Cities Will Feel the Pain Once the Urban Condo Market Bursts

Joel Kotkin reports:

Inventories for houses are up 39 percent from a year ago, while those for condominiums have shot up by 63 percent. Home price increases are slowing and could begin to decline. But the condo market is much worse. Prices could fall as much as 9 percent this year, according to one recent investment bank analysis. Four-fifths of developers say they find more price resistance from buyers.

High priced, overhyped urban areas are particularly vulnerable. Many of these markets are heavily influenced by speculators, who own as much as one-third of the condos for sale in downtown San Diego and more than four-fifths in Miami. These "flippers" are most likely to unload properties once they see the prospect of declining prices.

Many other big city condo buyers are nonresidents for whom their city apartment constitutes, if not pure speculation, a second or third residence. One New York real estate developer places the percentage of second homes in his buildings as high as 80 percent. Since the 1990s, the number of Manhattan residences serving as second homes has grown as much as threefold. Unlike year-round residents, many with families, this group seems unlikely to stick around to see a sharp reversal of fortunes.

There is simply less substance to the current urban "boom" than meets the eye. Over the past five years, job growth in many cities with the greatest home price inflation -- New York, Chicago, Los Angeles, Boston and San Francisco -- has remained well below the national average. True, there has been a substantial growth in income among the highest end professionals and those who benefit from rising asset prices, but earnings for everyone else have been flat at best. Instead of the real estate tide lifting most boats, it is helping elevate only a few yachts.

There could be a downward spiral here.Lower property prices and a much lower tax base.You might say some of these old cities are a house of cards.