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On May 11, 2006, Sherm Harmer, a developer and the chairman of the Downtown Residential Marketing Alliance, co-authored an op-ed in the Union-Tribune with Nancy Graham, then the new president of the Centre City Development Corp.

Harmer and Graham announced that the downtown housing market was a good investment and that while “appreciation was cooling,” condo owners downtown could still look forward to: “… steady, reasonable appreciation.”

Harmer and Graham declared that:

The bottom line is that demand for downtown condos should remain strong well into the future. Some may see this as a contradiction given the current market slowdown. But this slowdown should not be confused with the natural evolution of a maturing residential housing market.

The people buying downtown were now normal people, they said — not speculative investors. The prices of condos may not rise as fast as they were increasing with the investment money fueling the boom, in other words, but everything will continue, just slow and steady.

Condos ‘R Us

I could always understand why Harmer would want to promote the idea that downtown was a good investment for homeowners. I just didn’t know why a government official — Graham — would find it imperative to lure homebuyers into purchasing homes downtown with messages of how great of an investment it was.

After all, it was just a bad bet to buy real estate downtown in May 2006.

You might come out of it OK — if you hold on to the condo for the next 10 to 15 years.

But the problem is, most people couldn’t afford the condos, and had to use exotic loans to buy them. Those interest-only and adjustable-rate mortgages will demand much higher monthly payments from borrowers than what they are paying now.

In other words, unless they can easily handle those monthly payments, borrowers’ only option will be to try to get another exotic loan. If banks won’t do it, they’ll be underwater.

Now, places like Acqua Vista, a condo tower on the edge of Little Italy, which Harmer helped build, have become infected with foreclosures. Today, I counted 24 condos in that building that, according to RealtyTrac, were in the first stages of foreclosure. Eight condos there had recently been seized by lenders.

That’s just one building.

With all this swimming in my head, I walked down to CCDC’s offices Friday. The agency, and Harmer, had invited me down Friday to talk about my perceptions of downtown housing and give me their side.

Harmer didn’t shy from any of my questions and I enjoyed talking with him.

I asked him about his contention in 2006 that the housing market downtown would remain strong and that it was a good investment.

He blamed “flippers” and speculative investors for having run up prices downtown.

And he showed me some numbers, which I found fascinating.

Harmer, like many developers downtown, has been frustrated with the storyline that many thousands of condominiums are being built downtown and the accompanying assertion that that massive amount of inventory will weigh down the housing market tremendously.

When you hear about all the condos that are available for sale downtown and then you hear about how many thousands are in the pipeline to be built, you can’t help but come to the conclusion that downtown will be a massive center of affordable housing. Developers may want $400,000 for some of these places, but they’ll have to pay the bills at some point. Who knows how much they will lower prices to move those units.

Anyway, Harmer showed me a large table of figures that he shows bankers who have the same worries I just explained about the situation downtown. Even though we all have heard that a gaudy number of new condos were being built downtown, the table proved that it’s not quite that high.

The table showed what projects were actually under construction. Although many other buildings are planned — even permitted — it may be years before any of them get the financing needed to break ground, Harmer said.

That meant that between now and 2010, only 2,500 new condos were on their way to the housing market downtown. And Harmer claimed that many of them have been sold.

Harmer also showed me the graph below.

I think it’s astounding. And we can make some observations from it. Look at this year, for example, condo sales downtown are down precipitously from the years before. So much for demand for condos remaining so strong.

Harmer said he and other builders “detest” the speculative investment in condos downtown that caused this explosion. He said they would prefer steady growth.

“We made people sign documents that they wouldn’t flip and weren’t speculating on these properties. But the courts said those documents were unenforceable,” Harmer said.

Then he pointed to that graph — to the column for the year 2004 that shows an explosion in sales.

“I looked at that and said ‘Oh shit.’ When you have that, you’re going to have years of readjustment,” he said.

But that was 2004. If he thought he was going to have “years of readjustment” because of that boom, why, in 2006 at the start of that correction, did he implore Union-Tribune‘s readers to recognize the “strong” demand for downtown condos downtown and ignore the “fears of a bursting bubble?”

Today, I called Harmer back to follow up.

He said his and Graham’s 2006 op-ed was written under the assumptions that buyers downtown wouldn’t just buy for a year or two — it would be a long-term investment.

“The housing market is cyclical. It goes up and down, but over time it will go up,” Harmer said.

So, then I asked him about his sentence in the 2006 op-ed — that homebuyers downtown could expect a “steady, reasonable appreciation.”

If he knew that housing was cyclical, and he anticipated what he called a major readjustment for years after the boom, how could he tell readers they could expect steady appreciation of their investments in downtown condos?

“We did not anticipate the subprime financing issues,” he said, referring to crisis in the nation’s credit markets that has forced lenders to cut back and severely restrict the mortgages they let homebuyers get.

This has had, to say the least, an accelerating effect on the housing downturn.

But Harmer said there was no way to anticipate it.

“It was not on anybody’s radar screen. It surprised the best banks, the best investors. No economist predicted that,” Harmer said.

I’d love to see what Rich Toscano would have to say about that. Here is a Toscano column that ran just a week after Harmer’s in 2006. Toscano accurately predicted that, barring some unimaginable increase in local incomes, homeowners would soon have trouble making payments on exotic loans and that would speed up any deceleration.

Finally, Harmer made his last point. He said he was encouraged by the fact that CCDC and the city was going to spend so many millions in coming years making downtown attractive. If he couldn’t count on that, he’d sell his holdings at a loss because there’d be nothing to look forward to.

But he said the market was strong.

“If you bought your condo in 2003 and you still have it in 2007, it probably doubled in price. So if it’s gone down 10 percent since it doubled, you’re fine,” he said.

If you bought in May 2006, well, hang on.

SCOTT LEWIS

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