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.
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.
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).
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.