of retail is improving, not only as a destination, but for those of us who live in Downtown Austin.
“The average condo price in downtown Austin fluctuates around $450,000, which means buyers have to find a bank willing to give them a jumbo loan or have a substantial down payment.” Writer, Mark Collins
False (according to MLS). MLS sales data from September 1st through October 31st show an average sale price of $389,520 for a Downtown Austin Condo (pdf). Note: MLS does not reflect developer sales. Since these projects are more expensive per square foot, the developers’ sales data would most likely increase the average price.
“…we have a lot of units available right now today,” … “But looking at the number of units that are absorbing and knowing there aren’t going to be any new projects deliverable in the near future, it’s now or never.” Broker, Kevin Burns
True. Projects that haven’t taken their first draw on their construction financing aren’t likely to be built. What you see is what you get for the next few years.
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Jude: great job! This is a great service. I hope Shonda Novak reads your post and the comments before she writes more stories. A few comments:
– The average discount from list price of 5.63% seems about right. Keep in mind that there is always a little negotiation in any transaction even in the strongest of markets. Those of us in the luxury market (W, Austonian, Four Seasons, Spring, BartonPlace) are not under pressure to lower prices because we have strong pre-sales. In addition, the financial viability of the project is dependent on the prices we have because we have already locked into all our costs. It makes more financial sense to sit back and wait, even two or three years if necessary, than to start lowering prices dramatically. If a project has a few units left, it might make sense to offer a $10,000 or $20,000 discount to close out the project and move on — because the profits have already been made. Barring this, we are not going to see price deflation in downtown Austin. Mike Doerr has no idea what he is talking about..not sure why he was quoted as an authority in this story.
– What perry was saying about not being able to buy downtown is that there are almost no options to buy a finished condo in downtown Austin today. Other than a dozen or so units at 360 that are back on the market, someone wanting to move in to a tower tomorrow cannot do it. If anything demand exceeds supply. It is true that people are more reluctant to sign a contract right now because of the surrounding economic uncertainty, but once that clears up, I suspect we will see supply and demand really out of whack and prices will increase.
– If it is not under construction, we are not likely to see it. i agree with this completely. The one project that i think may break this rule is John Wooley’s project on Barton Springs Road. He is moving along in a very credible manner that indicates he has his financing and is going to proceed.
– There are no pre-construction contracts that allow developers to raise prices. The whole notion of a pre-construction contract is that the developer gets the certainty of the sale, and the buyer locks in the price. Mike Doerr’s comment is absurd. To suggest that we would lower prices during construction is also absurd. The prices are derived based on the cost of the project plus a reasonable return. If the market is rising, we cannot raise a purchaser’s price when it comes time to close. The flip-side of that is that the purchaser obligates themselves to close when the sign pre-construction.
– Nobody is losing 1/3 of their buyers. This is also absurd. The number of buyers a project might lose depends on a variety of factors — price point, the amount of earnest money and the demographic of the buyers. In the high-end market, projects typically require at least 10% and most of the buyers have real net worth to substantiate the purchase. On a $500,000 purchase, these people are not likely to walk from a $50,000 earnest money deposit. In a lower price point project, like our east austin buildings, we have $200,000 price points and 3% earnest money and mostly first-time buyers. On a project like this, losing 20% of the buyers in this market is more likely. Doerr’s numbers are made up out of thin air and are not based on any kind of real knowledge. 360 is 91% sold and closed. Of the remaining 9%, half of these are under contract. This is a stellar performance under any market conditions.
– The current limit for a jumbo loan is about $420,000. With an 80-10-10 approach, this means that most buyers of one and two bedroom units do not need to even think about a jumbo loan. The only units (at least in Spring and BartonPlace) that might require a jumbo loan are three bedroom units. We see that most people looking at these units want to put down substantial amounts of cash anyway, and don’t need to look at jumbo loans. In addition, our lender, IBC, will be offering portfolio in-house products for these folks that have better terms than existing jumbo loan options.
– When things stabilize, people are going to look up and realize that there are not too many projects and not too many units if they want to live downtown. It will probably take a little longer to sell-out right now, but with the pre-sales we have in place, we can pay down our debt and we can afford to be patient. Those of us underway are going to have a gorgeous runway to sell condos without much competition.
Thanks again Jude…
Shonda Novak is doing a story in the next couple of days and I hope you will do a ‘fact or fiction’ check on that story as well.
jude galligan says
Chris, the only data I’ve seen on number of downtown austin condos being used as second homes comes from Charles Heimsath at Capitol Market Research. He estimated, back in May, that 18% of buyers were purchasing condos as a second home. Second home being distinct from investment purchase (13%) and primary residence (~70%).
One approach I’d like to see someone take is to data mine Traviscad to find property owners with multiple properties, and one of those properties is located within the downtown boundaries. That would be an interesting piece of data. Maybe I’ll have some time over the holidays to take a crack at it.
Do you have any stats on how many condos are being used as second homes?
Nice work Jude. It’s good to read through the sensationalized media stories. Like a “factcheck.org” for downtown austin.