The Fed “cut rates” one week ago today, and mortgage rates have remained higher ever since. We’re only a few more rate cuts away from 8% mortgage rates again. 😊
I am being facetious, of course. But – this is just another reminder (my 5,234th) that long-term rates often don’t fall when the Fed cuts the Fed Funds Rate.
Why Are Condo Prices Falling So Quickly?
We’re seeing condo prices fall sharply in some markets, while single-family home prices are either holding steady or falling much more slowly than condo prices.
While some of the reasons are obvious, there is one that most are missing.
I. Climbing HOA Dues.
HOA dues are going through the roof for several reasons, including: (1) rising insurance costs; (2) inflation – pushing up repair and maintenance costs; and (3) regulations requiring more repairs and better maintenance.
In today’s market, $500 of monthly HOA dues equates to about $80,000 of extra purchasing power for a single-family home. High HOA dues are a deterrent in and of themselves, but savvy homebuyers also consider the purchasing power alternatives.
II. Warrantability/Financing.
This is a much bigger issue nowadays than in years past, as many condo complexes no longer meet Fannie Mae’s and Freddie Mac’s requirements for financing – rendering them “non-warrantable.” When a condo complex becomes non-warrantable, buyers have to use inferior, alternative financing. Not only are the rates and fees higher, but the down payment requirements are too (eliminating an entire segment of buyers).
So, losing Fannie/Freddie eligibility makes condos more expensive, and it eliminates large swaths of low-down-payment buyers.
III. Supply of Condos.
Condo supply imbalances are often more prevalent too – for a few reasons: (1) builders are often able to build a lot more condos than single-family residences in hot markets; and (2) condo owners are often more likely to sell in soft markets for a variety of reasons. One of them has to do with condo buyers often being less financially sound than single-family buyers – so they often sell sooner out of distress, concern for rising HOA dues, or concerns over a declining market.
IV. Supply of Single-Family Homes.
Homebuyers often opt for condos when there are too few affordable single-family homes on the market. But when markets soften, there are often more single-family homes on the market, making it less likely that lower-end buyers will opt for a condo. This, of course, further weakens the overall demand for condos.
V. Stigma.
Condos suffer from a stigma of sorts as a result of bad press that surfaces from time to time, when a condo complex has a major structural problem, or HOA dues climb notoriously high, or when someone blogs about condo prices falling. 😊 In any case, the stigma factor seems worse now than in years past, due to more bad press compared to previous years.
VI. “Flaws”/Inferior Properties Get Ignored In Hot Markets.
This is the factor that most don’t consider. But condo prices fall faster than single-family residences in every soft market. I’ve seen this play out numerous times now over the last 35 years. And – don’t get me wrong, as I love condos for many buyers (no maintenance, better locations for urban buyers, great amenities, more affordable than SFRs even with HOA dues, better security/safer, etc.).
But single-family residences nonetheless remain more appealing overall in most markets, so they hold up better in soft markets. I blogged about this to some extent in July: Beware! “Flaws” Impact Property Values Way More In Soft Markets. I am not saying condos are “flawed” per se, but I am saying they have inferior marketability factors that buyers seem to ignore in hot markets – when inventory is limited.
Final note: I “borrowed” this topic (and added my own perspective) from renowned appraiser, Ryan Lundquist – who published this excellent blog today: Condo prices are obviously dropping. As always, I highly recommend subscribing.
