There’s a natural cycle that’s part of the real estate market. It starts with potential homebuyers stating that they want something in particular — single family homes, multi-family homes, townhouses, condos, whatever it is. There’s a cluster effect involved too — often everyone wants one type of property at the same time, which leads to the next part of the cycle.
Developers read the market and start breaking ground on properties to meet this demand. If everyone seems to be clamoring for single-family homes, then that’s what the developer will build. It only makes sense — you have to follow the money.
The next part of the cycle is the buying frenzy, when everyone who was asking for a certain type of home buys it, and the entire market does well. But the tail end of the cycle, which no one likes to think about, is the surplus. Often times, developers will build more houses than they need to in case there is buyer overflow. But what can happen is that, while waiting for properties to be built, homebuyers can cool off toward one type of property and gravitate toward another, leaving the excess properties unsold.
This cycle is one of the reasons that those who are in the condo market right now are growing increasingly wary. There’s no question that condos — particularly luxury condos — are the hottest and most in-demand property right now. One triplex condo on Park Avenue in New York recently sold for $130 million, and million-dollar bidding wars have become commonplace.
Naturally, developers are moving quickly to capitalize on this incredibly lucrative trend, but what happens at the end of the cycle? If you’ve built a $300,000 home that doesn’t sell, that’s one thing. But if you’ve built a $2 million condo that doesn’t sell, that’s another thing altogether. That’s why many in the luxury condo market are getting cold feet and stepping away, leaving only gamblers who are convinced that luxury condo demand will continue to outpace the supply well into the future. Are they right? Time will tell.
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