By Liz Pulliam Weston
Posted October 23, 2003
Though condo values have been rising,
they historically have been much more volatile than single-family home
values. Worse, living in a condo can be maddeningly complex -- and costly.
Something weird is happening with condominiums
across the country. They’re not only gaining value, but they’re appreciating
faster than single-family homes.
Condo values rose more than 27% between
2000 and 2002, double the increase for regular housing. Incredibly, the
median value of condos in the second quarter of 2003 ($163,500) -- is now
just slightly below that of single-family homes ($168,400).
This is a big deal. Condos have long been
the unloved stepchild of the real-estate world. Typically, they've gained
value more slowly in good times and lost value more quickly in recessions
than other homes.
Median
values of houses vs. condos |
Year |
Single Family |
% Changes |
Condo |
% Change |
1990 |
$ 92,000 |
2,8 % |
$ 85,200 |
- 1 % |
1991 |
$ 97,100 |
5,5 % |
$ 85,800 |
0,7 % |
1992 |
$ 99,700 |
2,7 % |
$ 86,000 |
0,2 % |
1993 |
$ 103,100 |
3,4 % |
$ 84,400 |
- 1,9 % |
1994 |
$ 197,200 |
4,0 % |
$ 87,200 |
3,3 % |
1995 |
$ 110,500 |
3,1 % |
$ 87,400 |
0,2 % |
1996 |
$ 115,800 |
4,8 % |
$ 90,900 |
4,0 % |
1997 |
$ 121,800 |
5,2 % |
$ 95,500 |
5,1 % |
1998 |
$ 128,400 |
5,4 % |
$ 100,600 |
5,3 % |
1999 |
$ 133,300 |
3,8 % |
$ 108,000 |
7,4 % |
2000 |
$ 139,000 |
4,3 % |
$ 111,800 |
3,5 % |
2001 |
$ 147,800 |
6,3 % |
$ 123,200 |
10,2 % |
2002 |
$ 158,200 |
7,0 % |
$ 142,200 |
15,4 % |
Source: National Association of Realtors
Does this mean that condos suddenly have
become a great value? Hardly.
Condos can make sense for some buyers,
but they’ll never replace single-family homes as the best way to invest
your home-owning dollars. Condos simply have too many drawbacks, and too
limited appeal, ever to be more than a second choice for most buyers.
Here’s what is behind condos’ recent run-up
in value, according to National Association of Realtors Senior Economist
Lawrence Yun, and why I don’t think the trend will last.
Low rates brought
out first-time buyers in droves
Cheap mortgage rates brought home-owning
within the grasp of many renters, who happily traded up to what they could
afford. The homeownership rate in the second quarter of this year -- 68%
-- was the highest recorded since the Census Bureau started keeping track
in 1965.
In the middle of the country, where real
estate is relatively cheap and condos few and far between, first-time buyers
bought single-family homes. On the coasts, where real estate is expensive,
many bought what they could afford -- condos. (Perhaps not surprisingly,
the homeownership rate is highest in the Midwest and lowest in the Northeast
and the West.)
What interest rates giveth, though, interest
rates can taketh away. Rates can’t stay low forever, and every up tick
from now on will exclude more potential purchasers. With fewer entry-level
buyers, the market will cool for the typical condominium.
The supply of
condos is expanding
A rash of construction-defect lawsuits
in the 1990s drove some builders out of business and made others leery
of this market. Add to that the fact that the highest condo demand is concentrated
in cities like Los Angeles, New York and Boston, where buildable land is
at a premium, and you have a limited market.
Condo construction is picking up, though.
While building condos is still expensive and risky, the hot real-estate
market is making it worth more builders’ while. Combine that growing supply
with cooler demand, and you’ll see less appreciation in condo values in
the future.
The price numbers
are skewed
The fact that the median price of a condo
is now a hair’s breadth away from that of a single-family home doesn’t
mean you’ll soon be able to buy a house for less than a condo in the same
market.
As I’ve noted, most condos are located
in the expensive real-estate markets along the coasts, while the single-family
home data reflects prices throughout the entire country. Result: The numerical
averages skew sharply upward.
The condo median is further tilted by one
phenomenon that is likely to persist: luxury down-sizing.
More wealthy older folks are trading in
high-end homes for equally high-end condos, economist Yu said. These upscale
condos offer quiet, exclusive luxury with none of the maintenance hassles
that come with owning a stand-alone house. A rising number of better-off
Baby Boomers likely will continue this trend, keeping the upper end of
the condo market strong.
It’s harder to imagine a similar trend
among middle-class Boomers, though. If the choice is between the single-family
house you’ve lived in for years and a middle-class condo -- thin walls,
questionable neighbors and all -- you’ll probably stay put or opt for assisted
living when the time comes.
All this leads to the crux of the condo
problem: Many of them just aren’t very nice. Shoddy construction did, indeed,
plague the industry in the boom years of the 1980s. But even when condos
are decently built, residents still have to deal with the people who live
there and maintain the place. To wit:
Condo associations
can be the pits
These associations typically are run by
residents, not professionals. So, all kinds of nightmares can ensue. Petty
personal spats can turn into fines that turn into liens or lawsuits that
can even turn into seizures and auctions. Even seemingly innocuous issues
can become full-fledged battles.
Here’s a small sample of condo-association
controversies:
-
A Northern Virginia condo association has
twice ordered residents to take down American flags that went up after
Sept. 11. The first time, the association backed off after protests, but
it renewed its demands this year saying the flags are tattered and worn.
-
A Houston condo association mounted a four-year
legal battle against a resident who complied with his doctor’s advice to
install a window-mounted air conditioner. (The complex’s central AC didn’t
filter out the dust and mold that aggravated the resident’s breathing difficulties.)
The association won the first round when a judge ordered the resident to
remove the unit and pay $100,000 in legal fees and costs, but it dropped
the fight when the resident won a new trial.
-
A Laguna Hills, Calif., condo association
is threatening to kick out any residents who don’t pay their shares of
an $8.36 million special assessment to repair water and mold damage. The
residents say they wouldn’t be facing the $9,000-per-unit assessments if
the association had done its job and properly maintained the property.
Those shared maintenance costs, by the way,
are a real bugaboo.
It’s nice not to have to mow the lawn yourself
and to have someone else clean the pool. But many condo associations do
a poor job of keeping up with maintenance and repairs. One out of three
associations, according to Association Reserves of Calabasas, Calif., doesn’t
have enough money in the bank to pay for needed upkeep.
And that affects your bottom line. If your
fellow residents let the complex go to pot, your unit’s resale value will
suffer.
Your investment is in your neighbors’ hands
in another way, as well. If enough of them become landlords, you could
have trouble selling your unit. Lenders often balk when renters make up
more than a third of a condo complex’s occupancy.
Condo owners in hard-hit Southern California
learned about this potentially vicious cycle during the last recession
in the early 1990s. As real estate values started to drop, those who couldn’t
sell their units for what they owed on their mortgages often decided to
rent them out instead. That made it harder for those who remained and wanted
to sell. The more values dropped, the more renters appeared, and the more
lenders refused to offer mortgages to potential buyers.
If you’re still determined to buy a condo,
take the following steps to protect yourself:
-
Read the codes and covenants.
These outline what’s allowed and what’s not. Many restrictions are
designed to preserve the complex’s value, but you may find the lack of
freedom stifling. Make sure you know what you’re in for.
-
Talk to other occupants in any complex
you’re considering.
A high number of renters or complaints about the condo association should
be a red flag.
-
Ask about the association’s operating budget
and reserve fund.
Bad signs: More than 10% of owners
are late paying their condo-association fees, and more than 50% of maintenance
liabilities aren’t funded
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