Goodbye Condo Mania

Passengers on the Poseidon aren't the only people in distress this summer. Condo owners, who had been cruising along propelled by double-digit price gains, are encountering cooler currents and the prospect of perilous waters ahead.

The supply of existing condos for sale increased by almost two-thirds during the year that ended in June. At the same time, sales fell by almost 15%, according to the National Association of Realtors. Investors -- about one-third of all condo owners, according to mortgage-data tracker LoanPerformance -- have been fleeing like proverbial rats.

Sale prices of existing condos have fallen a bit, too. At $226,900, the nationwide median price of a condo is once again less than that of a single-family home ($231,500). Condos had been appreciating more quickly than single-family homes because they are concentrated in high-cost metro areas, where prices were rising rapidly. As home prices cool in overheated urban markets, the drop in condo prices is likely to be more precipitous. (Check out condo prices where you live.)

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Even more ominous: Over the next two years, "a tsunami of new units will swamp the market," reports the National Association of Home Builders. Conversions of rental apartments to condos are adding to the glut.

Don't panic

Although the median price of a condo rose nearly 14% last year, double-digit increases are a thing of the past. The NAR expects prices to rise 3% to 4% in 2006 (compared with 6% for single-family homes). And the outlook varies by region. Condo owners in the Midwest, concentrated in the Twin Cities and Chicago, probably have the least to worry about; between June '05 and '06, sales fell by about 1% and prices fell by just a third of a percentage point. The West has taken the biggest hit -- down 21% in sales and 11% in price.

In the Northeast, it's a mixed bag. Sales are down 20%, but prices are 6% higher. In Boston and other markets, real estate agents say the market for lower-priced condos (under about $400,000) is still relatively tight and demand is strong. But at the high end, the bidding wars are over and there’s more give-and-take between buyers and sellers.

Andrew Terrat found the market cooling when he listed his luxury condo in Boston's South End for sale last October. For several years, Terrat, an interior decorator, had been riding the wave of price appreciation by buying and renovating condos and then trading up. He bought his current apartment in 2004 for more than $900,000 and listed it for $1.4 million in October.

Buyers showed little interest, so Terrat took it off the market and used the time to transform a home office into a guest bedroom. In February, he put it back on the market; instead of reducing the price, he threw in his Bang & Olufsen audio system. By May, he'd found a buyer.

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In Miami, the market is less favorable for sellers -- but a better deal for buyers. The city had three times as much inventory on the market this spring as last, and there's more in the pipeline. "Most developers thought that speculators weren't going to stop buying," says housing analyst Jack McCabe, of Deerfield Beach, Fla.

At the NAR, senior economist Lawrence Yun expects demand from baby-boomers to strengthen as more of them approach retirement age over the next five to ten years. McCabe counters that one more bad hurricane could change boomers' migratory patterns, causing them to avoid Florida and wing their way to places such as Tennessee, Texas and western North Carolina.

Sellers: Send up a flare

If you're selling a condo, above all, price it right. Real estate agents in condo-crazed cities, such as Boston, Miami and Phoenix, agree that much of the slowdown is at the high end of the market and that more affordable units are selling well. Whatever the price point, it's not smart to be selling the most expensive apartment on the block, says Boston agent Ken Tutunjian. And with so many opportunities for buyers, you need to make your unit stand out over the competition, says Phoenix agent Brad Brauer. Clean your condo, remove clutter and stage it perfectly.

Be prepared to negotiate. Miami agent Troy Fowler says that a year ago, sellers took a "don't bother me unless you're prepared to pay full price" attitude. Now, many condo ads say sellers are "motivated" and encourage buyers to "make an offer." Incentives can also bring in buyers -- such as a year's worth of condo fees or a flat-screen TV. In Miami, Fowler has seen listings offering a $5,000 or $10,000 bonus to the agent who brings in the buyer.

Finally, get the deal done. "Don't hold out for a slightly better offer," says Ron Witten, of Dallas, a housing-market consultant.

Buyers: Take the long view

In most markets, this is as good a time as any to buy. But in the riskiest ones, especially in the Southwest and Florida, it might be wise to wait a year to see how things shake out. Don't worry too much about higher mortgage rates. The risk of falling prices, says Witten, is greater than the risk of higher rates. (Kiplinger's expects rates to be slightly higher by year-end.) And forget about a quick flip. If you buy, plan to own the property for at least three to five years.

Which units will hold their value over the long run? Look for condos with a great view and easy access to parking, public transportation, necessities and amenities. High-priced gas may enhance the appeal of properties located close to downtown or to employment centers. To attract empty-nesters, look for spacious, open-floor-plan condos in buildings with an elevator and, in cold climates, garage parking. In some luxury markets, buildings with a doorman or concierge are becoming highly desirable.

Take your time. Visit properties more than once. Drive a hard bargain and protect yourself with appropriate contingencies.

Next: See how condo prices fare in your area.