After an already turbulent two years, there could be more trouble on the horizon for the housing market.

The condominium market is struggling to absorb excess inventory as a result of speculation during the boom, especially in places like the Sun Belt, where prices have already fallen by 50%. Now, the expiration of urban tax policies which made condos appealing to buyers may actually add fuel to the foreclosure fire, increasing property taxes by as much as $1,000 a month in cities such as New York.

“I actually thought it was starting to look better last quarter, but the data is still pretty weak,” said Bill Staniford, chief executive of PropertyShark.com, an online real estate research company. “We are really going into sort of a death spiral; we definitely have some downward pressure, and the condo market is not unique—it’s going to come down like everything else."

One issue that could cause condo values to fall even further is the pending expiration of tax abatements in some cities. Tax breaks on residential property are generally given to developers by cities and municipalities to encourage development in parts of a city seen as costly to build upon or otherwise undesirable. While each city’s policy is different, the abatements allow qualifying properties to be assessed little or no property tax for 10, 15 or as many as 25 years. The abatement is usually passed onto new condo buyers in an effort to drive sales of the property.

In the past decade, as cities worked to bring more residents back into urban centers, residential projects across the country were granted tax abatements in the hope that developers would have more incentive to build and home buyers would pay little or no taxes for the early part of ownership. Now many redevelopment districts are closing in on the expiration of their 10-year or 15-year abatements, meaning the costs associated with the properties will soon go up.That could be problematic for condo-owners who are already having trouble paying their mortgages.

Paul Korngold, a real estate lawyer in Manhattan said many condo owners in New York, a market that has used abatement incentives for years and will soon see them expire, are not prepared for the steep cost increases that are coming. The expiration of an abatement on a million-dollar condo in New York could boost condo maintenance fees as much as $1,000 per month, Korngold said. That could be a tipping point for homeowners who have lost jobs or are receiving smaller annual bonuses.

“Co-ops have one tax bill and then as part of maintenance charges they started gradually increasing maintenance for years in advance,” said Korngold. “In a condo you’re paying your own taxes. Co-op boards were educated and prepared for this; condo unit owners are basically ignorant of how taxes are calculated.”

The expiration of the tax abatement on a property could serve to bring property values down further, pushing some condo owners further underwater and leading to more foreclosures, adding to the excess inventory the market is already struggling to absorb.

Still, Korngold says it could be less of a problem than it sounds. In the 1980’s, after the abatements on many lofts in the Soho neighborhood in Manhattan expired, the end result was not as terrible as many predicted.

“In the '70s and '80s there was this great fear that when the J-51s [abatements] were expiring that…values would crash,” Korngold said. “It never happened; but whether or not a rising market took care of that, I don’t know."

In New York, where prices have only fallen 8.2% since this time last year, there’s reason to believe the sector will continue to be problematic. Lis Pendens, or pre-foreclosure filings, are up 12% from last quarter, and have more than doubled from the third quarter of last year, according to PropertyShark.com. In other cities, such as Los Angeles, the problem is worse.

“New York is actually better off than most of the country,” said Staniford. “Los Angeles went through a real period of over development and that has caused prices to crater—literally 50% off; t’s a really bleak situation there. You see the same thing in Vegas, half off there, Miami is the same way. San Francisco is holding up kind of like New York.”

Still, as pending foreclosure activity continues to increase, especially in the boroughs where many of then newest projects were sanctioned, and abated by the city, it’s not difficult to picture a negative situation for the market.
“The government could always lower taxes…obviously they would get less revenue from property taxes, but they would certainly get more revenue for the total transactions,” Staniford said. "I don’t think they’ll do it—but it would certainly help out the market.”