Understanding Condo Economics

If you’re graduating from being a downtrodden tenant to home ownership by buying a condo, there are some economic realities you should be aware of as you shop around.
First, in a mixed area of competing single family homes and condos, the condos will not appreciate as fast as detached homes in a normal market. In slow economic times, the condo market suffers first and is slower to recover.
In urban areas that have predominately condos, this market competition with detached houses will not exist and normal supply and demand will govern values.
Second, condos are more area sensitive than detached homes. If a project becomes run down or the area suffers because an off ramp or factory is built close by, values will sink to the bottom and stay there longer than an area of single family homes will. Next, since units in a condo project are similar and buyers move in at about the same time, it usually happens that when you want to sell, so will a lot of other owners. A three- to five-year selling bubble often occurs in new projects that attract first-time homebuyers. So, if you need to sell fast, it may be difficult because most of the units are the same, and price is all that sets you apart from the competition. A desperate-to-sell condo owner, who bottoms out his sales price, will hurt the whole complex.
Lewis and Charlene had this problem when they tried to sell the condo they bought four years ago. Like most others in the development, they were first-time homebuyers and couldn’t afford the average $168,000 house prices in the area. The condo, with a fireplace, two baths, and two bedrooms seemed perfect at only $110,000. Monthly payments on a variable mortgage were less than rent, even with the $85 condo fee added in.
The first two years of living there were great for Lewis and Charlene. They loved the location, pool, and lifestyle. Then a baby came along, and suddenly the future looked different. After two more years, they started thinking about a home with a yard. Their income had gone up, and they felt they could afford to move up. About then more for sale signs started appearing in windows around the development and were slow to disappear. Moreover, Lewis and Charlene’s mortgage balance was still about $108,000, since they had financed some of the closing costs.
Some owners who had more equity were discounting their condos as low as $103,000, hoping to get a quicker sale. When this happens, your equity often becomes the difference between the loan balance and the lowest priced unit in the complex. In this case, Lewis and Charlene would have to write a check for $5,000 plus to sell their unit. In retrospect, they would have been better off to rent for a couple of years and save up a bigger down payment while their earning power grew.