This Quarter: Condo Sales Skyrocket, Rentals Stay Flat
by Dean Crist, NAHB Economics Group
Multifamily housing entered the fourth quarter of 2003 with production increasing, with permit activity remaining high, and with sales and prices of existing condominiums and cooperatives skyrocketing. Nevertheless, signs of weakness persist in the rental market. Absorption rates remain low, vacancy rates are on the rise, and low interest rates continue to draw renters into homeownership.

Starts, Permits Vary by Region

The actual number of apartments started through September of this year – 254,000 – represented a decline of 3.4% from one year earlier. The West posted a 20.4% increase, representing a year-over-year gain of 11,000 units to 65,000, while the Northeast eked out a 3,000-unit gain to 34,000. Otherwise, there were 7.4% and 20% declines in the South and Midwest, respectively, to levels of 113,000 and 44,000.  

Multifamily permit levels remain high relative to multifamily starts. One reason that multifamily permits are higher than multifamily starts is because some units (mostly townhouses) that were classified as multifamily by local permit authorities end up being reclassified as single-family units by the Census Bureau.   

Year-to-date multifamily permits are running 3% ahead of their 2002 pace, though they indicate that authorizations are up in the West and Northeast and down in the Midwest and South, similar to the starts data.

The permit data also show that production still remains concentrated in only three states – California, Texas, and Florida. These three states accounted for 36% of all multifamily permits issued through September 2003 (110,560 units), up from the 32% share they were responsible for through the same period one year earlier. Indeed, California’s 51% increase in multifamily permit authorizations through nine months of this year versus last (a numerical gain of 12,710) offsets a decline in permit activity in the rest of the country. 

Vacancy Rate Reaches All-Time High

The variables used to measure multifamily rental demand do not show an improving situation. The vacancy rate for all rental properties (of which 30% are single-family units) rose from 9.6% in the second quarter to 9.9% in the third quarter of 2003, up from 9% one year earlier. (Figure 1)

Regionally, the South had the highest vacancy rate, at 12.4% in the 3rd quarter, and that rate was up from 11.4% one year earlier. The West reported a vacancy rate of 8.1% in the 3rd quarter of this year, compared to 6.8% one year earlier. Vacancies in the Northeast came in at 6.6% for the period July-September 2003 – 0.6 percentage points above the 3rd quarter of 2002 – and the Midwest weighed in with an 11% rate, which was 0.7 of a percentage point above a year earlier. The largest number of rental units in the housing stock – 43% as of the 3rd quarter 2003 –  are found in buildings with 5 or more units. The vacancy rate for these structures rose from 11.3% to an all-time record of 11.5% in the 3rd quarter. 

Three-month absorption rates for new, unfurnished rental apartments languished below the 60% mark. Absorptions did rise from a record low of 55% for units completed in the first quarter of 2002 to a second quarter 2000 rate of 62%, but stood at 59% for units completed during the first quarter of this year (Figure 2).

Although the latest absorption rate is an improvement over the same period one year earlier, it nonetheless remains low in comparison to most of the 1990s and 2000, when absorption rates did not fall below 70% and reached the 80% level at times. One cannot ascribe the relatively low absorption rate to a lot more units coming on line. Indeed, there were 204,700 privately financed, unsubsidized and unfurnished rental apartments completed in 2002, up a bit from 2001’s 192,900, but well below the 226,000 completed in 2000 when 72% of those units were absorbed within three months. 

Condo Sales Take Off, Production Stays Flat

Absorption rates for condominiums and cooperatives remain substantially higher than rates for rental units, hovering between a 2002 low of 68% in the 4th quarter, to a high of 86% in the 2nd quarter. The absorption rate for condos was 75% for units completed in the first quarter of this year. The higher absorption rates for condominium units make a lot of sense in that these for-sale units benefit from mortgage rates in the same way as single-family homes, while condominium production has not moved up much. There were 33,000 multifamily condos/coops started through mid-year 2003, down from the 35,000 started one year earlier, and their share of overall multifamily starts through mid-year remained stuck in the 20% range. (Figure 3). 

Despite the lackluster numbers for new condo production, sales of existing condominiums and cooperatives have been soaring.¹ Existing condo and coop sales jumped 12.9% to a seasonally adjusted annual rate of 971,000 units in the third quarter of 2003 from a previous record of 860,000 in the second quarter. The third quarter 2003 figure was 18.0% above one year earlier. It appears that low mortgage interest rates are helping fuel demand for these types of ownership units, just as they are for single-family housing, and the demand appears to be regionally broad-based. In the South, existing condo sales rose 15.3% between the second and third quarters of this year to an adjusted 445,000-units pace, while gains of 13.9%, 12.1%, and 7.0% were recorded in the Midwest, West, and Northeast, respectively, to levels of 115,000, 259,000, and 152,000.

Demand for used condos is further evidenced by strong price appreciation. Median condo resale prices spurted by 10% and 15% in 2001 and 2002, respectively, to levels of $123,200 and $142,200. Prices have climbed throughout all of this year, averaging $161,000 through the first nine months of the year. This represents a gain of nearly 13% from 2002. The third quarter 2003 national existing condo sales price of $167,200 was nearly 17% above the third quarter of 2002 and strong year-over-year price gains were noted throughout much of the country. In the West, the median price was $204,700, up 21.7% from a year ago, while Northeast prices rose 21.8% to $183,000.  At $135,500 existing condo prices in the South were 16.0% above a year ago and up 9.3% in the Midwest to $162,800. 

1  [Information about the sales volume and prices of existing condos and co-ops is available on a quarterly basis from The National Association of REALTORS®.]

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