Posted on: Friday, April 9, 2004

Despite drawbacks, condos are selling

By Kristen Gerencher
CBS MarketWatch

SAN FRANCISCO — Condominiums can be attractive to first-time home buyers looking to get a piece of the American dream or older homeowners wanting to shed some maintenance demands, but they're often riskier investments than single-family homes.

In deciding between the two, buyers have to weigh their life-style needs against the financial reality that — unlike houses, which have never decreased in value on a national basis — condo prices haven't always risen. In fact, it wasn't long ago that condo prices tanked in the West and Northeast, stranding owners for at least seven years before prices went back up.

As more Americans consider buying a home before mortgage rates rise again, they should keep in mind some potential condo stumbling blocks, real estate experts said. While condo markets vary widely depending on location, it may pay to consider a more modest house as opposed to a larger condo because of all the variables.

Potential buyers should know that their return on investment may not be the same as for a person buying a house "because the market does fluctuate a lot more," said Mari McQueen, associate editor of Consumer Reports.

Overbuilding is a risk and — depending on the monthly assessment, which provides for common-area maintenance and other services — condos can make owners feel like they're paying rent on top of a mortgage, McQueen said. "You might think it's easily affordable relative to a private home, but once you add in common charges — or, in the case of a co-op, the maintenance fee — the cost can be quite significant."

Despite the drawbacks, condos are a fast-growing part of the housing market, accounting for almost 13 percent of total existing home sales in 2003, up from 9.6 percent a decade earlier, according to the National Association of Realtors.

Sales rose 9.5 percent last year to 898,000 condos and co-op units. That's not far off the 1.1 million new homes sold, which increased almost 12 percent. Together, new and existing single-family home sales were up almost 10 percent last year to 7.2 million, the NAR said.

What's more, last year's fourth quarter was the first time since the NAR started tracking condos in 1981 that the median condo price exceeded that of a single-family home. Existing condo prices appreciated to $174,700 on average nationally, nearly 15 percent higher than a year ago. By comparison, single-family homes went for $171,600 on average, up 6.6 percent compared with a year ago.

Condo prices are strong "because of demographic trends, and that's going to keep condo prices going up, not down, even as the market slows a bit," NAR chief economist David Lereah said.

The numbers reflect a greater mix of more expensive condos, according to Lereah. "That's really the empty nesters. It's the (baby) boomers that have money, and they're trading in their suburban homes and buying bigger condos," he said.

Of course, that trend doesn't help those with lower-priced condos at the entry level, Lereah said.