I have been marveling at how resilient housing prices have been here in Seattle.

Looking at incomes, housing prices are way outside of their historical averages due to the bubble-economics so I expect them to fall. But all I see are empty properties -- a LOT of empty properties -- for sale at bubble prices.

I know this is human nature. People wont drop the price unless they are forced to. So what will force people to take a loss and when will it happen?

Although we have been looking at single-family homes, I have noticed the huge supply of condos, specifically new, luxury condos. No one is going to purchase those condos and they are too expensive to rent. Why are they still being built? What will happen to them?

Here is the first article I have seen that provides some explanation - interest reserve provisions.

I have heard that bubbles are symmetric. If it takes 5 years to grow, it will take 5 years to drop back down. So the takeaway here is patience. Prices will come back down it will just take a while.

So this year we have to watch for the financing to fail and look at what the government does about it. Buyers want to see prices fall; sellers want them to stabilize and rise. The one thing we can both agree about is that the size of this problem is huge.

Condo King Corus Weighs Its Options

By JONATHAN KARP

Wall Street Journal

February 4, 2009

The bank that funded a big part of the condominium boom is considering selling all or part of itself as rising defaults force it to seek capital.

Corus Bankshares Inc., a symbol of the exuberance for glass-and-steel condo towers from Miami to Los Angeles, reported a $260.7 million quarterly loss late Friday and said that more than one-third of its $4.1 billion in outstanding loans were nonperforming.

Corus is one of the few lenders to report that the Treasury Department intends to reject the bank's application for funds from the Troubled Asset Relief Program, or TARP.

Some analysts don't believe the bank can raise the capital necessary to survive.

Mr. Cardenas on Monday reduced his 12-month target price for the stock to zero.

Condos are one of the hardest-hit segments of the housing market. Many of them were bought by speculators who walked away from deposits when the market soured and never closed on their units, leaving developers with empty condos.

Also, much of the new condo development is located in second-home markets, such as Florida, where prices have crashed and foreclosures have risen. There was a glut of 588,210 condo and cooperative apartments on the market in December, close to a 15-month supply, according to the National Association of Realtors.

While it has been clear for months that thousands of condo projects were doomed, the full impact on financial institutions is only now being felt. Construction loans were structured with "interest reserves," provisions that gave developers funds to pay interest until the projects were complete. Now that projects are completed and failing to sell, the loans are going into default.

Banks and thrifts had $36 billion of condominium debt on their books as of the end of the fourth quarter, according to Foresight Analytics. Over the past year, the delinquency rate rose to 26% from 10%, estimates the Oakland, Calif., research firm.

Conditions are likely to get worse before they get better because many cities still are getting hit by a deluge of new supply. In Chicago, 5,570 units are scheduled to be delivered this year, up from 4,018 in 2008, according to Reis Inc., a real-estate market-data firm. Deliveries are expected to increase in 16 other markets as well, including New York City, Phoenix, San Diego and Seattle, Reis said.