Condo Buyers: Who They Are and What They Want When Purchasing a Home
by Harika “Anna” Barlett, NAR Research
Historically, condominiums and co-ops account for around 12 percent of existing-home sales. Results from the 2007 NAR Profile of Home Buyers and Sellers* indicate that between July of 2006 and June of 2007, about one-in-ten home buyers purchased an apartment or condominium in a building with 5 or more units; an additional two percent of home buyers purchased a duplex, apartment or condominium in a building with 2 to 4 units.
Condo buyers have characteristics distinct from buyers of other types of homes, and those characteristics also differ between the two groups of condo buyers identified above. Knowing the traits of these buyers, their home feature preferences, and their home purchase process can help real estate professionals better serve these segments of the market, while enhancing their own business. Following is an analysis of those traits based on data from the 2007 NAR Profile of Home Buyers and Sellers and the 2007 NAR Profile of Buyers’ Home Feature Preferences.**
Who They Are
The median age of the typical home buyer was 39. But the typical buyer of condominiums in buildings with five or more units was younger than the typical home buyer – a median age of 38. The opposite was true for the typical buyer of condos in two-to-four unit buildings who had median age of 41.
There were also differences in median household income between all buyers and condo buyers. Median 2006 household incomes of the two groups of condo buyers were nearly the same ($60,400 - $60,700), but about $14,000 lower than the median household income of all buyers, which was $74,000. Some of this income difference is due to differences in household size and the number of income earners. While married couples constituted 62 percent of all buyers, their share among condo buyers in 5+ unit buildings was less than one-third, and among condo buyers in 2-4 unit buildings was 44 percent. Forty-one percent of 5+ unit building condo buyers and 29 percent of buyers of condos in 2-4 unit buildings were single females, compared to 20 percent of all buyers.
Condo buyers also tend to have fewer children under 18 living at home. While households with no children accounted for 60 percent of all buyers, their share was more than 80 percent among all condo buyers.
Condo buyers in 5+ unit buildings were more racially diverse than their counterparts who purchased condos in 2-4 unit buildings. Among the first group, 77 percent identified themselves as white, compared to 84 percent among the second group. Sixteen percent of the first group of buyers were born outside United States, and seven percent reported a language other than English as their primary language, compared to 9 percent and 4 percent of the second group, respectively.
Compared to all buyers, the shares of first-time buyers were also higher among both groups of condo purchasers. More than half of condo buyers in 5+ unit buildings (53 percent), and nearly half of condo buyers in 2-4 unit buildings (48 percent) were first-time buyers. For all buyers, the share of first-time purchasers was 41 percent.
Geographically, the share of condo buyers in a 2-4 unit building was proportionally much higher in the Northeast, and smaller in the South and the West. The share of those who purchased a condo in a 5+ unit building was proportionally lower in the South and higher in the West.
Why They Purchased a Home and How Long They Expect to Own it
Condo buyers were more likely than all buyers to report that the primary reason for their home purchase was a desire to own a home of their own or establish a household (41 percent among buyers in 5+ unit buildings and 38 percent among buyers in 2-4 unit buildings, compared to 33 percent for all buyers). Those who purchased a condo in a 2-4 unit building also had a higher tendency than other home buyers, including other condo buyers, to have traded down to a smaller size home (10 percent among buyers in 2-4 unit buildings; 6 percent among buyers in 5+ unit buildings; 4 percent of all home buyers). Those who purchased a condo in a building with 5+ units were more likely than others to cite financial security reasons for their home purchase.
Additionally, one-in-ten condo buyers mentioned it was very likely that they would buy another home within two years (comparable number among all buyers was 7 percent).
Condo buyers in 5+ unit buildings reported they expect to stay in the home they purchased for a median of five years, and those in 2-4 unit buildings for a median of 10 years – similar to results for all buyers. Among recent home buyers who had owned and recently sold a condo, their actual tenure in the condo they sold was five years for those who sold a condo in a 5+ unit building, and seven years for those who sold one in a 2-4 unit building.
What They Purchased and Where
Overall, slightly over one-in-five home buyers purchased a newly built home, and the rest purchased a previously owned home. The results were similar for all condo purchasers.
Nearly half of condos purchased in buildings with 5+ units (47 percent) were located in urban or city areas, compared with about one quarter of condos in 2-4 unit buildings (26 percent). These percent ages are significantly larger than the 16 percent of all recently purchased homes located in these areas. Fifty-six percent of all recently purchased homes were located in suburban areas. The comparable shares were about one third among recently purchased condos in 5+ unit buildings, and 42 percent among those in 2-4 unit buildings. Only about ten percent of condos in 5+ unit buildings were located in small towns, compared to one-quarter of condos in 2-4 unit buildings, and 16 percent of all homes.
The median size of recently purchased condos in 5+ unit buildings was 1,110 square feet with a median price of $210,000. That was much smaller but more expensive than the 1,550 square foot median size of condos in 2-4 unit buildings, which cost a median of $173,000. Condo buyers in 5+ unit buildings cited size of the home as the biggest compromise they made among the characteristicsof the home they purchased.
Factors That Influenced Neighborhood Choice
The quality of neighborhood, the most frequently cited reason impacting buyers’ choice of a neighborhood, was somewhat more important for condo buyers in 2-4 unit buildings than other condo buyers. For those buyers in buildings with 5+ units, convenience to job was equally important as the quality of the neighborhood. Overall affordability of homes, convenience to friends or family, quality of the school district, and home in a planned community were more important factors among buyers in 2-4 unit buildings. Convenience to entertainment or leisure activities, parks or recreational facilities, and public transportation were more influential among buyers in buildings with 5+ units.
How the Importance of Desirable Home Features Differed Among Condo Buyers
While energy efficiency of a home, central air conditioning, a garage, and a walk-in closet in master bedroom were among the most desirable features for most home buyers during their search for a home, there were significant differences in the importance of many home features for the two groups of condo buyers. Condo buyers in buildings with 5+ units placed more importance on neighborhood features, including proximity to work, shopping, restaurants and entertainment areas, and public transportation, having high speed Internet access, hardwood floors, high-end kitchen appliances, and reserved parking. Condo buyers in 2-4 unit buildings gave higher rankings to finding a home with a garage, or a garage with two or more spaces, an eat-in kitchen, and an air filtration system.
Looking for a Home
5+ units used real estate agents (83 percent), the Internet (81 percent), open houses (53 percent), television (8 percent), and billboards (11 percent) to a greater extent than did other condo buyers. While over three-quarters (77 percent) of those who purchased a condo in a 2-4 unit building used real estate agents, they also used home books or magazines (32 percent) to a larger extent than the first group.
For both groups of condo buyers, when it came to finding the home they finally purchased, the most frequently reported information source was real estate agents. Indeed, over one-third of condo buyers in each group indicated they first found the home they purchased through a real estate agent. But there were also significant differences between the two groups. Those who bought a condo in a building with 5+ units were more likely to first hear about their condo via the Internet (29 percent versus 22 percent), and those who purchased a condo in 2-4 unit buildings were more likely to have found it through a friend, relative, or neighbor (11 percent versus 7 percent).
Real Estate Professionals and Condo Buyers
Home buyers who work with an agent most frequently rely on friends, relatives, or neighbors for referrals to help them find their real estate agent. For more than half of condo buyers in 2-4 unit buildings this was the most dominant way of finding an agent. Although much less frequently, buyers in this group also reported more often than other buyers to have found their agents through personal contact by agent by telephone, mail, email, etc.
While 42 percent of condo buyers in buildings with 5+ units also relied on referrals by friends or relatives, buyers in this group were more likely than other condo buyers to find their agents through the Internet, through referral by another real estate agent or broker, or by walking into or calling a real estate office.
Among the benefits provided by their real estate agents, condo buyers were more likely than other home buyers to report that their agents helped them understand the home buying process, negotiated better sales contract terms for them, provided a better list of service providers, and a better list of mortgage lenders. This is probably because a greater share of condo purchasers were first-time buyers and consequently unfamiliar with the home purchase transaction process.
Conclusion
Knowing the demographic characteristics and specific needs of different segments of home buyers help real estate professionals develop better ways to communicate and target their services according to the needs and requirements of their clients. Additionally, since referrals are the best source of future business, improved service also improves real estate agents’ business.
While housing market activity is slower than in recent years, there are still over six million households a year purchasing homes. Housing continues to be a good long-term investment and the best way of wealth accumulation for most households. The condo market is especially important for first-time buyers and those trading down to a smaller size home, and will continue to constitute an important segment of the market. Many first-time buyers with a desire to own a home of their own start by purchasing a condo. As reported by recent condo buyers, real estate agents can particularly add value to the home purchase transaction by helping these buyers understand the home buying process, negotiating better price and contract terms, and providing guidance for additional services required during the complex process of home purchase.
*In August 2007, NAR mailed an eight-page questionnaire to a national sample of 150,000 home buyers and sellers who purchased their homes between July 2006 and June 2007, according to county records. It generated 9,966 usable responses; the adjusted response rate was 6.9 percent. All information is characteristic of the 12-month period ending in June 2007 with the exception of income data, which are for 2006. Due to rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent.
IRS is Eyeing Real Estate Practitioners
The Internal Revenue Service is paying close attention to the definition of “Real Estate Professional” when it reviews tax returns. Under the IRS Code and Regulations, real estate professionals are defined as those who spend 750 hours or more annually handling real estate-related activities.
Real estate professionals with property investments cannot record more than $25,000 in losses against their real estate income if they earn less than $100,000 and no losses at all are permitted if they earn more than $150,000. However, there are no limits to taking real estate losses against other forms of income.
Given that the IRS definition of real estate activity requires “brokering” property sales, purchases, or leases, two cases in California reveal auditors declaring that real estate agents are not real estate professionals.
Source: Realty Times, Diane Kennedy (02/21/08)
Man Robs Bank After Foreclosure
A masked gunman held up an Athens, Ga., bank on Thursday, saying that he was only getting his money back after the lender had foreclosed on his home.
The man entered Regions Bank wearing a black ski mask and pointed a handgun at a teller and said, “You took my house, now I’m going to take your money,” according to Athens-Clarke police.
The man fled carrying the money in a bag. The bank plans to review foreclosure records to try to identify the man.
Source: Athens Banner-Herald, Joe Johnson (02/21/08)
Don’t Fear Falling Prices
Yale Professor Robert Shiller, whose Case-Shiller 20-city home price index has become an industry standard, says people shouldn’t fear gradually falling home prices.
“There’s nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing,” Shiller says.
But if home prices fall suddenly, Shiller says that could undermine housing as well as consumer confidence and the economy.
There has been a misperception that houses will constantly appreciate, Shiller says. “Sometimes people will try to imagine that we can have both high home prices and affordable housing. But I can tell you that doesn’t add up,” he says.
“You either have high home prices or lower home prices. And lower home prices are what we want, and people shouldn’t be afraid of that,” Shiller says. “Most of us care about our children and grandchildren, and these people have to buy houses so why would we want high home prices? We want economic growth, we don’t want high home prices.”
Source: Reuters News, Lynn Adler (02/21/08)
Necessary Corrections
By NAR Chief Economist Lawrence Yun
The latest housing starts figure continues to show exceptionally weak levels. A total of 1.01 million units were started for construction in January, which was an increase of 0.8 percent from the prior month. The increase was driven by a jump in multifamily unit starts. Single-family units continued their descent. Permits (not starts) on single-family units also fell, implying further lowering of housing starts in upcoming months.
The current new home construction activity has essentially been cut in half from the peak levels in 2005 and is at the lowest point in over 15 years. This low level of new home construction is, however, a needed adjustment. The inventory of homes on the market for both new and existing homes is very high, and the last thing that is needed is to add more inventory to the market.
Based on the latest available information, my outlook is for new single-family home construction to decline for another year-and-a-half through the second quarter of 2009.
Lower home construction cuts into economic growth. The component that goes into GDP calculation called residential construction spending fell 18.3 percent in the final quarter of 2007 over a one-year time span. As a result, GDP growth will be sub-par throughout 2008.
However, lower home construction activity is just what is needed to help stabilize the housing market. Abundant inventory is not what we want. A high number of vacant new homes will pressure home prices on existing homes to fall and that could result in a sizable loss in housing equity for a vast portion of 75 million homeowners in the U.S. Consumer spending can spiral downward fast from loss in equity and push the economy into a deep recession. So the only way to halt this scenario is for the inventory to be reduced. That will happen if builders hold back on construction and that is what they are doing. Builders currently are in a very tough spot: to build a home and lose money or not build a home and not make money. I am glad that builders are taking the latter option and this is a necessary correction in the homebuilding industry.
Phoenix Area Inventory
Inventory up just a bit this week but nothing dramatic. Active listings crested 56,000 overall. A few cities had a drop but again, nothin significant. Lots of nice homes available. Get your self qualified or at least get the process started.
Refueling the Housing Bubble?
By NAR Chief Economist Lawrence Yun
The Federal Reserve has been aggressively cutting rates recently and the question is being raised about parallels to the past. Back in 2001, in the aftermath of the internet stock bubble collapse and the September 11 terrorist attacks, Alan Greenspan — then the Fed chairman — made deep cuts in interest rates in order to stave off a possible economic recession. Many also blame Mr. Greenspan for having fueled the housing market bubble and subsequent collapse by keeping the rates too low for too long.
Now in early 2008, with the economy possibly heading into a recession — as evidenced by the GDP growth rate slowing from 4.1% in third quarter to 0.6% in the fourth quarter — the current Fed Chair, Ben Bernanke, has been following a very similar step of sharply cutting fed funds rates in order to revive economic growth — partly by making home buying financially enticing. Though there is never a direct correction between the Fed funds rate and mortgage rates, which are outside of the Fed’s control and determined by the global bond market, the current 30-year mortgage rates have come down to essentially 45-year low levels. Aside from a few months in 2003, mortgage rates have never been this low since the early 1960s. A drop in the average mortgage rate from nearly 7% in mid-2005 to the current 5.7% would reduce monthly mortgage payments from $1330 to $1160 on a $200,000 mortgage. The average savings would be $340 per month or $4,000 per year on a $400,000 mortgage.
Therefore, could the Fed be simply refueling the bubble by dangling financial incentives to buy a home? Well, let’s replay the key factors related to the recent bubble-collapse and see whether the same behavioral patterns will reemerge. Keep in mind that there are significant local market variations, but the markets that had the huge swings followed the below pattern:
The Fed started cutting rates from 2001 — with the Fed funds rate eventually reaching 1% by mid-2003.
The mortgage rate fell to 5.5% by the summer of 2003 from 8% in 2000. ARMS rates fell from 7% to 3.5% over the same period.
Housing demand rose with existing and new home sales hitting successive high marks in 2003, 2004, and 2005. Inventory fell as a result.
Home prices accelerated. For example, in the D.C. region home prices more than doubled from $204,000 to $426,000 from 2001 to 2005. Homeowners’ net worth leapt by over $200,000 as a result — a figure many would considered good lifetime savings.
Given the general weakness in the stock market and relative “easy” wealth gains for real estate owners — there was an increasing view of homeownership and real estate as a financial play rather than in terms of family and housing needs considerations.
Housing demand ran exceptionally high, but the demand could only be realized if people could get the financing.
Global capital providers were chasing after high yields and were eager to provide the financing because…
Ratings agencies gave their blessing on subprime products, giving the impression that these were ’safe’ alternatives.
Moody’s, Standard & Poor’s, and other ratings agency raked in revenue by giving out top Triple-A ratings (an inherent conflict of interest exists when ratings agencies get their revenue from mortgage underwriters/securitizers… rather like a professor who gives out a lot of “A” grades will draw more tuition paying students to his class).
With funding plentiful, subprime and no documentation loans proliferated — if you had a heartbeat, you could get a loan.
Housing demand was further pushed higher as herds of house-flippers entered the market, and home prices accelerated in those markets. Prices grew by leaps and bounds in markets of around 70% in short two years — places like Las Vegas, Miami, and Phoenix, and Sacramento.
Inventories were pushed down to exceptionally low levels and homebuilders could not keep up with demand.
From late 2004, the Fed began to tighten and mortgage rates climb in 2005.
Housing demand naturally fell off.
Inventory quickly built — from a combination of lower demand, builders continuing to build at a high pace, and some speculators/flippers realizing that the period of easy price gains was coming to an end.
Rising inventory held back price gains.
Price stagnation no longer permitted mortgage refinancing. Flippers/speculators started carrying burdensome mortgage costs — some begin to simply walk away — pushing inventory higher.
Non-flippers — primary homeowners, who took out subprime loans, also faced the same price stagnation, but also the resetting higher interest rates. Refinancing is not possible and some have been forced to foreclose
More and more flippers/speculators and homeowners are unable to carry the high resetting interest rates and simply walk away. Lenders begin to write-down loan losses.
After the fact and very late, the ratings agencies stated that subprime loans are no longer Triple-A quality.
Global capital providers stopped funding subprime loans and the subprime market came to a halt.
Global capital providers, having been burned, also stop funding any U.S. mortgages other than those with Fannie and Freddie backing. The jumbo loan market, therefore, struggles.
From mid-2007, a lack of market liquidity and economic slowdown forces the Fed to cut rates.
Conforming mortgage rates again fall to historic lows, but not jumbo loan rates.
The Fed has been and is further ready to make deeper cuts.
Going back to our earlier question: is the current action by the Fed simply trying to replay the same volatile game? The answer is an unambiguous NO. The same game is played out because the global capital providers will not be taken for fools again. After being burned, German mutual funds or the Chinese government or the Florida’s teacher pension fund will no longer buy toxic subprime loans. Without the loans, homebuyers simply cannot enter the marketplace independent of their desires. We are back to the careful underwriting standards of verifying people’s income, requiring escrow accounts, and back to thoroughly checking borrower’s ability to repay the loan.
However, the current low interest rate policies of the Fed are a big help to housing because low rates can begin to furnish genuine potential homebuyers with the financial capacity to think seriously about becoming a homeowner. Furthermore, the rate cut is lessening the degree of forthcoming ARM resets, thereby lessening the burden the current subprime loan borrower faces. So the current policy of Ben Bernanke will help stabilize the housing market.
The Federal Reserve, however, should be mindful to not lower the fed funds rate too greatly. Inflation is expected to head lower in 2008 but too much money can fuel inflationary pressures. If that happens, 30-year mortgage rates will RISE, and therefore, choke off any housing recovery. A careful balance must be taken regarding how low to bring down the fed funds rate.
Though some in the blogosphere have figured Alan Greenspan as one of the key persons to blame for the current housing mess, I do not blame Mr. Greenspan. I believe there is plenty of blame to go around due to other factors. Global capital providers misunderstood and were simply not careful about purchasing securities composed on little income documentation and of risky-borrowers. Mortgage originators just originated loans to anyone including to suspicious borrowers because they had no skin in the game (see the recent academic article on this topic by a group of professors from the University of Chicago). There were also many books about how to endlessly profit from real estate. Consumers — particularly the flippers/speculators — also need to bear some of the blame.
But the biggest blame in my view goes to Moody’s and Standard & Poor’s — the rating agencies. If they had properly assessed the risk as is their job, then global capital would have never reached subprime homebuyers and flippers. The housing boom would have stopped dead in its tracks. We do not yet know how much of the ratings firms’ assessment were clouded by their financial interest in giving out easy Triple-A grades. Many workers at Moody’s and Standard & Poor’s took home hefty bonus checks when revenue skyrocketed from providing high ratings.
It is also fine for people to point the finger at me. In a fast changing market conditions, I too have been off on my forecast. I knew that the boom was clearly unsustainable and I made the forecast in early 2007 that home prices were likely to experience a price decline on a national level for the first time since the Great Depression. The national median home price indeed fell by 1.4%. I believe I downgraded my forecast for ten or so straight months in 2007 as it was strongly pointed out to me. At the same time, the Blue Chip consensus forecast, comprised of about top 50 private forecasters, including forecasts by Merrill Lynch, Goldman Sachs, UCLA, and the like — had also downgraded the housing forecast by more than 20 straight months. Forecasting is never perfect. Forecasts are bound to be off but the forecaster’s job is to make the best prognosis given the available information at the time. The readers should always view any forecast with caveat emptor.
But back to the original question: Will we experience a re-emergence of a housing boom from the current easy money policy by the Fed? The answer is no because as Abraham Lincoln said — fool me once, shame on you. Fool me twice, shame on me. It will be impossible to part global capital providers’ money with another foolish investment.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®.
Calif.: More Can Afford to Buy Homes
More people renting homes or apartments in the Golden State can afford to purchase an entry-level house, according to a study by the California Association of REALTORS ®.
About a third of households in the fourth quarter of 2007 would have been able to contribute a 10-percent down payment and be approved for an adjustable-rate loan at 6.21 percent on a starter property. In the same three months of 2006, just 25 percent of people met those guidelines for purchasing a home priced at 85 percent of the local median home price.
The downturn in California’s housing market is cited as the main factor for the increase in affordability. The most affordable area of the state was in the desert north of Los Angeles, though Sacramento County was very close behind.
By comparison, just 20 percent of households were able to afford to live in Monterey, where the price of an entry-level home is approaching $600,000.
Source: North County Times (CA) (02/19/08)
Lenders Find Owners Late on Payments
Mortgage lenders are going door-to-door in some parts of the country to track down borrowers who are behind on their payments and help them work out a solution.
The bottom line is the average foreclosure costs more than $50,000. It is cheaper and easier to lower the borrower’s interest rate and put them on a repayment plan or sell the home at less than is owed.
Hard to track down, no-contact borrowers, as the industry calls them, are in the majority. From September 2005 to August 2007, 53 percent of the loans backed by Freddie Mac that went into foreclosure involved borrowers who could not be reached.
Wells Fargo estimated that it had no contact with about 30 percent of delinquent home owners who went into foreclosure in 2006. Last year, it began testing envelopes in bold or unusual colors or resembling wedding invitations as a way to get these customers to open their mail.
Source: The Washington Post, Renae Merle (02/17/08)
Bernanke is Optimistic for Late ‘08
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee on Feb. 14 that the central bank is likely to make fewer rate cuts in the immediate future.
Over the past six months, the Fed has cut rates by a total of 2.25 percentage points; but the aggressive moves have not done much to alleviate the credit squeeze. Bernanke said the economy is more likely to see the benefits of the rate cuts in the second half of the year, and analysts now say the markets still expect the Fed to cut rates at its next meeting on March 18 but do not expect it to be as aggressive in doing so.
The Fed “is signaling less rather than more in the way of future rate cuts and this is disappointing to those who feel more is necessary,” says Richard DeKaser, National City Corp. chief economist.
Source: Investor’s Business Daily, Scott Stoddard (02/15/08)
