Real Estate News
The condo market, just like the single-family home market, has been on fire the past six years. Every metric I measure has shown an enormous demand from condo buyers and a shortfall of inventory from sellers. As you would expect, this has led to competing offers and fast rising prices. Condo prices rose an incredible 12.3 percent in the past year.
What’s very interesting is that many people think condos are not as good an investment as single-family, detached homes. Or, that condo prices are less stable and fall faster and deeper than the prices of homes when the market drops. When a client tells me this (and they ALL do!), I just show them the data, because the data show this is not true.
If you look below you see the graphic of metro Denver condo sales from 1972 to the present. Remarkably, the price fluctuations over this 45-year period closely mirror the rises and falls in the single-family home market. What’s more, the condo appreciation over that 45-year period is 5.6 percent per year, just 0.7 percent per year lower than the home market – a rounding error.
Of course, the major difference in purchasing a condo is understanding the financial health and rules and regulations of the Home Owners Association (HOA). The effort to understand and qualify the HOA should be taken very seriously by anyone interested in purchasing a condo. HOA financial reporting can take some getting used to, but with a little effort you can grow in your understanding of how it all works. Take a long view of the HOA’s finances. Yes, it is important to remain aware of the here-and-now financial health of an association, but it is equally important to think about any major, upcoming expenses that you know about. The balance sheet, for example, provides a cumulative, complete picture of the association. The current year’s equity reflected on the balance sheet is the net income or loss being added or subtracted for the year’s operations. The balance sheet is a picture of the association, reflecting its financial position at a specific point in time. It is categorized into three areas: Assets, Liabilities, and Members’ Equity. The three are always in balance, thus the equation: Assets = Liabilities + Members’ Equity. A bad HOA makes for a bad condo purchase, plain and simple. The good news is there are well established metrics and rules to guide us in evaluating an HOA, so it’s not guesswork, it’s just work. And let’s not forget condos come with lots of advantages as well. They usually are more affordable than single-family homes, and all of the outside maintenance is taken care of by the HOA – a big advantage for many buyers.
Let’s look at a number of key metrics for condos to help understand the market better:
Average price: Prices have been up strongly in each quarter since 2010, rising another 12.3 percent since Oct. 2016. Smaller condos have generally experienced more price appreciation than large ones. I expect continued price gains in 2018 (range 7-9 percent).
Number sold: The number of condos sold rose 6 percent in the past year. Tight inventory has limited sales for the past several years, continuing to drive up prices. I expect modest increases in sales volume in 2018 vs. 2017 (+5 percent or so), as new construction continues to filter into the market. The problem for most buyers, though, is that the majority of the new attached construction is in the luxury market, priced well beyond what the average buyer can afford. So while we expect more units to come on the market, the average buyer will continue to see limited inventory for affordable condos and no end in sight to price rises across the board.
DOM (Days on Market): DOM has been flat since 2016, at a remarkably low 21 days. Ninety days is considered a “balanced” market where neither buyers nor sellers have the upper hand. Because inventory levels have been low for years, DOM has remained low as well. Simple “supply and demand” economics at work. I expect DOM in 2018 to stay near historical lows, around 2017 levels.
MOI (Months of Inventory): Six MOI is considered a “balanced” market where neither the buyer nor seller has the advantage. Currently, there is only one month of inventory for condos as condo inventory levels continue to be extremely low, especially for less expensive units. Low inventory has driven the nonstop condo price gains since 2012. Inventory will remain super tight next year in all but the luxury segment. Someday, increasing prices, an improved economy, and solidification of consumer confidence will bring more sellers (i.e. inventory) to the market but we believe we are years away from the equilibrium.
If you want to know more about condos give me a call, I’d be happy to talk to you about them!