January 13, 2015

Going Condo: Four Reasons It Makes Sense in Today's Market

Christina Boyle
Christina Boyle, SVP Single-Family Chief Client Officer

In today's purchase market, going condo could be the answer for many first-time homebuyers and those with lower and/or limited incomes. Here are four reasons why:

More Affordable. In most markets, condos are a more affordable option for homebuyers. On average, condos sell for 6 percent less than comparable stand-alone homes in the same area.* So not only are the mortgage payments more affordable, but the lower price points make it easier for homebuyers to save for a down payment. This is important given that 50 percent of renters surveyed said they were going to continue renting over the next three years because they could not afford a down payment. With new 3% down mortgages soon becoming available, condo homeownership opportunities should improve.

Where can you get the best bang for your buck? Condos are cheapest in the Midwest and South, with November 2014 median condo prices of $145,000 and $154,000, respectively. This is followed by a median condo price of $240,000 in the Northeast and $276,000 in the West. Nationally, the median sales price was $199,000.

We expect to see the affordability gap between condos and stand-alone homes continue to widen as overall affordability in the housing market declines as mortgage rates and house prices continue to rise.

Rising Rents: Rents nationwide continue to rise, increasing an average of 3.6 percent in 2014 and nearly 11 percent over the last three years – significantly outpacing income growth. We believe this trend will continue in 2015 and expect that it may move renters to buy while mortgage rates are still low and affordability still high in most markets. Condos will be a good entry point for many of these first-time buyers. Check out our rent vs. buy calculator to learn more.

Growing Opportunity. Condo sales have yet to recover from the housing downturn, with existing condo sales down about one-third from their peak. With about a 5-month supply on the market, inventories are currently tight. However, a lot of renters are living in condos. In fact, condo renting is at the highest level we've seen in decades – about 45 percent of all occupied condos were filled with renters in 2013. As the housing market continues to stabilize and prices rise, selling may become more attractive than renting for condo owners, which may boost opportunity.

Less Maintenance & Repairs. Condo living may be a better option for homebuyers on tight budgets because there are generally less out-of-pocket maintenance and repair costs than for other property types.  In a condo, the Homeowner's Association (HOA) fees are paid by the owner to the HOA and generally cover all care and maintenance of the building and grounds, including repairs such as roofs and siding, which can be big one-time expenses. However, it's important to understand that HOA fees are mandatory, do not go away, may increase over time and could include one-time special assessments for major property repairs not included in the HOA budget.

At Freddie Mac, we are facilitating more condo sales by helping our lenders better understand our requirements and workflows for condominiums, which we recently streamlined and clarified. These were aimed at addressing common misconceptions lenders had about our requirements, including those around project reviews, investment properties and loan-to-value ratios.

Sources: American Housing Survey; NAR; Reis Inc.

*Discount rate was calculated by looking at all 1-unit owner-occupied housing units in the 2013 American Housing Survey and running a regression of the log of value on an indicator of condo unit, the total square footage of the unit and indicator variables for the Metro area for the unit. The coefficient on the condo indicator shows that after controlling for metro area and square-footage of the unit, condos sold for about 6% less than single-family units.

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