U.S. Builder's Confidence in Condo Market Dips in Q2
Aug 24, 2006
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Builder confidence in the condominium housing market weakened significantly in the second quarter of 2006, as sales continued to retreat from the record-high levels seen last year, according to results from the National Association of Home Builders Multifamily Condo Market Index (MCMI).

“Investors and speculators had been a big factor driving sales and production at the height of the condo boom and they have been pulling out of the market,” said NAHB Chief Economist David Seiders. “What we are currently seeing is a level of condo production that is probably more sustainable in the long run, although builders are worried that affordability has also become a factor for buyers, now that the overall economy appears to be slowing.”

The component of the MCMI that tracks current condo supply conditions fell to an index value of 32, compared to a value of 61.3 during the second quarter of last year. It was the third time since NAHB began tracking this data that the for-sale index has fallen below 50. A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.

The MCMI is a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about market conditions as well as their expectations for the next 6 months. Survey answers are assigned numerical values to calculate two separate indexes, one tracking rental demand and the other tracking supply conditions for rental and for-sale units. The index gauging builder sentiment about condo production over the next 6 month also declined, down to 34. The scale is from 0 to 100.

Two new questions were asked in this quarter’s survey, both designed to gauge aspects of condo demand. The first asked builders about the volume of traffic they are seeing from prospective buyers. The survey response stood at an index value of 26.8, indicating that more respondents believed that traffic was lower than in the previous quarter. The second question surveyed condo builders about the asking prices on new units resulting in an index value of 46.3--indicating that prices are softening to some degree.

In a set of special questions for condo developers, 82 percent said they had noticed buyer resistance to current prices and, of these, more than one-fourth reported that they have reduced prices. The average price cut was 9 percent.

About three-fourths of the respondents said they are using non-price incentives to boost sales and limit cancellations. Two-thirds of those builders who reported using incentives are including optional items at no cost, a third are absorbing financing points, and two-thirds are paying closing costs or fees to bolster sales. Half the developers are using agents or brokers to help sell, up from about 20 percent a year ago.

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