Too-hot housing market? Not for condos
Condo prices haven’t bounced back as quickly from the housing bubble’s collapse, and that’s partly because of financial hurdles. Some prospective buyers are finding good opportunities.
Seattle Times business reporter
Interactive: Condo sales in King County
In most parts of King County, the median price of condos sold in the first nine months of this year is still far below the peak median reached during the last housing boom.
Click the image to see an interactive map showing condo sales activity in King County.
Comparing condos and houses
Median condo prices in King County
At height of the boom: $286,438
First nine months of 2014: $253,400
Percentage change: -11.5%
Median single-family home prices in King County
At height of the boom: $455,000
First nine months of 2014: $440,000
Percentage change: -3.3%
Ann Saneholtz bought her first home last week, a condominium in Shoreline, for $130,000. She’s 70.
The retired schoolteacher rented for years because she was unable to accumulate enough cash for a down payment on a house in the Seattle area.
But in the uneven condominium market, where prices in most areas have a long way to recover the ground lost after the housing bubble burst seven years ago, Saneholtz discovered she could afford to buy.
Low prices and low interest rates have meant that owning a condo has been drastically cheaper than renting a comparable apartment since late 2010, according to Dupre+Scott Apartment Advisors. Despite that, condo prices haven’t bounced back as fast as single-family homes.
In the Shoreline area, for example, the median price of condos sold this year through September was $189,500, 25 percent below the peak median price during the last boom, according to data from the Northwest Multiple Listing Service. By contrast, single-family homes in Shoreline sold for a median $381,000, only 7 percent off the peak median price set in 2008.
Across the 30 submarkets in King County tracked by the MLS, only three — downtown Seattle, Bellevue and the Kirkland area, all major job centers — have seen the median price of condos surpass their respective peak medians during the boom. None of the six submarkets in Snohomish County have, either.
In 19 of those 36 King and Snohomish submarkets, median prices are still more than 20 percent below the peak.
Financing hurdles, a smaller buyer pool and high homeowners dues are among the factors that have slowed sales in the condo market, industry experts say. But over the past year, condos have appreciated at a faster rate than single-family homes, MLS data show.
In areas with at least 100 condo sales this year, southeast Snohomish County has led all submarkets with a 59 percent annual increase in median price, to $249,800. Everett/Mukilteo, Kirkland, Des Moines and Federal Way also have seen strong improvement in sold prices, rising more than 25 percent over the year.
Surprisingly, while single-family home prices and apartment rents climb, some submarkets have seen condo prices drop this year.
The biggest decline: downtown Bellevue, where the median price last year reached a record, only to tumble this year by 14 percent to $430,000. West Seattle, the Eastside south of Interstate 90, and Burien also lost ground over the year (see chart).
Downtown Seattle, the biggest condo submarket, saw the largest increase in sales activity, but only 3 percent appreciation to a median price of $439,500.
Challenges for condos
Condos — which make up about one-fifth of home sales in King County — offer a path to homeownership, albeit with one’s fortunes tied to owners of other units in the development. For that reason, they don’t appreciate as much and tend to suffer more during recessions, experts say.
But singles, small families and downsizing older couples target them for their affordability: The median price of condos sold this year in King County was $253,400, just over half of the cost of the median-priced house.
“A lot of my buyers are first-time buyers and they can’t afford to buy a single-family home,” said Sue Morrow, a Keller Williams real-estate agent in Seattle.
Moreover, “a lot of people get sick of maintaining a yard. They want to travel, close the door and leave, and not worry about it.”
Some prospective buyers turn away from condos, she said, because of homeowners dues, which typically pay for common-area maintenance, insurance and repairs. But buyers of single-family houses must budget for the same expenses, she said, even if those aren’t included in a mortgage payment.
Condos have some special challenges in the wake of the real-estate bust.
During the recession, condo associations had to hike dues significantly as some unit owners stopped paying their dues. Banks took years to foreclose on units in lower-value areas but were liable for only six months’ worth of homeowners dues, said attorney Valerie Oman of Seattle-based Condominium Law Group, which represents homeowners associations.
One condo association in hard-hit South King County had to adopt a 35-year special assessment — an additional $150 to $450 a month per owner — to shore up financial reserves and pay for major repairs.
“They’ve got a large delinquency rate,” said Oman, who did not identify the condo project. “Without that money, the association is deteriorating. They are considering filing for bankruptcy.”
Big hurdles with FHA
The Federal Housing Administration, or FHA, is an important part of the puzzle of why condo prices fell so hard during the downturn and have yet to regain all the ground lost, experts say.
Saneholtz didn’t know any of that last spring when Morrow told her about a condo at the 25th Place Condominiums, a 36-unit Shoreline project. The unit was offered as a short sale — the seller had the bank’s permission to sell the condo for less than the outstanding mortgage debt.
25th Place’s original owners bought their condos from 2006 to 2008. Since then, nearly a third of the units went through foreclosure, short sale or similar distress sale.
When the credit markets crashed in 2008, private mortgage insurance — which protects lenders against default by borrowers — became hard to find, said David Floan, executive vice president for loan production at Evergreen Home Loans.
As a result “a lot of mainstream borrowers, even those perfectly qualified, couldn’t get financing,” Floan said.
Lenders fell back on FHA, which kept the housing market from grinding to a halt during the Great Recession.
“FHA’s bread and butter really is the first-time and low-income underserved borrowers,” said Scott Canady, a federal-affairs consultant for the Virginia-based Communities Association Institute. “For a lot of them, their first foray into homeownership is in the condo market.”
But first-time buyers using FHA were effectively locked out of the condo market because after 2008, FHA required condo associations for the first time to be recertified every two years — and the agency won’t insure mortgages on condos that lack FHA certification.
Condos can lose their FHA approval if they lack a recent study of their reserves, more than 15 percent of units are delinquent on dues, or more than half the units are rentals.
Because many condos cap the number of rental units, investors, who played a big role in the price recovery of single-family homes, didn’t have as much interest in buying condos, brokers say.
“You can’t sell it to investors. First-time homebuyers aren’t able to buy it. Where do you go from there?” said Dennis Dillon, a John L. Scott broker.
Dillon listed a Burien condo that had been foreclosed and submitted a $70,000 offer from a buyer relying on FHA financing. But the condo project didn’t have FHA approval — Dillon said he’d failed to check before listing it — so the deal fell apart. Another buyer got the condo last month in an auction, for $42,000 in cash.
Even now, of the 1,375 condo projects in King County that have sought FHA approval, 60 percent have expired approvals and 20 percent have had their applications rejected. Only 17 percent have current approvals, federal records show.
FHA changed its rules often enough between 2009 and 2013 that some associations have simply given up trying to get approval, while others don’t see the need to cater to buyers using FHA loans, Canady said.
Lots of condo associations don’t even know their FHA certification has expired, said Kim Bergesen, an Everett consultant who handles submissions to the agency.
“I would not buy a condo that’s not FHA-approved,” she said. The stamp of approval means “you’re a good business.”
Last Thursday, Saneholtz got the keys to her Shoreline unit. It marked the end of a long and arduous process of hunting for the right property and getting the holder of the mortgage debt to approve the $130,000 short sale, about half the price the condo sold for in 2007.
She might never have started looking for a home in May had it not been that her rent was going to go up 14 percent after her lease ended last month.
As a single mom raising two kids on a schoolteacher’s salary, Saneholtz had rented since she moved to Seattle in 1981. After retiring, she moved to Shoreline to be closer to her two kids and three grandchildren.
She didn’t rely on a mortgage backed by FHA, which rejected 25th Place Condominium’s application last spring. With a 20 percent down payment, she got a conventional loan through Evergreen Home Loans.
Her monthly payment for the nearly 700-square-foot unit is $990, which includes $227 in homeowners dues. If she’d renewed the lease on her 600-square-foot apartment, she’d be paying $1,145 in rent, plus $85 for covered parking.
“It makes so much more sense financially because you have something to show for your money,” Saneholtz said. “I wish I had done it years ago. I think people give up too easily and don’t understand that it is possible. If I can do it, anybody can do it.”