Are condos and townhouses a poor investment?
I've heard people say "condos don't appreciate as well as single-family homes" so often that it must be true...somewhere...somehow.
In fact, it is true in places where they can build so many condos so quickly that the word "overbuilt" is customarily used to describe the local condo market.
But that's not the case here in the San Francisco Bay Area, where environmental restrictions, neighborhood resistance and a shortage of land keep the supply of new condos far lower than demand. It is true that condos and townhouses in this area appreciate differently than single-family homes, but the difference is the difference between the tortoise and the hare.
Remember the fable of the tortoise and the hare? The hare was faster, but the tortoise got there first. Here condos are the tortoise.
So have condos appreciated as well as single-family homes? Common sense, for one thing, says they have.
Because if condo appreciation had lagged single-family homes over the thirty-plus years both have been a significant part of the local housing market, the price difference between condos and single-family would by now be a yawning chasm as wide as the Grand Canyon. Condos would be given away as door prizes at scrapbooking parties, while single-family would sell for zillions of dollars instead of just millions.
Sales statistics also disprove the idea that condo values don't keep pace with single-family. The price difference between a Santa Clara County condo and a single-family home has stayed fairly constant since 1998. I say "fairly constant" because the difference between condos and single-family in that county has narrowed, not widened, since 1998.
That narrowing gap in price brings us back to the real difference between condos and single-family homes: the tortoise and the hare. "Slow but steady wins the race", or at least keeps condos in the race, against the blazing speed of single-family.
The average condo sells for less than the average single-family home, of course, and our lower-priced housing stock has slowly but steadily gained value since 1998.
During the same period, single-family prices in the mid-range and top-end markets have been all over the map, racing ahead, then falling back.
Why the big difference in short-term appreciation? "Dirt" makes the demand for single-family more emotional, especially in a white-hot market. I've never seen sixty-seven offers on a condo. I have seen sixty-seven offers on a single-family home.
Reversion to the mean: hot markets cool, and single-family prices revert to their long-term relationship with condo prices. The limitations of statistical analysis and the fluctuating demand for different price ranges makes that relationship vary, but only within a narrow range.
Even in the hottest markets, condos don't often inspire the bidding frenzy that single-family does. But condos are the best, and sometimes the only, choice for many buyers. That large pool of buyers keeps the condo market relatively stable and healthy.
So who wins, the tortoise or the hare? Let's call it a tie.