Developers and owners of residential condominiums for sale in overbuilt markets would be wise to cut their losses and sell before a wave of construction adds another 100,000 units to the national inventory of this year, experts say.

"People don't realize that prices are going to be trailing the market down," says Gene A. Berman, managing director of broker Marcus & Millichap's Florida offices. "Smart lenders and smart owners are cleaning up the books [to sell] now because they know that in the next six months to a year, it's not going to get better for them."

Nationwide, the supply of condos for sale totaled 604,000 units in February, according to the National Association of Realtors (NAR). That number is down 1.8% from the inventory a year ago and well below the peak inventory of 731,000 units measured last July. Due to a slower pace of sales this year, however, February's inventory equates to a 13-month supply, an all-time high.

Overbuilding is concentrated in specific markets. Chicago, for example, will add 24,000 condos this year; 18,000 are slated for completion in Miami and another 13,000 are coming online in Tampa, according to Josh Scoville, director of strategic research at Property & Portfolio Research. "These are just being added to the glut of empty units in the markets."

The oversupply will worsen this year with the delivery of new projects that started construction before the credit crunch hit last August, according to Matt Anderson, a partner at Foresight Analytics LLC. Of 120,000 units under construction at the end of 2007, the company expects approximately 100,000 to reach completion this year and another 77,000 to break ground.

The oversupply and its diluting effect on sales have been accompanied by soaring delinquency rates on condo construction loans. Of the $42.3 billion in construction loans outstanding for condos at the end of the fourth quarter last year, a whopping 10.1% were behind on payments by 30 days or more, according to Foresight Analytics, a real estate and economic research firm in Oakland, Calif. That's up from 2.6% a year earlier and nearly double the delinquency rate of 6% in the third quarter of 2007.

"It's striking how rapidly the market has deteriorated, but at the same time it's not surprising given the general residential downturn across the U.S.," Anderson says. Indeed, the inventory for single- family homes in February exceeded 3.4 million, an unhealthy 9.2 months of supply, NAR reported.

While Anderson expects construction on about 10% of the condos under construction to be halted before completion, most projects are barreling ahead. The large number of units in the pipeline is due in part to the all-or-nothing nature of condo development, which requires completion of an entire project in order to close the sales on even a fraction of units.

Developers midway through a project have few good options. Some are falling back on conversion of completed projects to rental units, but the more substantial building materials and luxury fixtures that go into most condominiums today come with a high cost of construction, making rental income a poor substitute for sales. "It doesn't recoup all of the money they've put in," Anderson says.

In markets like San Diego, Las Vegas, San Francisco and South Florida that experienced some of the largest residential construction bubbles, new units will find few interested buyers upon completion, according to Berman of Marcus & Millichap. That's because potential buyers at this point in the cycle are more likely to be investors than residents, and investors will wait to see prices bottom out before they buy rather than risk purchasing an asset that may continue to decline in value.

Vulture funds are already hovering in overbuilt markets like Miami, which has 50,000 to 70,000 condominiums either under construction or completed and empty, according to a Marcus & Millichap estimate.

Since late February, condos in downtown Miami have gone to auction without a minimum bid requirement, a sure sign that some investors believe the time to hold out for a specific price point has passed. Investors who want to snap up some of those deals appearing at auction will need cash resources, Berman says, because sellers aren't going to allow time for a buyer to line up third-party financing.

Having experienced the price declines and lengthy recovery of commercial real estate in the days of the Resolution Trust Corp., Berman believes investors that continue to hold out for better prices on their condo units are setting themselves up for more painful losses down the road.

"A lot of developers or people who have bought really nice units on spec are holding onto them and renting them out for next to nothing in hopes that the market will come back," Berman says. "But there's really no market for seven-figure condos."

Source: NREI Online

Note: This is a program for a lower to middle income area in Baltimore - Would such a program be just as effective in Eagle Mountain or Kearns? - Bob

BALTIMORE - When Wilbert and Patricia Savage missed two mortgage payments on their tidy row house here last fall, Mr. Savage, 75, despaired that they could ever catch up.

But he remembered Roy Miller, a nonprofit housing counselor with a nearby storefront office who had helped other neighbors in trouble. The Savages visited Mr. Miller, and he called their lender and was able to work out a repayment plan for the missed payments, something Mr. Savage said he could never have managed on his own.

"Without Roy, we'd probably be out of the house or close to it," he said.

As home foreclosure rates rise around the country, they appear to have stabilized or dropped in one neighborhood here, Belair-Edison, providing a model that local housing officials say can be copied in other areas.

For much of the decade, Belair-Edison, a lower- and middle-income neighborhood on the edge of East Baltimore, has had one of the city's highest foreclosure rates. From 1993 to 2003, one in three homeowners in the neighborhood lost their homes.

But since those peak years, foreclosures have fallen by more than a third, a development that Thomas E. Perez, Maryland's secretary of labor, licensing and regulation, says can be largely credited to Mr. Miller's group, the Belair-Edison Neighborhood Initiative, which uses public records and street level marketing to reach high-risk borrowers before they fall too far behind.

"People all too frequently hide, or get embarrassed, or put their heads in the sand, but delay is disastrous," Mr. Perez said.

The Savages bought their three-bedroom house in 1988 for $55,000, with a low-interest loan from the Veterans Administration. But by 2006, they had bills to pay and needed to do some home repairs. At the same time, with home prices rising, they began to receive offers to refinance. Through a radio advertisement, they found they could get a $117,000 loan, with mortgage payments they thought would be $800 a month. Last fall, however, the payments were adjusted to $1,181, and they fell behind.

Mr. Miller is now helping the couple refinance to a low-cost loan through the city. He also put them on a budget for the first time, cutting out lottery tickets, restaurants and some clothing purchases. "We used to eat out every Friday," Mr. Savage said. "I miss it."

Housing counseling has long been a part of community development, and in December, the federal government approved $180 million for counseling programs to stem the foreclosure crisis.

But in a survey that month by the California Reinvestment Coalition, most housing counselors said lenders were either largely unwilling to modify loans or they proposed terms the borrower could not afford. Mr. Miller said he had had success persuading some lenders to modify terms and had been able to help some homeowners refinance using public sources of money. But sometimes, he fails.

Statistics on foreclosure are snapshots of a moving phenomenon, and data from the state labor department show 174 foreclosures in Belair-Edison last year, while the Community Law Center, a nonprofit public service group, counted 181; both figures are well below the more than 275 foreclosures in 2001 and in 2002. Because of a difference in counting the 2006 figures, the state number represents an increase in 2007, but a decline over several years. Both agencies attribute the discrepancy to the inexact nature of counting foreclosures.

In the foreclosure crisis, lenders and borrowers both say the other has missed opportunities to save troubled loans. Lenders, who say they lose tens of thousands of dollars on every foreclosure, estimate that half of borrowers facing foreclosure never contact their lender, and many avoid the lender's calls or letters. In turn, housing advocates say lenders are reluctant or unable to modify loans. A survey by Moody's Investors Service found that 16 large servicers of subprime mortgages modified only 1 percent of loans that adjusted during three months studied last year.

"People are calling and they can't get through to anyone at the servicer, and time is running out," Mr. Perez said.

Both sides are hurt by this impasse.

In Belair-Edison, the campaign to break through began in 2003 and 2004. Belair-Edison is a transitional neighborhood flanked by boarded-up stretches on one side and a popular park and middle- income neighborhood on the other. At the time, it was starting to attract teachers and hospital workers, and housing prices, which had been depressed since the 1970s and 1980s, were on the rise. But houses were falling into foreclosure, in part because of mortgage fraud schemes.

In response, the Belair-Edison Neighborhood Initiative began to change the way it worked with residents and other housing groups. The agency has eight full-time employees and an annual budget of $450,000, from public and foundation sources. "Their reaction to foreclosure was to strengthen outreach," said Sally Scott, co-chairwoman of the Baltimore Homeownership Preservation Coalition. "That's very different. A standard housing counseling agency runs ads with their phone number, saying, 'Call us if you're thinking of buying a house.' They reach out and say, come in."

The Neighborhood Initiative increased its visibility through a local newsletter and a banner over the main drag: "We Don't Buy Houses. We Help You Save Yours." Working with other housing organizations and using public records, the agency began to identify and contact residents with high-interest or adjustable-rate mortgages, offering free counseling and access to low-cost alternatives.

"We preach that if you even dream you're going to be late on your mortgage, call me," Mr. Miller said. "The key is to contact us in time to do something about it. Don't call two days before foreclosure."

The foreclosure crisis has been hard on counselors, and some veterans are burning out, said Lisa R. Evans, deputy director of St. Ambrose Housing Aid Center Inc., Baltimore's oldest nonprofit housing group.

"Volume has doubled or tripled," she said. "Families in the past were losing their homes because they lost a job or had a medical expense. You could fix that with a couple thousand dollars. But now we have families coming in where the loan is two times the value of the property, and there was never any income, and there's just nothing you can do for that person. One counselor said, 'I'm exhausted.' And the phone keeps ringing."

In January, Belair-Edison hired a second housing counselor, and Mr. Miller said the volume of calls keeps rising. But he said he had not grown disheartened.

On a recent Saturday morning, he led 11 aspiring first-time home buyers in a five-hour homeownership workshop. If they also attend his one-on-one counseling, they can qualify for up to $10,000 in public and private aid for down payments and closing costs.

In private, Mr. Miller talks forcefully about the predatory loans he has seen in this neighborhood. But to the class, he took a different tack.

"When people say it's the banks, or it's the lenders, or it's the real estate agents - it's not their fault. You're the one who said, 'I want it.' "

Many subprime mortgages taken out in 2006 will adjust this year, and Belair-Edison remains a neighborhood at risk. But Eric Johnson, who was listening to Mr. Miller, was confident.

"From what I understand, with all that done, this is a good time to buy a home," he said. "This class is a good preparation."

Source: New York Times