Condos appreciating faster than single-family homes

Nation's Housing

September 22, 2002|By KENNETH HARNEY

IN WHAT could be the harbinger of a significant trend in American home real estate, condominiums no longer are lagging behind traditional houses in appreciation rates. They've begun gaining in resale value at a faster pace than detached, single-family homes.

According to new research on sales volume and price patterns, the median price of condominiums sold across the country during the second quarter of this year was up 14.7 percent over the second quarter of 2001. That is almost double the 7.4 percent year-to-year increase registered by the median-priced detached single-family resale home.

Condominium sales were close to their all-time record pace nationwide during the first two quarters of 2002, according to the National Association of Realtors, and are likely to set a new annual sales volume record by the end of the year. Some regional performances in appreciation gains by condos were even more impressive. The median-priced condo gained 15.3 percent in the Southern states, and an even splashier 19.3 percent in the Northeast. In the West and Midwest, condo prices rose by 12.5 and 12.4 percent, respectively, still well above the median gain nationally for detached houses.

Long regarded as the poor second cousins of the home real estate market, condos now appear to be the beneficiaries of several key factors. Tops on the list: Pricing and demographic changes. Condominiums - whether in townhouse or apartment form - tend to be smaller in square footage and cheaper than detached dwellings sitting on lots. Condominiums virtually always consume far less land per improved square foot of interior space than do detached units - thereby slashing what often is the largest or second-largest component of the price of a house.

Lower costs make condos more affordable and attractive to the most dynamic sector of the real estate marketplace: entry-level, first-time buyers who increasingly have access to low interest-rate, low downpayment mortgages. Buying a condominium townhouse or apartment unit is more feasible financially to this segment of consumers than at any time in the past two decades. As a result, they are snapping up entry-level condos, and that demand in turn is exerting upward pressure on prices.

At the other end of the condo spectrum, a very different dynamic is under way. Condos are turning into the first choice for "downsizing" moves by growing numbers of empty nesters and pre-retirees who don't want to mow lawns or shovel snow. And who don't need vacant bedrooms, unused recreation rooms or fenced yards for the kids.

Loaded with equity from sales of their family residences, baby boomers and older seniors are bidding up prices at the upper reaches of the condo market - luxury and super-luxury units. They are transferring some of their winnings from the detached single-family marketplace to high-amenity condos - whether in downtown neighborhoods (as in the Washington, D.C., market) or warm and sunny resort locations (as in California, Florida and Arizona).

More than 42 percent of all condominiums now are purchased by people older than 50 years of age, according to the Realtors' national data. Looking ahead for at least the next decade, all the demographic pressure is going to be pointing in this same direction: greater demand and higher values for well-located empty-nester condos.

The 2002 appreciation boom puts the lie to some of the traditional raps against condominiums. In a nation that idolizes the detached, single-family home, condos historically have been seen as a distant and troublesome second choice - tougher to finance, more complicated to sell and the perennial underachiever on resale appreciation.

Even in today's market, giant mortgage finance sources such as Freddie Mac see condominiums as generally riskier bets than traditional homes. Condo projects can indeed present higher risks of default - or even loss of value - when high percentages of the units in a building are rented out by absentee investors, rather than lived in by owner-occupants.

Condo units can also hit their owners with shocking financial surprises, such as occur when a major system in the "common elements" requires replacement and the costs are apportioned as special assessments among the units.

Condos have other potential negatives as well. Unlike detached units built on separate parcels of land, condos legally are corporate subdivisions, run by boards of directors. If the board members make bad judgments on maintenance and management, the whole building may suffer.

Despite such downsides, the latest sales and appreciation data suggest that American homebuyers are focusing on the positives about condos. And that focus could continue for many years.

Kenneth R. Harney is a syndicated columnist. His e-mail address is kenharney@ aol.com. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.

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