I. There is
plenty of demand for housing in Portsmouth
Before we talk about supply we need to understand demand. Let’s start by estimating how much demand there is for housing in Portsmouth right now. This is actually fairly easy to calculate if you know where to look for the numbers.
Forecasted Population 2010[1] 22,200
Minus Estimated 2003 Population[2] 21,051
Equals
Forecast Growth +1,149 Additional Residents
Estimated 2003 Population 21,051
Divided by Estimated 2003 Households[3] 9,981
Equals
Average Household Size 2.11 Residents
per household
Forecasted Population 2010 22,200
Divided by Average Household Size 2.11
Equals Forecast Households 10,521 Households
Forecasted Households 10,521
Divided by estimated occupancy rate[4] 96.5%
Equals Required Housing Units 10,903 Required Total Housing Units
Required Housing Units 10,903
Minus 2003 Housing
Units[5] 10,363
Equals Additional Units Required 540 Required Addt’l Housing Units
All other things being equal, unless an average of 90 units per year is built in Portsmouth from 2004 to 2009 (540 units divided by six years), there will continue to be a shortage of housing.
In fact, Portsmouth has only averaged 44 new housing units per year from 2000 to 2003[6].
In each of Rockingham and Strafford County’s eight other large municipalities (having more than 5,000 housing units) an average of 116 units per year were added from 2000 to 2003[7].
Therefore, unless a dramatic shift in Portsmouth’s housing policies occurs, supply will remain tight. In fact, if all other things remain the same, vacancies will likely stay low, price levels will not likely retreat substantially, properly priced property should continue to be readily absorbed and, regrettably, Portsmouth will likely continue to be the subsidized housing capital of the region. The threat of seeing Portsmouth “overbuilt” in the next five or so years, by any type of property remains remote (assuming competent marketing). But, keep in mind that simply because there is demand for 540 housing units does not mean that they must be built now. To do so would likely result in an oversupply.
II. Demand Continues to Contribute to Price
Increases
The tables below summarize 154 houses and 184 condominiums that each sold twice between 1999 and 2004. The average annual rate of appreciation is calculated for each set of resales based upon the year they were first bought.
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Average Annual Appreciation Rate Based |
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Upon Year Bought & Year Sold |
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Portsmouth, NH (1999 thru 2004) |
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Condominums |
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Year Sold |
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2000 |
2001 |
2002 |
2003 |
2004 |
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Year Bought |
1999 |
19.9% |
18.9% |
20.0% |
22.9% |
16.2% |
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2000 |
-- |
18.8% |
19.9% |
14.3% |
14.6% |
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2001 |
-- |
-- |
13.1% |
14.0% |
17.6% |
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2002 |
-- |
-- |
-- |
9.3% |
15.4% |
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2003 |
-- |
-- |
-- |
-- |
11.5% |
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Overall Average: |
17.5% |
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Single Families |
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Year Sold |
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2000 |
2001 |
2002 |
2003 |
2004 |
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Year Bought |
1999 |
12.0% |
14.8% |
17.4% |
14.1% |
14.8% |
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2000 |
-- |
11.3% |
13.1% |
18.7% |
15.5% |
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2001 |
-- |
-- |
13.5% |
15.5% |
14.0% |
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2002 |
-- |
-- |
-- |
13.2% |
15.5% |
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2003 |
-- |
-- |
-- |
-- |
10.8% |
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Overall Average: |
15.1% |
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Working backwards from 2004, the charts show that the prices of houses and condos continued to rise during 2004, but it was at a slower pace than years before. The rate of increase is still impressive, at four times the rate of inflation. If the demand for condominiums in Portsmouth was significantly softening, prices would not have risen 11.5% from 2003 to 2004.
III. The
Condominium Market is Not Experiencing an Oversupply
Properly
priced condominiums continue to sell and do so briskly. Tables on the next page
break down condominium sales by price range. Comparing 2003 to 2004, a similar
number of condos sold and did so at a similar ratio of sale price to list price.
They also sold at a similar median price but did so at a somewhat faster pace.
Although it is quite early in the new year, year-to-date results are similar.
Addressing the question of a possible oversupply of condominiums: there are no interesting trends that can be seen when comparing 2003, 2004 and YTD 2005. Everything looks fine on this page. Frankly, I appreciate the opportunity to speak to you today, but there really is not much to tell you … things are pretty much the same, they are doing ok and there is not much new to report.
IV.
Why does it seem like there are so many condominiums on the market?
Return to the tables above. You can see that the strongest segment of the market is condominiums priced under $300,000. Here is where there is the largest volume of sales, the shortest marketing times and the highest ratio of sale price to asking price. Demand is the least strong (notice how I didn’t say “weakest”) for condominiums priced from $300,000 to $400,000. In both years, the number of units sold is fairly small, their ratio of sold price to asking price is below average, and their marketing time is longer than average.
The median sale price of a single family home in Portsmouth during 2004 was $327,000. Generally speaking, condos are supposed to be a more affordable alternative to houses. With few exceptions, most market segments prefer a house to a condominium. Therefore, if a condo is going to be priced higher than detached homes, it must offer something more -- it must have some attribute that makes it more desirable than the competing houses.
Also, and this is purely speculation, but I would guess that this price range is where the most families can be found. Families of all shapes and sizes tend to require features such as yards, basements or garages (at least more so than young urban professionals do). Downtown living, in a one story apartment, in a multistory building, is probably less appealing to a large enough segment of the $300,000 to $450,000 crowd that the impact on marketing is noticeable. Again, this is pure speculation, but it seems reasonable to me.
Therefore, I would expect to see condos that are priced between the low $300,000s and the mid $400,000s will be harder to sell because they are in a price range where demand is lighter.
In fact … a review of the condos
that are now listed for sale show this to be true. Of roughly 90 units now
listed for sale, one-half are priced between $300,000 and $450,000 and
they have been listed for an average of 181 days (as of 3/19/05). The other
half, those priced below $300,000 or above $450,000, have been on the market
for an average of only 97 days! (If 97
days seems long to you, remember that we are just coming out of an awful
winter, so even properly priced properties have languished a little.)
It appears that there are more
sellers competing in a price range that does not have very high demand in the
first place. If I were a developer, I would avoid the $300,000 to $450,000
market unless my property offered something truly unique. (Keep in mind also that I am arbitrarily drawing lines at $100,000
intervals; it is likely that a more detailed analysis would better delineate
where the caution zone lies.)
This is sound advice, but it seems some developers have a different strategy. Below are some examples of current projects that you probably know… because they are directly on our most heavily traveled streets, we seem to notice them more.
# |
Location |
DOM |
Original |
Current |
Avg Size |
$/SF |
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5 |
126 |
STATE |
112 |
$615,000 |
$615,000 |
2,050 |
$311 |
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8 |
159 |
STATE |
33[8] |
$435,000 |
$435,000 |
890 |
$484 |
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14 |
871 |
ISLINGTON |
380 |
$425,000 |
$397,000 |
1,219 |
$327 |
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1 |
237 |
ISLINGTON |
135 |
$439,900 |
$399,900 |
1,238 |
$323 |
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7 |
133 |
ISLINGTON |
166 |
$424,900 |
$424,900 |
1,400 |
$304 |
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35 |
|
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213 |
$425,000 |
$424,900 |
1,238 |
$341 |
This table highlights another important point: when asking why some condominiums are not selling, we need to be aware of the asking prices. The units now listed for sale below $300,000 and above $450,000 are listed at an average price of $293/SF. So far this year, 25 condominiums have sold at an average price of $214 per square foot (ranging from $144 to $319). Of the 26 units that are pending, their average list price was $278/SF. But look again at the prices above; the average asking price is $341 per square foot and they range from $300 to $600 per square foot. Ultimately the marketplace will decide if these units are properly priced. But right now, they are not selling and there has to be a reason. To give you some idea of what is selling and for how much, I have attached a list of all of the condos that sold during 2004 (through a Realtor).
As an aside, I must warn you about getting bogged down in studying prices per square foot. The new condos on Islington Street, next to Hovey’s, have an asking between $350,000 and $360,000 for roughly 1,000 SF of living space. At $350 or so per square foot, that sounds high, but smaller properties sell for more per square foot. Remember when I suggested that the products priced in this range should have some characteristic that makes them stand out. Well these units are townhouses, they are lower priced, they have garages and they have a different location than the others. Whatever that certain something is, the listing agent tells me that she has four non-binding offers already, so it would seem that $350/SF is right for these units. More importantly, overall, condominiums are selling.
Many of you may also be aware of a number of projects due to come on-line whose asking prices are in this same “caution zone”. It would not be unreasonable to wonder what will happen to those units. All I can say is that I hope all of these developers know something that we do not. Maybe some actually do, but it seems more likely that a few developers have forged forward without the correct knowledge of the marketplace. Like lemmings, other developers are assuming that this first group must know what they are doing, so they are going to do the same thing. And so on.
The concern I express is for the well being of the developers though; not for the marketplace at large, or the near term economic vitality of Portsmouth. No harm is done having these condos sitting unsold. All the others are still selling and from all observable signs, the condo market is generally quite healthy. What you are witnessing is simply a small but highly visible segment of the market. Remember, these condos will eventually sell, although it remains to be seen what their final price will be. These units may simply require a longer absorption time, the market may eventually catch up to them, or their developers will be forced to sell at prices where demand is greater.
V.
Please remain calm
Remember that at the beginning of this discussion I reported that Portsmouth is not allowing homes to be built fast enough? Although we are a very long way from doing our part to house working families, we can look at the glass as being half full rather than half empty: Strict policies preclude over-development. I wish we could strike more of a balance, but we are so far from the conditions that lead to an oversupply of condominiums, I urge you not to worry … There are no signs at this time to suggest that any segment of the housing market is at risk of suffering due to an over supply.
Steven H. Berg, MAI, SRA lives in
Portsmouth and is the owner of Sargent Consulting, Ltd. He is a graduate of
Connecticut College, where he earned a Bachelor of Arts degree, cum laude,
majoring in economics and sociology. Steven has been appraising a variety of
property types in New Hampshire’s Seacoast area since 1987. He specializes in
providing consulting services and litigation support and has amassed
considerable classroom education on a wide range of related topics. Steven is
both a residential and general member of the Appraisal Institute. In addition,
he is a member of the New Hampshire Real Estate Appraiser’s Board, Portsmouth
Housing Endowment Fund Advisory Committee, an alternate member of the
Portsmouth Board of Adjustment, and is on the board of The Portsmouth Economic
Development Loan Program.
[1] Municipal
Population Projections 2005 to 2025, Prepared by NH Office of Energy &
Planning (OEP) Jan 2005
[2] 2003 Population
Estimates of New Hampshire Cities and Towns, Prepared by NH OEP, July 2004
[3] Household
Estimates for New Hampshire Cities and Towns, Prepared by NH OEP, March
2005
[4] Per 2000 Census, vacancy in Portsmouth
was 2.3%. I have assumed a 50% increase and forecast vacancy to be 3.5%.
Therefore, occupancy is forecast at 96.5%. The nationwide average for vacancy
in 2000 was 5%±.
[5] Current Estimates and Trends in New Hampshire's
Housing Supply: 2003, NH OEP, November 2004
[6] Based upon the net of building permits
and demolition permits, the State estimates that 38 units were added in 2000,
30, in 2001, 41, in 2002 and 68 were added in 2003
[7] Derry averaged 68 units per year; Dover,
182/year; Exeter, 60/year; Hampton, 80/year; Londonderry, 107/year; Rochester,
204/year; Salem, 193/year; and Somersworth, 41/year.
[8] Note that 159 State Street has been
“officially” listed for 33 days, but the sign has been on the front of the
building for nearly one year.