Arnold Kling  

High-Beta Houses

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Kenneth Harney reports that prices for condominiums rising have shot up.


whereas the nationwide median price of single family resale homes was up by 7.4 percent during the past year (to $169,900 at the end of the second quarter), the median resale condo price was up 15.1 percent during the year (to $163,500).

There are issues with using the national median as an indicator of home price trends. In particular, the mix of sales among regions and other factors can affect the median.

Regardless, my view has been that condominiums are high-beta houses. That is, when house prices rise, condominium prices rise faster. When house prices fall, condominium prices fall faster. A large proportion of the cyclical component of housing demand consists of potential homebuyers choosing to either get into the condo market or stay out of it.

For Discussion. Harney strongly implies that the hot condo market is a secular trend rather than a cyclical phenomenon. How would one assess which is the case?


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COMMENTS (6 to date)
Adrian writes:

First I will say that I am not familiar with the US Housing market, however similar phenomena occur in Australia regarding pricing differentials.

My observation is that the key issue is treating teh housing market as a homogenous market. In reality what you have is a range of substitute markets operating at the same time. These would be from a top down perspective the purchase market and rental markets and then sub markets in 'mansions' (large land large house, 'family homes' (median house median land), 'cottage houses' (small land small house), townhouses/condos, units/apartments and nec. Clealry this segregation could be further broken into urban/non urban splits and so on.

The way participants react depends largely on preferences and factor contraints. For example in a low interest environment with increasing real wages it is likely that renters at the high end of the income spectrum may be induced into the lower priced unit/cottage home market. Their decision (as a collective) would affect the demand and supply conditions in that segment of the market,while changing the conditions in the renting market as well, but most likely not in the higher 'mansion' end of the spectrum.

Hence the pricing movements should probably be seperated and consideration be given to the segregated markets and the factors that influence the laws of supply and demand for that market. Some obvious issues include internal migration, demographics, particularly the ageing population, and the pricing relativities between substitute products.

I am interested to know what people think of this seperation because I am contemplating doing my Masters dissertation on this topic.

Eric Krieg writes:

Adrian is on the right track, I think.

I think that in the big markets, like New York, Boston, Chicago, etc. there is way more value in a condo than in a similarly priced home. Condos tend to be newer, for one thing. They have more features, like upgrade kitchens.

And Adrian, don't forget about submarkets within markets. Chicagoland is a huge market, and the City of Chicago is a separate market than the northern suburbs, which is different than the western suburbs, etc.. Condos are more prevelant in the more urban areas of the region, in both the City as well as suburban downtowns with access to public transportation. I think that people will pay more for an urban lifestyle, and that is reflected in rising condo prices. In America, that is something unique in the postwar period, when everyone was trying to escape the city.

So, in a nutshell, rising condo prices are a trend, sort of a paradigm shift, and I discount the idea that their rise is a cyclical phenomonon, and that prices are set up for a fall.

Brad Hutchings writes:

Eric writes:
"So, in a nutshell, rising condo prices are a trend, sort of a paradigm shift, and I discount the idea that their rise is a cyclical phenomonon, and that prices are set up for a fall."

Arnold asks how we could assess this. Eric says it's more than a trend by saying it is a "paradigm shift". I disagree.

I live in Southern California (south OC) in a condo that I own which would sell for $290K+ if I put it on the market today. My neighbors who I talk with are generally not happy living in the "project" (as we joke about it). Everyone would love to get a detached home in the area. There are lots of problems with closely packed communities that most of us never had growing up in single-family homes -- mostly "tragedy of the commons" kinda things like parking, trash, kids wrecking things, etc.

It blows me away that people continue to buy condos here at as fast a pace as ever. They sign up for a lot of debt and don't have something they are happy with. I bought in in 1994 when the price of my condo was $139K, a great deal during a sagging market. I think Arnold made the point recently that people still buy houses assuming that their income will rise with time, when we may be in a period of long-term wage stability or deflation. I think when the housing market absorbs this, and should interest rates pop up again, single family home prices will drop a bit and condo prices will drop precipitously. So put me down for cyclical.

But Arnold asked how we could decide (presumably without waiting it out). John Poindexter needs a job. Maybe he can set up a futures market in condo prices. Place your bets!!

-Brad

Eric Krieg writes:

Brad, I can only speak for what I see in the Chicago area. The condo market is simply huge, with all kinds of building, way more building than I ever experienced when I lived in NYC. I wonder where the builders can keep finding new people to buy into the new construction. But I have been wondering that for 4 years, and the building keeps going on and on.

Young people and empty nesters want the urban experience. You get that with a condo. And these urban condos are priced at least as much as a similar home in the burbs. $300k for 2 bedrooms, and the price escalates from there (although urban homes cost in the millions, so they're really a bargain.)

And then on the other hand, you have the suburban townhome phenomenon, where prices ARE cheaper, and you have the aspect of new construction vs. an overpriced ranch home from the '70s that needs work.

Even in your "project", what is the alternative to condo living? There aren't any homes for $290k! Its a condo, or nothing.

BTW, this conversation does not apply to smaller cities. I would never buy a condo in Cleveland, for example, where housing prices are moderate because land is available and cheap. Condo prices there may be headed for a fall.

Brad Hutchings writes:

Eric,

I think we are using very similar data to support different conclusions. Where are people going to go if condos are 290K? Exactly. Right now, they are priced out of detached homes and that does continue to push the condo market up, up, up. But if owners can keep the equity they have and time their sale at the top of the market, they might be able to slide into a detached home when those prices come down. In Southern California, I do not doubt that prices will. We have a net outflux of people, and as Arnold Swarzenegger has put it, every incentive for businesses to pack up and leave.

As for condo dwellers wanting the urban experience... Maybe in urbia, but in suburbia, condo life stinks. Just my two cents.

-Brad

Eric Krieg writes:

>>But if owners can keep the equity they have and time their sale at the top of the market, they might be able to slide into a detached home when those prices come down.

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