Are America’s condos having a midlife crisis?

It’s easy to get whiplash when you hear news about condos today. On one hand are stories [pro and con] about new, luxury condos. On the other, is Champlain Towers, a twelve-story condominium that collapsed in Surfside, Florida, killing 98 people. The majority of condos in the US fall somewhere in between. They aren’t shiny and new, but most aren’t about to collapse either. Instead, many condos are middle-aged and need major repairs. Their ability to do this is stymied by collective action problems and the lingering effects of the early 2000s real estate boom and bust.

What are Condominiums?

Condominiums, or condos, are private residences within a larger property or complex. When you buy a condo, you purchase a specific unit in a complex and a share of its common elements. Condominiums can take many forms. They can be detached single family homes, row houses, and units in a multi-family building.

Common elements are things outside individual units, like hallways, lobbies, basements, and roofs. Internal systems — furnaces, plumbing and electrical risers — are also common elements. So are outdoor amenities like patios and pools. The co-ownership of common elements is a method for pooling risk for big ticket items. Residents co-own these elements so they are jointly responsible for their maintenance, repair, and/or replacement.

Condominium complexes are governed by associations that are legally responsible for the upkeep of common elements. Associations charge monthly condo fees to cover operating costs and maintenance of common elements. A portion of fees is also put into a reserve fund that associations can draw on for emergencies or unexpected costs.

The first collectively owned multi-family building in the US was a co-op built on West 57th Street in New York City. In a co-op you buy a share in the property and receive a proprietary lease to live in a particular unit. Other co-ops soon followed, but they were mostly built in big cities like New York.

The co-op model wasn’t widely adopted for several reasons. Government financing for co-ops came with lending restrictions, including that construction could only begin after a majority of units were sold. Owners who wanted private mortgage financing also faced obstacles. Banks balked at the co-op practice of screening potential buyers because it complicated sales.

The condo model of collective ownership (what we now call common interest developments) got a boost in 1961 when the National Housing Act allowed the Federal Housing Administration (FHA) to issue and insure mortgages for units inside multifamily buildings. This made it easier for buyers to buy condos, and thus for developers to build them. Within a year, 31 states had passed the condominium laws required to meet FHA guidelines.

Who lives in condos?

Condominiums are usually smaller than single-family homes. In 2020 the average new single-family home was 2,261 square feet. The average new condo was 1,306 square feet. Although single-family detached homes are the preferred choice for buyers of all ages, buyers in their twenties or over 65 are more likely to buy condos than other age groups.

Stereotypes suggest condos are for the rich, but low- and middle-income people own condos too. However, the financialization of housing has affected condo prices. Condos are increasingly seen as investment opportunities rather than homes.

During the early 2000s real estate boom, for example, condo prices increased rapidly. In 2005 the National Association of Realtors reported that for the first time ever, the national median price for a condo was greater than it was for a single-family home ($223,500 and $218,600 respectively). This trend didn’t continue after the 2008 recession, but the price differential between single-family houses and condos is no longer very large. In 2020, the average price for a condo in the US was $266,300. It was $300,000 for a single-family home.

Midlife crisis

When condo’s hit middle age, their internal systems start to fail. After thirty years, for example, most condominiums will need to replace elevators and heating and cooling systems. At 50, most will need to replace windows and plumbing risers. And, depending on the quality of initial construction, some may need to do structural repairs. Unfortunately, many condo associations put off repairs.

Deferred maintenance isn’t specific to condos, but it’s complicated by two problems. The first is collective action problems.The second is the financialization of housing.

Collective action problems

Obstacles that keep people with common interests from working together are called collective action problems. Condo complexes are susceptible to collective action problems because they involve multiple owners. Sometimes owners have competing interests. It’s easy to vote against repairing the complex’s pool if you never swim in it. At other times owners agree on the problem but not the solution—some want to fix the pool, others want to get rid of it.

In condo complexes collective actions problems often emerge around condo fees. Associations levy increases annually, but owners often push to limit them. Smaller increases, however, mean deferred maintenance, and bigger costs down the line. When that happens, condo associations with insufficient reserves must levy special assessments—one-time fees—to cover costs. Sometimes, assessments can be exorbitant. Before Champlain Towers collapsed, its condo association levied an $80,000 assessment.

Collective action problems can happen in any complex, but are more likely to happen in older complexes and to hurt low- and middle-income owners the most. Not surprisingly, these owners often balk at yearly increases. And, when special assessments are imposed, many don’t pay them because they can’t.

When this happens, condo associations can either take owners to court or defer maintenance. Going to court takes time, costs money, and isn’t always successful, but deferred maintenance can draw the attention of municipal authorities.

The latter happened at the now-defunct Lynnhill Condominiums in Prince George’s County. In 2014 the Washington Suburban Sanitary Commission (WSSC) announced it was shutting off the complex’s water for unpaid bills. The County said it would have to evacuate the building if that happened. A judge ordered WSSC to keep the water on, but the complex continued to rack up code violations. In 2017 the county condemned the property and residents were forced to leave. The complex was dissolved and sold. News reports suggest the complex’s problems began in the 1980s when some residents couldn’t afford hikes in condo fees and stopped paying.

Financialization of housing

The early 2000s real estate boom and bust also created problems for condos. Initially, the boom was good for condos. Prices went up, even in older buildings. But we now know that many banks were engaged in predatory lending.

When the market crashed, condo associations faced three problems. First, borrowers with subprime loans saw their monthly payments rise sharply. Many responded by not paying their condo fees. Second, banks were slow to foreclose on properties, extending the time associations went without fees. And when banks did foreclose, they often failed to pay condo fees.

Third, efforts to reign in predatory lending slowed down condos sales at a time when most associations needed people to purchase foreclosed condos and start paying fees. Likewise, the FHA, which underwrites many first-time home-buyers’ mortgages, started requiring condo associations to win pre-approval before FHA buyers could purchase their units. Some requirements were difficult to meet. For example, associations with a lot of investor-held units often couldn’t meet the requirement that a majority of units must be owner-occupied.

These trends had knock-on effects that continue today. In 2016, the Washington Post reported on area condominiums still facing financial difficulties because their reserves had been depleted during the recession. These complexes were spread across the metro area, they had two things in common—they were middle-aged and they were located in low and middle-income areas. The pandemic has only worsened the situation for condos like these.

Finding stable footing

There are no easy answers for aging condos with limited reserves. Some condos will need a municipal lifeline in the form of low-interest loans or grants to prevent dissolution.

But, there are things municipal and state governments can do to prevent condos from falling into disrepair in the first place. Right now, the FHA already requires condominium complexes eligible for FHA mortgages to meet reserve requirements. State and localities could provide incentives for properties to come up to FHA standards. States could also standardize rules for how complexes within their borders report budget information to prospective buyers. Doing so would make it easier for buyers to compare across properties, and would encourage all properties to meet baseline requirements.

To avoid predatory lending, and speculation in condo markets, municipalities could also incentivize condominium associations to sell to individuals (rather than LLCs), or require LLCs to name the owners behind them.

Condos are an important part of the American housing stock. They are often more affordable than single-family homes and better suited to people who don’t need or can’t maintain larger homes. The more healthy condos are, the more equitable the wider housing market can be.