`Condo-mania' peters out: Yuppies prefer the suburbs, after all
Whatever happened to ``condo-mania?'' In 1980, the Department of Housing and Urban Development (HUD) predicted that 1.1 million rental apartments would be transferred to private ownership between 1979 and '85. Cities like New York and San Francisco enacted laws to restrict the number of conversions and protect tenants. Investors bought up buildings looking for a quick profit as condo prices soared.
But even as the ink was drying on the HUD report, the momentum slowed. As it turns out, ``yuppies'' appear to have the same suburban housing preferences as the rest of America. Only about 650,000 units have been converted since 1979, estimates ``US Housing Markets,'' a publication that monitors the real estate industry. Even that figure may be high, says editor Saul Shiefman, since the 1985 estimates were made in April and the market has been softer than expected.
Residents in Boston and New York City probably haven't noticed the falloff. That's especially true in Boston, where condo prices have doubled in the last three years and condo conversions reached a record 4,433 in 1985.
But in city after city -- Los Angeles, Chicago, Washington, Philadelphia, Houston -- conversions peaked in 1979 or '80, only to bottom out a couple of years later. In most cases, they have risen only marginally since. And in parts of the South, the situation is more dramatic: In Houston, hit by falling oil revenues, many of the 4,000 apartments converted in 1979 are still on the market, and Mr. Shiefman says there have been almost no conversions since 1982.
When condo sales and conversions were booming in the late 1970s, sociologists said that the generation buying homes for the first time (the 24-to-32 age bracket) had made a fundamental shift in housing preferences. Instead of wanting single-family homes in the suburbs, they said, this group preferred the city life and shared maintenance that condominiums offered.
But, says Robert Gough, senior vice-president at Data Resources Inc., an economic forecasting firm, the sociologists appear to have been wrong.
``As younger professional groups are maturing, they have a tendency to move to the suburbs. The preference for `dense living' [in condominiums and cooperatives] was forced on them by economics,'' he says.
As the economy improved, Mr. Gough adds, people were able to afford the suburban living they wanted all along. He says three major economic forces made condos popular: high inflation, high interest rates, and high energy costs. (When gasoline prices rose, people found it cheaper to live in the city than to commute.) But now, he says, ``Those forces have disseminated.''
The dropoff in the early '80s was also due to competition from newly built condominiums with better amenities. Since 1981, more than 1.1 million new condominiums have been built or are being built, according to the National Association of Home Builders.
And housing experts do not see an end to the glut, as investors try to get out from under their buildings. When investors bought up buildings in 1979 and '80, they generally kept renting the units and got rapid depreciation for five to seven years. After that point, it was no longer economical to rent to tenants, giving investor-owners incentive to sell to another investor or to occupants.
Today, coops and condos are still in demand in New York and Boston, says Shiefman. Boston, with its high-technology firms, defense contractors, and financial services, has one of the lowest unemployment rates in the country; housing is one of the area's scarce commodities. New York, financial capital of the world, is in much the same boat.
Both city governments have passed laws to control conversions. New York has made it tough to evict tenants, but easy to convert a building otherwise.
In December, Boston passed a highly controversial law that requires investors to obtain a permit from the Rent Equity Board before converting rental units to condominiums. The board would generally reject permits if the units were being sold to absentee investors, not people who planned to live in them.
This type of law, which supporters say will protect tenants and keep the stock of affordable housing from shrinking, has been a goal of Raymond Flynn's since he was a city councillor, before he became Boston's mayor two years ago. Mr. Flynn objects to investors making a quick profit on conversions, and contends that about 75 percent of conversions in the last two years were done for investment purposes.
To get a sense of how good the Boston market has been to investors, consider the case of Matthew Simon. About three and a half years ago, the 21-year-old Mr. Simon bought his first town house in the South End for $135,000. After spending approximately $15,000 for renovations, he sold two of the four units for a cool $100,000 profit.
Now Simon owns about 225 units in Boston and outlying Chelsea. He declines to say how much money he's made. But it must be considerable: Since 1982, the average price of a condo has doubled, from $66,300 to $123,225 in November 1985, according to Christopher Pantaleoni, president of Condex, an appraisal consulting firm.
The Greater Boston Real Estate Board is challenging the law in court. It is arguing that the city didn't have the authority to pass the bill without going to the state legislature first, and that it discriminates against developers and investors.
Moreover, opponents of the law say, the ordinance may end up raising rents for tenants, not protecting them. When investors convert buildings, they generally keep them as rental buildings. But this law would allow only people planning on living in the condos to buy the apartments, which would take those apartments out of the rental market. And fewer apartments on the market for rent could mean higher rents.
Likewise, fewer condos coming onto the market could lead to higher prices of existing condos, accelerating a process that the marketplace started a couple of years ago. Skyrocketing prices have forced people to look outside of Boston. Simon stopped buying in the city nine months ago because he felt prices had nearly topped out. Now half his units are in Chelsea. And by making investment in Boston more difficult, the new law will increase the value of those buildings, he says.
But in the end, notes William Zucker, a professor at Wharton business school, ``laws are short term.'' If investors believe they can make a profit in conversions, he says, legislation won't stand in their way for long. Condo conversions move into low gear Number of rental runits converted to condominiums or cooperatives 1978 80,000
'85 (est.) 63-67,000 Source: ``US Housing Markets''