Condos fare worse than houses in lowest tier

In my most recent post, I wrote about how condominiums, all else equal, can fall in value farther than houses due to underwriting standards issued by Fannie Mae, Freddie Mac, and the FHA. I gave a hypothetical example of how just two foreclosures in a 12-unit building could keep anyone from getting a traditional mortgage. So any sales in that building would be to cash buyers, who generally pay in five figures.

It’s probably impossible to figure out the extent to which the low end of the condo market is affected specifically by these standards. But it is interesting to compare how the low end of the condominium market compares to the low end of the single-family market. For 20 neighborhoods, I calculated the difference between the first quartile of sales at the end of 2007 and the first quartile of sales at the end of 2011. The first quartile is the level at which 25% of sales are below and 75% of sales are above.

For the 20 neighborhoods I examined, the lowest quartile of condominiums fell by 46% on average and the lowest quartile of houses fell by 32% on average. In 16 of 20 cases, the lowest tier of condominiums has fared worse than the lowest tier of houses (see chart).

This could be because of the hitches in condominium underwriting I described, but it could also be because condominiums were more likely to be bought and flipped, or bought by those willing to stretch their incomes. Either way, the bottom of the condominium market has fallen harder than that of detached houses.

Jeff Baird is a real estate valuation consultant based in Chicago. He founded Lakeshore Analytics to bring comprehensive, understandable housing data and analysis to Chicago-area readers. The site features a blog with free market news and charts, summary data on 20 top neighborhoods, and quarterly data subscriptions.

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