DC Condo & Co-op Market Sizzles in May

The Greater Capital Area Association of Realtors has released the most recent market report for condominiums and cooperatives in DC and it shows the market is very strong. (Click here for the report.) The inventory is severely down, the contracts taken are way up.

The market for condos and co-ops has clearly shifted to a seller’s market. The inventory of available condos and co-ops is down 33.1% year over year (857 vs. 1,281) and demand is up with an increase in contracts taken of 16.7% (1,452 vs. 1,244).

Supply Side
The drop in inventory is particularly striking when looking at historic trends. For the past seven years inventory of available condos and co-ops builds an average of 33.7% between December and May. From there it drops until September when it builds again for the autumn market. However, this year the increase has only been 13.5%. This indicates that there will be a continued shortage of available condos and co-ops throughout the summer.

The only indication of a slowdown on the supply side is that the inventory of new condos coming on the market increased by 3.4% year over year in May (429 vs. 415).

Demand Side
The number of contracts accepted in May was up 6.9% year over year (324 vs. 303). Here again, this is a strong number, but it’s not as strong as the rest of the spring has been. Also, May is typically a stronger month for contracts than April is and this year contracts were down from April to May, which is an indication of a strong market, but not one that’s continuing to tighten dramatically.

Stand Out Performance
Out of the entire market for condos and co-ops in DC, the price bracket between $500,000-$600,000 has been the strongest. The number of available properties has dropped 39.3% year over year (71 vs. 117) and the number of contracts for these properties has jumped 44.9% year over year (171 vs. 118).

The Bottom Line
The market is clearly on the seller’s side. As a buyer it’s critical that you bring a strong offer and be prepared for multiple offers on a home. We’re still not seeing large price increases, but escalation clauses are de rigeur now. If you are a seller and you are not getting an offer within a week your home is either not being marketed correctly or is priced too high.

Strong DC House Market Tightens Further

The Greater Capital Area Association of Realtors has released the most recent market report for houses in DC and it’s striking what it shows. (Click here for the report.)

The market for houses in Washington, DC has shifted to a seller’s market.  Indications of this come from both the supply side with a decrease of 34.7% in available houses to buy versus last year and from the demand side with a .2% increase in the number of contracts accepted this year vs. last.

Supply Side
Typically in DC the inventory of homes to sell rises from December until May and then slowly drops throughout the summer before a small autumn bump.  But, for the first time in over eight years the available inventory is lower in May than it was in December.

The current level of available homes is down 34.7% from the same month in 2011 (814 vs. 1,247). But the majority of that decline happened from September 2011 through December of 2012 when the inventory plummeted 26.6% from 1,124 to 825 available homes.

The number of new listings on the market for the month of May dropped 8.3% compared to last year (483 vs. 527). This shows that the supply is still tightening but not at the torrid rate that it did from last autumn to last winter.

Demand Side
Interestingly, the demand side is actually increasing even as the inventory shrinks. The number of contracts accepted year-to-date is up only .2% (1,828 vs. 1,824). But last month the number of contracts was up 3.5% compared to May of 2011 (443 vs. 428). This indicates that the demand is increasing as the year has progressed despite the lack of inventory.

Stand Out Performance
Out of the entire market for houses in DC, the price bracket between $800,000-$900,000 has been truly exceptional. The number of available homes in that range plummeted 51% year over year (25 vs. 51); and the number of contracts for those homes has increased 31.8% year over year (116 vs. 88).

The Bottom Line
If you are a buyer in today’s market you need to bring your best offer right from the beginning; there is no room for second chances on a house you love. As a seller, if your home is on the market for more than two weeks and has not generated an offer either it’s not being marketed correctly or the price needs to drop.

Special Considerations for Co-op Special Assessments

The worst news most condo and co-op owners can hear is that their building is doing a reserve analysis and it appears that the building does not have enough money in reserve. What this means is that the building should have been saving more money (for necessary building repairs and improvements) and is now short. When this happens the building will need to levy a “special assessment” on owners to raise more money for repairs and improvements. This special assessment can range from just a couple of hundred dollars to well over $100,000 per owner!

When a special assessment comes due co-op owners are in a much better position to handle it than condo owners. That’s because cooperatives can take out an “underlying mortgage,” which means the co-op can mortgage itself as collateral for a loan. (Condos don’t have this option and the assessments usually have to be paid in one lump sum.) There are several nuances that a co-op owner must consider when they find out that their building is about to take out an underlying mortgage.

Generally, when a cooperative building finds that it is short on funds it will allow owners to either pay for the assessment in cash when it come due OR finance the assessment as part of an underlying mortgage (ULM). So, what should a co-op owner do?

If You’re Not Moving it Doesn’t Matter
If you are not moving during the course of the underlying mortgage (ULM) then it doesn’t really matter if you pay off the assessment or take out a ULM. Whatever meets your financial needs is fine. But, the reality is that most ULMs are at least 20 years and the odds are that you’re not going to move within 20 years. So it is important to consider the long-term consequences of your decision.

Should you pay off the special assessment?
Buyers are very sensitive to what the fee for a particular unit is. When a fee is very high the buyer will be less inclined to buy the home. Even when the fee is mostly comprised of a ULM the buyer will be less interested in the home because the buyer’s monthly holding costs will be higher.

Underlying Mortgages will generally have a higher interest rate than a regular “institutional” mortgage. That’s because the bank is generally making a loan that cannot be resold like a “regular” mortgage could.

So, if you own a co-op and have equity in the home, it may be better to get a “cash out” refinance than take the ULM. That means that you would get a whole new mortgage to pay off your existing mortgage and take out extra cash from your equity to pay off the special assessment. This will allow you to pay off the assessment over 30 years (instead of the usual 20 or few years) and have a lower interest rate; the lower rate and longer repayment mean you’re monthly payment will be lower than paying a ULM.

Or, if you have the cash available to pay off the assessment why would you pay interest on a ULM for 20 years? That’s a whole lot of interest on money that you don’t need to pay.

These points would indicate that an owner should pre-pay the assessment when possible. But things are not always what they seem.

Should you take the Underlying Mortgage?

Buildings get reputations for having high fees. Once a building gets that reputation agents and the public will not necessarily take the time to review what the fee for a building is. They’ll see the address and the photo of the building and dismiss it as having a high fee immediately.

This means, as an owner many agents and buyers will not take the time to read through information about a property to discover that the fee is actually lower than usual because the owner pre-paid the special assessment.

Even if the agents and buyers do look at the unit and discover that the fee is acceptable they will undervalue your home. That’s because they’ll look at the most recent sales in the building and compare your sale price with the prices of other units that have substantially higher fees. It’s hard to get agents and buyers to acknowledge that your unit is worth more money because the fee is lower when they see everything else sells for less.

Another consideration is that underlying mortgages are always assumable. So, with interest rates exceptionally low right now, you can lock in an assumable mortgage at a very low rate. In the future, when you sell the odds are very high that rates will be much higher than they are today. Thus, the underlying mortgage actually becomes a benefit! The next buyers can borrow money at a much lower rate than they will be able to with an institutional mortgage.

Remember, the interest on ULMs is tax deductible so they give you the same financial benefits as an institutional mortgage.

The Devil is in the Details
Before you can make a decision about whether to take an underlying mortgage or not you will need to know the details of the ULM. You will want to carefully consider if you can afford to pay off the assessment in cash. If not, you will want to carefully consider whether to take a cash-out institutional refinance or just accept the ULM. You will also want to think about how long you plan on staying in the property and how the assessment will affect your long-term financial position.

What is an MLS?

First, you need to know that a “listing” is a property that is for sale and represented by an agent. 

A multiple listing service is a computerized database of all listings for sale by all the participants in the MLS. So, isn’t any computerized list of homes an MLS? No. 

To be an “MLS” the database must allow the listing broker to offer to pay a commission to another broker if the broker procures a buyer who buys the listing. That offer of compensation from the listing broker to broker who brings the buyer is what makes it an MLS and not just a database of homes.

There are hundreds of MLS’s in the United States, but there is typically only one multiple listing service per geographic area. For the Mid-Atlantic area the MLS is called MRIS, which stands for “Metropolitan Regional Information Systems.” (www.MRIS.com) MRIS is 100% owned by local Realtor associations, but any real estate licensee in a state covered by the company may join whether they belong to a Realtor association or not.

We are fortunate in the Mid-Atlantic to have the second largest and the most advanced MLS in the world. MRIS supplies the full range of multiple listing services for the region. In addition, the technology MRIS created is used as the backbone for the two largest MLS’s in the world as well as many other MLS’s in the US.

The full information in the MLS is only available to subscribers of the MLS. However, the general public has access to information about every property that is actively available in the MRIS database through www.MRISHomes.com . This web site is up-to-the-minute accurate and a serious buyer would be wise to use this site as the best source to see which homes are available.