Why Isn't the Condo Market Rebounding?

July 22, 2015

While construction of single-family homes and multifamily rentals is on the rebound, condo construction has sunk to new lows. A condo rebound has been delayed by stringent rules on condo mortgages that took effect post-housing crisis, as well as stronger demand among young people for rentals, The Wall Street Journal reports.

Condo construction in the first quarter comprised only 5.5 percent of all construction of multifamily housing — the lowest ratio since the Commerce Department began tracking such data in 1974. Historically, condo construction falls at a 24 percent average.

Condos traditionally offer higher returns for investors than apartments. "Many developers would rather be building condominiums," says Peter Bazeli, senior vice president at New York-based real estate consulting firm Weitzman Group. "With condos, you're paying down debt with every closing and then putting money in your pocket right away."

But many factors are hampering the condo market's recovery. For one, economists note that young adults have been flocking to rentals instead, and condos typically cater to entry-level buyers. Also, developers say construction loans are limiting the supply of condos they build. Developers say they can get a construction loan for about 75 percent of the cost of building an apartment complex, but only about 50 percent for a condo complex because lenders are deeming it a higher risk.

The Federal Housing Administration tightened its lending standards from 2008 to 2012, which has made condo funding even tougher, too. In order for the FHA to insure mortgages in a condo complex, at least half of the units must be owner-occupied and no more than half can be FHA-insured. For condo projects under development, at least 30 percent of units must be under contract for sale before the FHA will start backing mortgages there.

Economists say that has kept the condo market sluggish and still far from recovery. The median condo resale price in May was $216,400, about $15,400 less than its pre-crisis peak in June 2005. On the other hand, the median resale price for single-family homes in May was $230,300 — only $600 less than its pre-crisis peak in July 2006.

But some developers see glimmers of a condo rebound forming.

"Rising apartment rents provide renters more reason to buy instead of renting," the Journal reports. "Job growth is improving for young would-be buyers. And real estate lobbyists say they are making inroads in Washington to build support for easing the FHA restrictions on condo mortgages."

Source: “Condos Left Behind in Housing Rebound,” The Wall Street Journal (July 21, 2015)