Home values: condos vs. single-family

Factual Questions
1

For years I’ve heard and read that condominiums don’t appreciate as quickly as single-family homes. It’s usually presented as received wisdom—something that’s Just True.

But if that were true in a simple and literal way, the values of condos and free-standing homes would diverge over time, eventually causing condos to be radically cheaper than free-standing homes.

And if that happened, more people would buy condos, increasing demand and driving up the price. And then the rate of appreciation would increase, nullifying (or at least weakening) the claim.

How did this truism arise?

My best guess is that it stems from drawing an overly-broad conclusion based on the fact that condo fees effectively eat into a property’s rate of appreciation. If your $500K condo requires $800/month in fees, then you’re paying about 1.9% of your condo’s value each year. If a comparable free-standing house would appreciate 5% annually, I see why someone might claim that the condo’s appreciation, though nominally 5%, is more like 3.1% under the same circumstances. And of course, condo fees aren’t covered by the US mortgage interest deduction.

But even then, I’d expect the lower rate of appreciation to be priced in, at least on the macro scale.

Obviously, I’m not an economist or professional real estate investor. Does anyone have the straight dope on (a) why this received wisdom is so broadly accepted and (b) whether it’s generally true?

2

I’m not a professional either. But I think houses have a few advantages:

  1. You get land. Much of the house’s value is actually the land’s value. In Canada, people will often tear down a house and build a bigger house, or two houses, or something like that. Canada is losing good farmland as suburbs encroach toward farms. The farmers aren’t being bullied, just being offered tons of money to sell their farm.

  2. No condo association, close neighbors, etc.

  3. You can get a yard. If you have kids or dogs, this can be a big deal.

  4. Some renovations can increase a house’s value. These kinds of extensive renovations don’t really work in a condo.

  5. Canadians get emotionally invested in houses, but not condos.

Of course, none of this helps buyers.

Recently a quasi-government branch passed rules making it harder to buy a home, as too many people were buying homes they couldn’t afford. The prices of houses fell as people effectively lost 20% of their borrowing ability. People switched to condos, whose prices are going up.

3

Biggest advantage of a house over a condo, assuming no HOA with the house, is that you don’t have to get someone’s snotty permission to paint your front door a different color, or to remodel your kitchen.

Also you don’t have to fight the condo board about doing proper maintenance and fixing problems in a timely manner.

When we bought a house in 2004, our first, our agent tried to get us interested in a condo because there were more of them in our price range. We looked at some. Even the newest ones looked tired and unimaginative, with no private outdoor space, and those condo fees and regulations just made this a no go. We paid a premium for a house and were glad to get it.

Another thing: when you have the kind of appreciation in value that we get here in San Francisco, almost all of it (unless you have done extensive renovations to your house) is in the value of the land. That’s why you get people paying ridiculous prices for a teardown – they don’t care about the house, they just want some of that scarce resource, land, on which to build a new house. You don’t get that kind of appreciation with one unit in a large building.

In other words, condos tend to depreciate relative to the market, houses tend not to.

4

Condos are also limited.

I have added onto my house twice. Origional sq footage 1580. Today 2150. You can not add on to a Condo.

I have a spa that my wife and I can enjoy by our selves.

We have abut 27 rose plants plus a bunch of other plants.

And much more.

In the Bay area I would say that house prices and condo prices have raised at a near rate. A house that was $500,000 may be worth a Mill today. The condo that was $400,000 may be worth $800,000 today.

5

I think the simple answer is that buildings wear out but land doesn’t. They say that real estate goes up in value because they aren’t making more land in [desirable city]. They are in fact making plenty more buildings, so buildings don’t appreciate as quickly. Single family homes have more of their property value tied up in land than townhouses so a bigger portion of their purchase cost is dedicated to faster-appreciating land.

I’ll fictionalize my own home as an example. My land is roughly 60% of the value of my property and the house is most of the remaining 40% (with a pittance for the garage). But my house is getting older, its systems are getting older, and it is in some ways functionally obsolete. So the house is barely appreciating (slower than inflation) but the land, in a good neighborhood in a good school district, is appreciating faster than inflation.

My lot is big enough to hold five new, bigger townhouses, each of which would easily sell for 30% more than my house. However, the land value they collectively sit on wouldn’t change. So the breakdown in values would look something like this:

My home: Total Value $500,000 (House value = $200,000 and Land Value = $300,000)
Individual Town House (if there are five on my lot): $650,000 (House Value = $590,000, Land Value = $60,000 [that is, $300,000/5])

Over time, the buildings might appreciate something like 1% per year. The property appreciates something like 4% per year. With those assumptions, after 20 years, the single family house is worth a combined $901,375 (House $244,023, land $657,337), which is more than the townhouse at $851,380 (building = $719,912, land = $131,647). That is a combined rate of appreciation on the single family home of about 2.99% and a combined rate of appreciation on the townhouse of about 1.36%.

The same general idea applies to condos, which have an even smaller portion of their value tied up in land than townhouses.

6

Trying to go over your figures and I have a question. Are you compairing a House that sails for $500,000 to a town home that sales for $650,000? That is either some really run down house or some high end town homes.

7

To me there are two things creating upward pressure on condo prices:

  1. Condos are entry level housing. They are always being sought by first time home buyers.

  2. At some point in life everyone is ready to have someone else take care of the trash, snow, maintenance etc. So virtually everyone winds up in a condo eventually.

That covers the beginning and the end of our life of habitation.

8

In what area? In the DC suburbs it is very easy to find single-family homes under $500K (that are not run down) and townhouses over $1M.

9

While I appreciate these replies, they all seem to be addressing the question, “why do single-family houses appreciate faster than condominiums?”

That’s not my question. I doubt the premise: if houses appreciated faster than condominiums, then condominium prices would generally (over long time scales) fall relative to house prices, and I haven’t observed that.

I don’t see that the premise can be true over the long haul, because it predicts price disparities that don’t seem to actually exist. For example, this blog post shows that in the Honolulu, HI area, condos and single-family homes have appreciated at nearly the same rate over the last 33 years:

Now, the Honolulu Board of Realtors is not exactly my first choice for unbiased economic analysis. And obviously, every market is a little different. Still, this is what I was able to find.

I don’t see that condos appreciate at a different rate than do single-family homes over long time scales (e.g., 15-30 years). As far as I can tell, that claim is generally false.

This is my primary question: is the claim as false as it appears to be?

My secondary question: if the claim is generally false, how did it take root?

10

Who said it was possible for 2 types of housing to diverge over time, when it’s the same market?

11

Market valuation of residential real estate (condos and free standing homes), is subject to a variety of factors, but supply and demand are one of the leading factors. Changes in condo valuations in San Francisco are going to vary drastically from condo valuations in Scranton, PA, primarily due to differing supply demand factors in those different markets. You can’t just compare relative valuations between condos and freestanding homes and come to some overarching conclusions. It’s going be different based upon the market you are in.

ETA: When it comes to investing having general rules is one of the quickest ways to get burned. Always do your research.

12

I think it also depends where you live.

Here in Chicago most neighborhoods near the lake are almost all condos. Stand-alone homes are rare and expensive. You can get them further out on the fringes of the city but then transportation to the city center is a lot longer making them less desirable.

I also think you are safer in a condo than a stand-alone from theft. It’s just harder for a thief to sneak into a condo and steal stuff than it is in a stand-alone home.

Also, things like roof repairs are a shared cost. Plumbing to the building, electric and so on too.

Frankly I think yards are over rated unless you have kids. Most of my time spent with a yard was maintaining it. Perfectly happy with a balcony to be able to read outside with a drink and enjoy the weather. Doing the same in grass I find no more enjoyable.

And while home can appreciate in value they can certainly depreciate too. There have been a number of high profile examples of very nice homes around Chicago having to slash their asking prices (below what they bought it for). I think a condo has less fluctuation either way.

13

The OP’s analysis seems spot on to me. The prices simply cannot diverge over the long run. I think of condo fees as just another form of maintenance, but more predictable. I am about to move into a condo in less than a month.

14

How does “taking care of the trash” differ between a condo and a single-family home? You still have to take your garbage out to the big can. What happens to the big can (e.g., do you have to wheel it out to the curb?) is more an issue of the garbage service rules than the type of housing.

For me, in terms of long term condo value, the big unknown is the competence of the condo association as well as unexpected big repairs to common property. The condo board screws up and gets sued into the ground by someone who knows what they’re doing. You’re on the hook. The condo pool breaks open and floods a bunch of stuff. You’re on the hook.

While these are not everyday events, they do happen. Around here there have been several condos that just flat out cratered. Maintenance work was skipped so everything started leaking. Roads caved in. Etc.

With a single-family home (and no HOA) you don’t have to worry about stuff like this that takes place off your property.

15

Most condo association fees include a little extra to put in a rainy day fund precisely to manage unforseen expenses. Usually condo owners understand that letting things get rundown only hurts the value of their home. Same as owning your own home.

Frankly, I’d much rather have the shared expense rather than having to pay 100% for a new roof if a tree falls on it.

16

With condos, there is a thing called a “special assessment” which can be a big surprise for unplanned expenses. A woman at my office owns a condo that had part of a building collapse. The renovation is an enormous expense (tens of thousands of dollars for each resident) and people are having to finance this like it’s a mortgage. Many were evacuated and left with no place to live. Even though my colleague lives in a different building, this is costing her a bundle and will make it very difficult to sell any of these units. This is the downside to a shared expense.

17

A problem you would have if part of your home collapsed.

And certainly before buying try to assess the quality of the building. Same has buying any home.

18

I certainly wouldn’t say that, but it’s often presented as a truism in popular articles about real estate and personal finance:

Nolo Press:

US News & World Report:

The Washington Post:

The Post article goes on to suggest that this received wisdom may no longer be useful:

That’s nice and all, but I still don’t see how this assumption ever held any macroeconomic water. Sure, condominiums are priced differently from houses; $/ft[sup]2[/sup], fees, amenities and buyer demographics are all fairly different from single-family homes.

But if, in a given market, condo prices were genuinely deflationary relative to house prices—if they appreciated at a substantially slower rate, as these articles explicitly suggest—then over time, condos would cost dramatically less than houses—and yet, as far as I can tell, they don’t.

Let’s say you buy a housing unit for $500K today. If you chose a free-standing house and it appreciates at an average of 5% annually for 20 years, you’re looking at $1.33M. If you bought a condo and it appreciated at 3% annually, the value after 20 years would be about $0.903M. In other words, the house is worth 47% more after 20 years. Current appreciation trends don’t seem to show this effect.

That’s a gross simplification, of course. And changing buyer preferences could explain why condominiums are perceived to be more desirable now than they were 30 years ago. But if the truism isn’t true now, why would it have been true in the past? Changing preferences might explain some markets’ improving condo appreciation rates, but that would be a one-time effect, no?

If the idea were true as presented, New York City real estate would be fairly cheap—there market is dominated by condo-like housing. And yet NYC real estate is somehow not dramatically cheaper (ha!) than one might expect.

At this point, I’m inclined to conclude that the trope that houses appreciate faster than condos is long on truthiness and short on substance. But if there are any lurking economists on the board, I’d love for them to weigh in.

19

Thanks for the sanity check. I strongly suspect that there’s a kernel of truth to this idea: condos involve carrying costs (like condo fees) that can’t be financed and thus can’t be deducted from one’s taxes, so the net appreciation (final sale price - purchase price - total expenses) rate tends to be lower than for a free-standing house.

This may be generally true, but many free-standing houses come with HOA fees, and a free-standing house with a yard and a pool can add substantially to a house’s non-deductible expenses—expenses that are often covered by the condo fee.

That’s why I think it’s an oversimplification to assert that houses appreciate faster than condos. You’ll notice that the quotes I provided above don’t cite any sources for that claim…there’s a lot of “industry experts say,” “historically, houses have appreciated faster,” and “the standard answer is that houses appreciate faster.”

There may be a real reason to expect houses to appreciate faster than condos in the same market, but I have yet to hear that reason articulated. Seriously, though, I’m all ears.

20

Right. That’s why I said, two posts before yours, that every market is different. I probably should have been explicit in my OP that I was talking about houses and condos within the same market. (Or maybe your comment was directed at someone else).

I’d argue that the assertion that houses appreciate faster strongly implies “within the same market.” If it didn’t, it would be as meaningless as asserting that “ropes are longer than cables.” Some ropes are longer than some cables, but the assertion is meaningless without some sort of context.