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The Long-Term Rise of Condo Sales

Naples, Houston and Denver Are The Three Fastest Growing Condo Markets in the US

Sam Khater    |    Housing Trends

In July we analyzed the normalization of existing condo prices relative to the single-family housing market, which we concluded was a prelude to recovery in prices for the new condo market. But to truly understand what’s happening with condos now and in months or years to come, we have to look at part two of the condo comeback: sales, on their own and as a function of all home sales.

Historical data shows us that despite the cyclical pattern of condo sales during recessions, there is clear, consistent structural rise in the condo share of home sales that has been occurring for nearly 25 years. Starting in 1981, there were 162,000 condo sales that accounted for 6.3 percent of all home sales[1] measure. As the real estate cycle was reaching its peak in 1988, condo sales then hit 350,000, or 9.1 percent of all sales (Figure 1). After the recession in 1991, however, the condo market followed the downward trajectory of the overall housing market. As the market began to recover in coming out of the recession, condos were slower to bounce back and did not materially eclipse the 1988 real estate peak until 1997, when the condo share reached 9.3 percent of all home sales.

Cue the housing market boom of the mid-2000s, which caused the condo market to surge to 12.7 percent of home sales in 2005, more than twice the level it was in 1981. Thereafter, the financial crisis and impending meltdown caused the condo market to shrink even more than the single-family market, eventually hitting a trough of 10.7 percent of all sales in 2009. Condo sales moved sideways several years after the recession before picking up steam again in 2013. This year, it continues to rebound and currently accounts for 12.3 percent of all sales in 2014.

While the national condo market is recovering, analyzing condo sales activity in the top 25 condo markets by total sales reveals some very different patterns at the metro level (Figure 2)[2] measure. As of June 2013, 22 of the 25 markets had increases in condo sales relative to the prior year[3]. Similar to the impact it had on the rest of the market, the interest-rate rise in the second half of 2013 caused condo sales to cool off somewhat, and by June 2014 only 14 of those same markets were exhibiting increases year over year. As of June 2014, Denver led the pack with condo sales that were 16.9 percent higher than a year ago, followed by Houston (15.5 percent) and Naples, Fla. (10.8 percent). The weakest market was Las Vegas, where condo sales fell 16.5 percent from a year earlier, followed by Honolulu (-14.3 percent) and Orlando (-10.1 percent). Examining a variety of real estate transaction-related data reveals that cash sales have had the largest impact on changes in condo sales. This should not be a surprise given that the cash share of condo sales was 53 percent in the first half of 2014. In fact, in some of the markets, condo cash sales almost exclusively account for all sales. For example, three of the top 25 condo markets had condo cash sales that exceeded 85 percent[4].

Though trends in prices and sales indicate a recovery for condos nationwide, there are some short-term vulnerabilities to be aware of, alongside major opportunity on the horizon. The condo market is currently susceptible to a pullback in cash sales (that tend to be to investors), which would lead to more normal levels of sales. Even so, the opportunity for an increase in sales is still significant, because the largest age cohort in the U.S. is currently 20- to 24-year-olds. This specific age cohort might currently be driving today’s rental market, they will likely be driving the first-time homebuyer and condo markets over the next five to 10 years, driving demand for newly built condos. That demand is heavily needed in the market now, given that newly built condos were hit harder in the last housing downturn than newly constructed homes overall (Figure 3).

As usual in the housing industry, history can serve as a guide for understanding future market dynamics. Despite low levels of unsold condo inventory, new condo production is currently running at roughly 10 percent of the pace during the late 1970s and early 1980s when baby boomers were in their early 20s and roughly the same size population as the current age cohort of 20- to 24-year-olds. Therefore, the lack of new condo production, in conjunction with large demographic demand on the horizon, provides the market with a large opportunity to expand new condo sales over the next decade.

© 2014 CoreLogic, Inc. All rights reserved.

[1]Source: National Association of Realtors
[2]The 25 markets selected had the most condo sales between 2000 and 2014 according to CoreLogic.
[3]The percent changes cited represent the percent change in the 12 month cumulative number of condo sales from a year ago according to CoreLogic.
[4]Cash sale share represents the cumulative 12 month share ending in June 2014.