CoreLogic takes a Second Look at Condo Comeback

In July Sam Khater, an economist at CoreLogic, wrote about the comeback of the condo market and how construction of units had increased from post-recession lows while the ability of the market to absorb those new units had also improved.  Much of this, Khater said, came from a normalization of prices in two ways.

First he pointed to the boom years when the median condo price was 37 percent higher than the median price of a single family detached home.  Today there is about a 1 percent difference. 

There was also a roller-coastering gulf between the prices of new and existing condos. New units commanded a 29 percent premium in the 2000 to 2003 but rising prices during the housing boom reduced that premium to 5 percent by 2005.  Then came the crash and, while most prices plummeted new condo prices did not and by late 2011 the premium had been pushed to 80 percent.  Now rising prices again have reduced it to 43 percent, but Khater says, "Given more recent improvements in the amenities and locations of new condos, it is reasonable to expect the new premium to be even higher than in prior "normal" times."

From that analysis Khater concluded the normalization of existing condo prices was a prelude to recovery in prices for new condos.  Now he has written another post in CoreLogic's Insight blog in which he says that in order to understand what's happening with condos now and in months or years to come, we have to look at another aspect of the condo comeback: sales, on their own and as a function of all home sales.

Despite the cyclical pattern of condo sales during recessions, the rise in the share of home sales going to condos has rising consistently for nearly 25 years, from 162,000 sales in 1981, a 6.3 market share to 350,0900, a 9.2 percent share at the peak of that cycle in 1988.  As housing recovered from the 1991 recession condos were slow to come back but by 1997 sales reached 9.3 percent again.

During the mid-2000's boom condos rose to a 12.7 percent share but shrunk even more than other sales, down to 10.7 percent of all sales in 2009 and then they moved sideways before picking up steam again last year.  This year it has accounted for 12.3 percent of all home sales.

Khater points out that where condo sales get interesting is at the metro level.  As of June 2013, 22 of the 25 top markets had increases in condo sales compared to a year earlier.  But then interest rates rose and all housing sales cooled and only 14 of those same markets showed year-over-year increases by June 2014.  But looking at individual markets he found that cash sales had the largest impact on changes in sales. 

This reveals a vulnerability in condo market recovery as the cash share of condo sales in the first half of 2014 was 53 percent and some markets are almost exclusively supported by cash sales.  Three of the 25 markets had condo cash sales that exceeded 85 percent.  If there is a pullback in cash sales - which are mainly sales to investors - the condo market could be disproportionately hit.

On the other side of the coin however is an opportunity to increase sales.  The largest age cohort in the U.S. is currently 20 to 24 year olds, the group currently driving the rental market.  Over the next 5 to 10 years they are likely to become first-time homebuyers, and turn that demand toward newly built condos.

Khater says that history can serve as a guide for understanding future market dynamics. Despite low levels of unsold condo inventory, new condo production is currently running at roughly 10 percent of the pace during the late 1970s and early 1980s when baby boomers were in their early 20s and roughly the same size population as the current age cohort of 20- to 24-year-olds. Therefore, the lack of new condo production, in conjunction with large demographic demand on the horizon, provides the market with a large opportunity to expand new condo sales over the next decade.