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Rebound in Condo Construction, Sales Means Most-Sensitive Buyers Are Back in Market

NEW YORK (TheStreet) — Though its best days are still behind it, the condo market is returning to normal. And since condos are a kind of canary in the coal mine, that's good news for real estate in general.

CoreLogic, the real estate analysis firm, reports that in the fourth quarter last year completions of new condos reached 2,100 buildings, up 11% over the year-earlier quarter and 90% from the worst of the real estate doldrums in the second quarter of 2012.

That's still a far cry from the peak of 20,000 completions in the first quarter of 2008, when builders were finishing projects started in the housing bubble, but the condo market is now clearly headed in the right direction.

"The strengthening is also evident in the market's ability to more quickly absorb new condos, indicating an increase in demand to match the increase in new condo supply," CoreLogic deputy chief economist Sam Khater says. "In 2013, condo absorption rates [purchase of available units] reached 82%, over twice the 36% low at the height of the financial crisis in mid-2008."

Read More: Investing in Single-Family Homes Isn't as Easy as Many Hope

Compared with single-family homes, condo prices and sales are particularly volatile because many are bought by groups that are among the first to stop buying when times get tough: first-time buyers, retirees who are downsizing, young people and those looking for second homes. So a rebound in condo construction and sales means buyers sensitive to prices, interest rates or job security are returning to the market.

Also, says CoreLogic, condos have become cheaper relative to single-family homes. 

"Between 2000 and 2003, condo and single-family median home prices were both around $138,000," Khater says. "In late 2003 and early 2004, as the overall market began to overheat, condo prices rose much faster than single-family home prices. By March 2008, the median condo price inflated to 37% above the median single-family detached home price."

That premium hurt sales, since many buyers prefer the greater privacy and freedom from association rules that they enjoy with single-family homes, as well as the lack of condo fees. By summer of last year, low demand for condos and high demand for single-family homes had eliminated the price gap, so the median condo sold for 1% less than the median single-family home. This year prices have been about the same, in line with long-term patterns.

Read More: With 3-Plus Years to Full Housing Recovery, What If You Want to Sell Now?

New condos sell for about 30% more than existing condos, down from the 80% premium of 2011. Short supply and demand for freshly built units account for much of the gap. Newer units go for more because they provide better amenities and locations, according to CoreLogic. Because of that, new units will probably continue to cost more than older ones, Khater says.

Though CoreLogic doesn't address this, it's also possible that many new condo complexes are financially stronger than many older complexes, because new buyers have had to pass more rigorous financial screening than the owners of older units. To get a mortgage on a condo, the borrower must show the lender that the complex is financially sound, a requirement not faced with a single-family home. This, too, raises demand for new units, supporting the price premium of new condos versus old.

"Clearly," Khater says, "the condo market is recovering in a multitude of ways, from construction volumes to price normalization, which is a good sign because condos are one of the few sources of affordable housing." 

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