Savvy Condo Owners Know When to Sell

Over the last few years, much has been written about the rapid escalation of housing prices, particularly in Southern California. Similarly, much has been written the last few months of the recent market downturn.

Most real estate prognosticators foresaw this as an inevitable slowdown, so it came as no surprise to all but the most zealous optimists.

Such overall trend statistics, however, are much like the stock market’s Dow Jones Industrial Average. They are excellent indicators of an entire entity’s performance. Yet, just because the stock market as a whole may be suffering, some individual stocks may be doing quite well, or at least outperforming the market.

The key to savvy securities investing is being able to identify those stocks and act upon them at the right time.

The same is true of purchasing a home. Real estate appreciates much like a stock, dependent upon a variety of factors: geographical location, the surrounding economy, zoning changes, etc.

The key again is being able to identify those individual investments and take advantage of the opportunities presented. Real estate speculators and developers do it all the time. Why shouldn’t home buyers?

Housing appreciation over the last few years has been well documented. According to a study by the Real Estate Research Council, prices in 10 selected Los Angeles County cities from 1984 to 1988 increased anywhere from a low of 56% in Pasadena to a high of 119% in Beverly Hills.

Regardless of location, however, not all segments of the housing market took part equally in the phenomenal rise in appreciation. Different types of housing in different price ranges appreciated at different rates, and the segment most notably behind the rest was condominiums.

This price lag occurred for several reasons. First, condominiums were a relatively new animal to the investment market during the 1970s and early ‘80s recession years and took more of a beating than houses.

Questions of quality and doubts of potential market size among the general population for this new product did little to enhance their speculative appeal. Most were bought as second homes or by those who couldn’t afford a house.

So a market imbalance developed as house prices skyrocketed, while condominium prices rose at a much lower rate. Well, as with all market imbalances, when the difference becomes too great, it sooner or later corrects itself, either slowly or rapidly, continuously or in spurts, depending on how outside factors help or hinder the natural market forces.

Correction of this market imbalance began slowly a few years ago, with general improvements in the quality of condominiums and their reputation as sound investments.

As construction specifications became more stringent and condo associations stronger and more experienced, consumers began to accept condos as a more viable housing alternative.

Sociological changes also enhanced the desirability of condominiums. The increase of single-parent families and unmarried adults relaxed the need for more space, and created a desire for less home maintenance. The Tax Reform Act of 1986 wiped out or scaled back the deduction of interest for most non-real estate investments, creating an incentive to buy homes.

The most important corrective force, however, occurred recently, as housing prices became so high as to be out of reach for most consumers.

According to the California Assn. of Realtors, the pool of potential qualified buyers able to purchase a median-priced home in the Los Angeles region decreased from an average of 27% in 1987 to 16% in 1989.

As a result, the more specific pool of potential qualified condominium buyers grew proportionately, increasing the relative demand for condominiums.

Additionally, fueled by a drop in interest rates and a fear of being left out of the “ownership club” altogether, the shift in buyer demand forced condominium prices to take off. Condominium appreciation overtook house appreciation.

According to the Los Angeles Board of Realtors, the median condo price increased 46% from November, 1988, to November, 1989, in the area covered by the board--Los Angeles city communities south of the 101 Freeway, west of downtown and north of Culver City.

Meanwhile, the median housing price remained comparatively stable throughout much of 1989. The average price of a single-family house in the board’s area in October, 1989, was within $1,000 of its price in January of the same year. However, in December, the median price had dropped to nearly $10,000 below the January price.

Although most of this price decrease can be attributed to a drop in the number of more-expensive homes being sold, it nonetheless signifies a soft housing market.

It now appears, however, that home prices may be beginning to rise. The L.A. Board of Realtors reported a slight increase in the median home price for the Los Angeles region in January, 1990.

Meanwhile, the median condo price remained stable.

This situation of condo prices reaching a peak while single-family home prices temporarily flatten creates a opportunity for those condo owners who want to own a detached home.

Following a “buy low, sell high” philosophy, condominium owners would do well to take advantage of the increased appreciation in their condo and buy now in the soft housing market.

Of course, just like the savvy securities investor, one should try to buy at the absolute trough and sell at the absolute peak.

Unfortunately, there is no telling exactly when the condo market will peak and the housing market take off again, but now does seem like a good time to take advantage of the confluence of these two price trends.