REAL ESTATE NEWS
Many people are feeling the pressures of this housing market and rising costs of living. There has been a lot of competition for homes, even in the luxury price segment of the market. Take a look at our Market Snapshot in this newsletter. Inventory at the end of January was extremely low at 1,291 active homes for sale. This was down a massive 70% from the end of January 2021, which was already a tight market for buyers. So, the questions on most people’s minds are, “Why don’t they just build more homes?” and “Where have all the condos gone?”
WHERE HAVE ALL THE CONDOS GONE?
In Metro Denver there has been a shortage of new construction for about 12 years now. Our city became more attractive to companies and qualified buyers looking to move. As a result, population increased more dramatically than usual. But construction has not been able to keep pace with all these new buyers. We have discussed some of the limiting factors to new home construction in previous editions of this newsletter. This includes shortages of everything from supplies to skilled labor, and even land shortages. But what this issue really boils down to is profitability.
From a development standpoint, investors prefer to put their money into multi-family units (only apartments, NOT condos and townhomes). The return on their investments is higher. They can rent to more people using the same amount of square footage. Condo construction is near historic lows relative to the past 50 years. This data also compares multi-family units available for rent (apartment buildings), and for sale units (condo complexes).
Condo construction reached an all-time high around 2005/2006. Back then, 50% of the new multi-family construction was a for sale product. Condo construction has gone from representing about 50% of the new multi-family construction to about 5% today. Hardly any multi-family construction money is getting put into condos, and most of it going into apartments.
WHAT CAUSED THIS DECLINE IN CONDO CONSTRUCTION?
There are a few factors for low condo construction, and lack of demand is certainly not one of them. One reason is that there is currently too much uncertainty with the retail and office asset classes. Those properties are a lot less interesting to commercial investors than they used to be. As a result, a lot of that money shifted to assets like apartments and warehouses. With higher investor demand, prices for those two industrial assets have gone up.
Another factor is that as first-time home buyers are being priced out of the market, they are being forced to either rent longer, or rent for the very, very long-term. This has created a lot of rental demand for apartments. So unfortunately, rising purchase prices for condos is creating more demand for apartments, which is in turn taking the availability of the condos away from renters.
The final component is probably not consistent for every market, but at least in Colorado there is a condo defects liability problem. Developers that build a for-sale condo are exposed to liability for any defects in construction for up to 7 years after the project is completed. There was a little bit of reform on the condo defect law a couple years ago, but it did not go far enough, so it is still financially unattractive for developers to build condos here. Unfortunately, all these factors are likely to be stuck in place for a while, so do not expect to see a lot of condo construction any time soon.
UNCONVENTIONAL BUYERS BREAK WITH TRADITION
“Hey grandpa, did you pay our mortgage this month?!” While that question may seem straight out of a bad T.V. show, it is one that more people are asking over the past several years. With demand for homes skyrocketing and inventory in short supply, it is no surprise that people have started teaming up on their real estate purchases. What may surprise you are the numbers. According to a recent survey from Realtor.com®, 31%, almost a third of all Americans (110 million people), have bought a primary residence with someone they are not married to. Among the 18-34 age group, that number is even higher at 41%.
Unsurprisingly, many of these buyers are romantic partners who have skipped marriage (16%). With wedding costs also on the rise, many people forgo getting married and use that same money as a down payment on a house. Other co-buyers include parents/grandparents/older relatives (6%), children/nieces or nephews/younger relatives (5%), siblings/cousins/relatives of a similar age (4%), roommates (4%), and friends (4%). Despite the unfortunate market imbalances forcing people to make these hard life decisions, maybe in the end it will bring people closer together. No matter who you are, just be sure you like to be around, and especially trust, your co-borrower(s).