Condo Sales Lag Despite Lower Interest Rates

Not too long ago--in the late 1970s--condominium buyers in San Diego County often waited in line to purchase units. Eager to profit from the condo-mania, developers built thousands of units and converted thousands of apartments into condominiums.

But interest rates rose in the early 1980s and the bottom fell out of the entire housing market. Condominium sales suffered even more than those of single-family units.

Now, with interest rates declining, the single-family housing market in San Diego County is booming. While condominium sales have improved substantially, they continue to lag behind sales of single-family houses.

In May, for example, one out of four available new condominiums was sold, compared with one out of two single-family homes, according to Insites, a monthly survey of all tract development in Southern California. During the month, 657 of 2,604 available condominiums were sold compared with 1,271 of the 2,542 available single-family homes.


Condominium sales lag because “the first choice for a buyer is still a single-family house,” according to real estate consultant Steve Aranoff.

Moreover, condominiums often have a poor public image.

“I’ve never met a condominium owner who wasn’t upset at the homeowners association, and I’ve never met a developer who hasn’t been sued,” said Gary H. London, director of real estate services for the San Diego office of Laventhol and Horwath, a national accountancy firm.

Lawsuits are sparked by several factors, including poor construction in many units. Engulfed in a litigious climate, many homeowner associations have tried to recover whatever damages they could from the builder. The high number of lawsuits has helped create a poor public image, industry experts agree.

Besides lawsuits, many consumers felt a lack of control over their homeowners associations, which make the rules governing what they can and can’t do with their units.

Even with these problems, the market for new condominiums is doing quite well. There is a four-month supply of new condominiums, the lowest inventory level during the 11 years that Insites has surveyed San Diego County, according to Stephen Bottfeld, president of the firm. What this means is that, at current sales rates, all the units now on the market would be sold in four months if no new units were built.

By contrast, the supply stood at 19 months in 1982.

Another good sign for the new condominium market is that prices are increasing. The median price in April was $99,374, up 10% over the year-earlier figure. In May it rose even higher, to $105,100, as builders raised prices because of increased demand, according to Bottfeld.


The new condominium market has improved because “builders are building a better product than ever before,” Bottfeld said. “They learned the lessons of the past, and they are using space better. The consumer knows he can’t have a four-bedroom, two-bathroom house on one acre like mom and dad. So he is saying: ‘Make 1,000 square feet work for me.’ ”

In addition, as more and more people move to San Diego County, they create an increased demand for all types of housing. Because rents have risen substantially in the last few years, owning a condominium can often be less costly than renting, especially with falling interest rates and the tax advantages.

Condominiums priced under $100,000 are the easiest to sell. In the coastal areas, higher-priced units also are selling well because consumers expect to pay more because of higher land costs there. Otherwise, consumers prefer to stretch and buy a single-family home, according to real estate analysts.

The lower-priced units sell the best because the primary buyers of condominiums are the first-time home purchasers for whom a low monthly payment is quite important. The other segment of the condominium market--the empty nester, a couple whose children have grown--represents a much smaller share.


The best-selling projects are in Rancho Penasquitos, Mission Valley, Del Mar, Sabre Springs, Santee, Chula Vista and other parts of the South Bay, according to both Insites and the Meyers Group, another firm that surveys tract development.

Condominiums are selling much more slowly in Hillcrest, Mission Hills and North Park, and some projects are now being rented as apartments. Part of the reason, according to Jeffrey S. Meyers, a principal with the Meyers Group, is poorly designed product.

In new condominiums, the most popular size is two-bedroom, two-bathroom units, Meyers said. In addition, he said, buyers want amenities such as washers and dryers, and trash chutes if the units are in a three- or four-story building. Also important is a garage with direct access to the unit or covered parking close to the entrance.

The resale condominium market, which suffered during the period of high interest rates, is also enjoying a recovery. Prices remained stable or even declined between the late 1970s and 1985. However, in the last few months prices have started to rise, according to Bob Schwartz, a broker with Realty Executives in San Carlos.


Schwartz only handles sales of condominiums and units in a planned unit development (PUD), where the units are usually constructed in pairs or fours. In many cases, they have their own backyards and a homeowners association maintains the front yards.

“Units in a PUD, which is a hybrid between a house and a condominium, are the hottest sellers,” Schwartz said.

At Mission Pacific, a Pacific Scene project in San Carlos, units haves appreciated $25,000 in the last 2 1/2 years. A unit that originally sold for $100,000 is now selling for $125,000, he said.

The hardest condominiums to sell are in buildings with hallways.


“East Coast people like them but, on the West Coast, people like to walk up to their front doors,” Schwartz said.

Despite past problems with condominiums, most real estate analysts think they have a bright future--as long as developers build them in limited quantities.

This probably should happen, as many builders were so burned in the late 1970s by the combination of unsold units and lawsuits filed by homeowners that they swear never to build condominiums again.

Moreover, higher densities will probably be required in many parts of urban San Diego because of the lack of available land. And the continued in-migration to San Diego County increases demand for all kinds of housing.


“Single-family home prices are rising, so many consumers will have no other options,” Bottfeld said. “Also, what’s important is that builders have learned from the past and are building a better product than ever before.”