Explaining Dallas’ Apartment Boom That Leaves Condos In The Cold

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Last column, I wrote about how single-family home construction is finally getting back on track after the deficit of building during and post-Recession. But it still hasn’t built enough of the right product to drop prices. Now let’s look at multifamily construction, a place designed for younger buyers not ready for pastoral lives in the burbs. 

Historic homeownership rates

In Texas, apartments, not condos, have become king. One reason is that the Recession produced a shift towards renting. The chart above documents the rate of homeownership (versus renting) going back decades. Homeownership rates were relatively stable at between 64 and 66 percent until the mid-1990s when political rhetoric and programs encouraged homeownership rates to spike to roughly 69 percent during the buildup of the housing bubble – after which they collapsed to roughly 63 percent, only rebounding in 2015.

What this tells us is that relatively minor shifts in homeownership rates – the six percentage point spread between 63 and 69 percent – have a massive impact on the overall housing market.

Homeownership rates mapped against 30-year fixed mortgage rates

Cheap money doesn’t equal high homeownership rates

What the Franken-chart above shows is that mortgage rates (green) are not in lockstep with homeownership rates (blue). Homeownership is more driven by overall economic forces like recessions, income, and employment that impact personal confidence and wealth.

This disconnect is seen in the late 1970s and early 1980s when mortgage rates reached almost 17 percent as homeownership rates peaked. Meanwhile, after a slight downturn, homeownership rates began to rebound in the mid-1990s, peaking in 2006-2007. The ensuing Recession-led homeownership collapse demonstrated that the ongoing lowering of interest rates couldn’t maintain homeownership (because of unemployment and overextended personal finances).

Median home prices vs. median income. Source US Census and NTREIS

But now we can safely say that home price escalation has been funded by low interest rates because median income is essentially flat. That $5,500 median income bump between 2006 and 2018 did nothing for affordability after homes began spiking in 2012 (as consumer confidence rebounded and homebuilding had stalled for five years).

Looked at another way, in 2006, median home prices in Dallas County were approximately two times the median income. Today they’re nearly four times the median income. Mortgage interest rates can’t really increase until there’s solid wage growth or housing prices collapse. Since no one wants house prices to collapse, we tread water as wages continue their 30-year stagnation. Building more is a big part of the answer.

Many people have been chased away from homeownership by rising prices (due to short supply) and stagnant wages. For those people, especially younger first-time buyers with student loan debt, renting is the only alternative to rebounding back to their parent’s home.

Condos could be an answer for some with their smaller size and resulting lower costs. Unfortunately, Dallas isn’t building many (and we’re mostly talking seven-figure price tags). About the best these buyers could do is a larger and more expensive townhouse.

Is Dallas building tomorrow’s condos today?

I’ve written about how Texas scares away condo construction. In Texas, developers of multifamily projects must indemnify buildings against construction defects for 10 years. This has produced condo HOAs who at 9 years, 11 months suddenly find all manner of defects they need to be compensated for (some valid, some not). This scares off condo construction because all projects have issues – resulting in a 10-year time bomb. So developers build apartments with one owner and a more controllable outcome – perhaps even getting an exemption from the 10-year insurance policy.

This situation has long made me wonder (out loud to developers) whether any of these new apartment blocks – especially the 20-ish apartment towers recently built or in progress – will convert to condos at 10 years and one day. If homeownership rates continue to return to historic levels – and new residents continue to migrate from condo-rich markets – will it make economic sense to convert to condo once an apartment building’s original construction costs have likely been paid off?

I look to my hometown of Chicago for answers. Back in the 1980s, I remember a lot of older 1920s walk-up apartment buildings being converted to condo. Today, residents in reasonably-priced condos are fighting a wave of forced sale “de-conversions” to apartments. Sometimes, the very 1920s apartment buildings that had converted to condo in the 1980s are now being reconverted back. But the high-rise space is also vulnerable as 1960s and 1970s buildings are ripe with underfunded buildings that are facing big maintenance bills. In these cases, some view a developer sale as a white knight.

So yes, in more condo-heavy markets, buildings vacillate with the market from apartment to condo and back again. In Dallas, we see The Shelton in Preston Center that has gone from apartment to condo to apartment and again back to condo. The Athena began as apartments. The Renaissance was planned as apartments (converting before opening) and 3883 Turtle Creek was initially HUD housing.

So yes, I foresee some of Dallas’ high-rise apartment towers going condo later in the decade. While good news, it creates a decade-long vacuum of reasonably-priced condo product for first-time buyers. This will keep prices high because of limited supply.

This is a long way around to explaining why condo prices will remain high for quite some time. Unlike the single-family market that’s correcting itself, growing demand for condos is not being matched by new construction largely due to Texas regulatory issues. And what little new construction there is only targets the ultra-luxury buyer.

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Jon Anderson

Jon Anderson is CandysDirt.com's condo/HOA and developer columnist, but also covers second home trends on SecondShelters.com. An award-winning columnist, Jon has earned silver and bronze awards for his columns from the National Association of Real Estate Editors in both 2016, 2017 and 2018. When he isn't in Hawaii, Jon enjoys life in the sky in Dallas.

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Comments

  1. DFry says

    I concur with your analysis and appreciate the graphs showing the history. I wish more condos were being built if just for the improved quality required. The subpar build-quality I see in many “luxury” apartment communities built in the past 5 years is appalling to me considering their high rents. Just seeing what structural materials are used on balconies makes me cringe for residents. Standards that apparently are good enough to cover the 10 years, but will burden future HOA’s and unaware condo homeowners who will face costly repair issues beyond standard building maintenance.

  2. Kris-Tina A. Wilson says

    Hey, Jon, you have been a good friend to the people from PP Condominiums. It will be 3 years on March 3, since the fire. I am sure you know that Provident pulled out of our deal recently, apparently they did the same thing with Royal Orleans. Lots of interest in our land, including out of state developers. Bids are currently being taken, will be culled through in next 2 months or so and then we will ask for last and final. Hopefully we’ll close late summer or early fall. Fingers crossed, we have had 3 former residents pass away in the meantime and many are hurting financially. I finally stopped paying my mortgage company when I got a copy of their request to USAA for the insurance they wanted and it was the wrong kind. They have been remarkably silent and I am still considering suing for failure to perform their fiduciary responsibility. There are some interesting stories out there.
    Again, many thanks and fingers crossed that we are at the beginning of the end.
    Appreciatively, Kris-Tina Wilson

    • Bill Kritzer says

      Jon- I will admit that you did a great analysis for the trends of homeowners, apartment dwellers and the potential future need for condominiums. Hopefully, we will see the pendulum shift back in the condo direction.

      Just a correction to the comment by Kris-Tina Wilson. Preston Place HOA was the entity that decided to cancel the potential $18 Million dollar contract with Provident as they did not want to wait 6 months for Provident.

      Since Provident had plans to build on both Preston Place and Royal Orleans, Provident is the one that cancelled the contract with Royal Orleans. My understanding of this rationale was that it made no sense for the developer to build on such a small lot without having both properties together. In addition, the contract between the Diplomat and Spanos was cancelled due to fire lane issues.

      So as Preston Place continues to collect bids, I truly hope the residents will be able to put this behind them soon and good luck on getting anything close to the original $18 Million.

      As a side note, I believe this could be a developers dream to come in and buy all 3 properties as this concept was presented by one of the architectural firms in Dallas.

  3. Dr. Timothy B. Jones says

    The Renaissance Is a great example of the perils of buying in a building that was built as a rental. Inadequate insulation is just one everyday reminder to anyone living on any floor below the top. Imagine spending $300-$500k for a highrise condo with views of downtown only to find you can hear every step being taken on the floor above. Never would I buy in a converted building……which will make the well built condo buildings even more attractive and expensive!

    • John Sieber says

      Um. I live in the Renaissance and my electric bill for a 2 bedroom corner unit with 2 balconies has never been over $150 even in the hottest July. I never hear my neighbors because the walls and floors are all solid cement.

  4. al tisdale says

    FYI Jon Anderson
    A article in the Observer from March 26, 2011 reveals the corrupt nature of Judge Joe Ashmore and associates,Maybe Friends of Revershon should not have an Ashmore on the board without a thorough background check on Ashmore and associates.

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