The Great American Condo Crisis

The starter home isn’t what it used to be.

For the better part of the past century, most Americans became homeowners by purchasing a detached single-family house. But soaring prices are making that paragon of U.S. real estate less attainable, and many people have turned to condominiums as the only affordable option, particularly in expensive coastal cities. Now even that option has become endangered.

People often use condo as a synonym for apartment, but it refers to a particular arrangement: Residents own their unit and share possession of their building’s common areas and the surrounding property. Thanks to their efficient use of land, condos cost significantly less than single-family homes in nearly all major cities.

Construction of virtually every kind of housing plummeted during the Great Recession, but condo production has proved especially anemic in the years since. Large cities have generally stopped building them, forcing more and more urban families to either remain renters or depart for the suburbs.

Through our work at the housing-advocacy group California YIMBY, we have sponsored legislation that can help spur the condo’s revival. Policy makers have the power to reverse its decline; other countries show them how. If the U.S. wants to remain a nation of homeowners, it has no choice but to start building condos again.

Condominios were popular in Latin America long before they came to the United States. Inspired by their neighbors, Puerto Rican legislators enshrined condos in American law for the first time, in 1958. On the mainland, condos took off in Florida, where they appealed to affluent retirees by offering both on-site amenities and freedom from landlords. In the 1970s, single women helped drive national demand for condos, which provided them greater safety, community, and proximity to jobs than most suburbs could. The following decade, middle-class Americans without children moved to cities en masse, buying up condos and building wealth in urban areas otherwise dominated by rentals.

[Read: The disappearing American mortgage]

By the early 2000s, developers were constructing hundreds of thousands of new condos, expanding the national housing supply, keeping prices in check, and seeding a generation of urban homeowners in cities across the country. Production peaked around 2005, when nearly half of all new multifamily units were sold off separately rather than rented out by a single owner.

Then the condo boom collapsed.

Condos always faced an uphill battle. For starters, American zoning tends to prohibit multifamily housing, which is altogether banned in most suburbs. By one estimate, fewer than a quarter of the residential areas in many cities allow anything other than detached single-family homes. Erecting an apartment building typically requires a long and unpredictable rezoning process as a result.

Beyond the red tape that snarls any new apartment, condominiums confront an additional hurdle. In order to sell off individual units, condo developers need local officials to designate each one as a distinct legal parcel—a drawn-out process involving lots of open-ended negotiation. Many officials hassle developers into paying extra to upgrade nearby intersections, setting aside land for parks, or making ad hoc contributions to various local funds.

Consider two recent housing developments in West Los Angeles. One developer built four condos; next door, another developer built five rentals. The city forced only the condo developer to pay for widening the street. The demand likely added tens of thousands of dollars in project costs to the condo. When these added mandates push costs too high, projects either go under or get turned into rentals.

Condos also encounter discriminatory treatment in the federal tax code. If an investor finances an apartment and retains ownership, she pays capital-gains taxes, which top out at 20 percent. But if she finances a condo and sells it off, she pays income taxes, which top out at 37 percent.

Still, condos managed to spread despite these constraints—until the Great Recession. Along with the rest of the housing market, condo production plunged starting around 2008. But by the early 2020s, overall housing production had largely recovered in most U.S. cities, whereas condominium production remained a fraction of its prerecession peak.

In dense cities like San Francisco, where building condos is the only way to turn renters into homeowners, the recovery has been especially sluggish, even as rental production has increased. In New York City, the collapse hasn’t been so dire; production has reached roughly 50 percent of its mid-2000s apex, according to one analysis. But it has substantially lagged behind overall housing production.

[Read: The real reason California can’t build]

Two changes in particular stifled condo construction. First, regulators tightened lending standards. Condo buyers had a harder time securing federally backed mortgages, and condo boards faced reams of new compliance hurdles. Stricter oversight made sense amid the frenzy of the late 2000s. But it rendered thousands of condos blacklisted by federal authorities and effectively unsellable for years. Regulators scaled back some of these rules in 2019, but not enough to reverse the damage.

Second, many of the condos built in the 2000s became embroiled in lengthy litigation over concerns about defective construction. Rules that regulate construction quality are essential, but a series of laws and court decisions starting in the late 1990s may have pushed the issue too far. Collectively, these changes have lengthened look-back periods, limited the rights of developers to make repairs, inflated insurance premiums, and made condo-board members liable if they fail to initiate litigation, practically guaranteeing that developers will be dragged into court.

In the most extreme cases, poorly balanced defect laws have almost entirely killed off local markets. According to one analysis in Colorado, the number of active condo developers shrank by 84 percent in the 15 years after the Great Recession, due in part to an earlier defect law. Denver was once a boomtown for condominiums; now nearly all new multifamily developments are rentals. That’s bad news for prospective homeowners in Denver, where the median home price is nearly seven times the median household income.

Canada’s experience suggests that America’s condo crisis is a policy choice, not an inevitability. Like the U.S., Canada spent most of the 20th century adopting zoning codes that discriminated against multifamily housing, and nudging families to live in detached single-family homes. Yet today, Canada builds far more condos than the U.S.

To understand how, compare Seattle and Vancouver. Seattle almost exclusively builds rentals, whereas Vancouver overwhelmingly builds condos. The divergence owes partly to the fact that Vancouver’s tax code discourages rentals, as the researcher Margaret Morales has argued, but also to Seattle’s conventionally American cocktail of regulations, which heavily discourages condominiums. In British Columbia, developers are largely spared the costly litigation endemic in America, and buyers can more easily secure federal financial backing.

Another distinction involves presale rules. Condo developers typically sell units before they’re constructed, and collect about a quarter of their value. In British Columbia, developers can use these deposits on construction costs, reducing their dependence on more expensive sources of capital. In Washington State, by contrast, developers are allowed to use only 5 percent of the purchase price on construction—a liberal allowance by national standards.

Put another way, Canada takes an abundance approach: channeling demand to spur the creation of more supply. The U.S. takes the opposite tack: forcing demand to chase after existing supply—a choice that has made homeownership an ever-scarcer good.

[Michael Powell: The left shouldn’t demonize homeowners]

Canada’s strategy is hardly unusual. Widespread use of presale financing fueled the development of major international cities including Hong Kong, Singapore, and Taipei, helping produce high-quality housing and make room for a growing urban middle class. Condominium-building booms are also transforming the skylines of developing cities such as Cairo, Kuala Lumpur, and São Paolo.

Some U.S. lawmakers are beginning to embrace elements of Canada’s model. The California State Assembly recently passed A.B. 1406, which would expand opportunities for developers to use presales to lower the cost of construction financing. (Our organization, California YIMBY, is a sponsor of the bill.) California lawmakers are also contemplating legislation that would better balance the state’s construction-defect laws. Colorado, Hawaii, and Washington have advanced or passed legislation on these issues too.

Still, America has a long way to go to make condos as accessible as they are elsewhere. Take it from one of our families. A couple of years ago, Nolan’s mother-in-law bought a condo in a building still under construction near her home in Guatemala City. She called it an investment, though she keeps stressing how perfect the unit would be for a young family—a not-so-subtle hint that she wants Nolan and his wife to move in when a baby comes into the picture.

Finding the condo was easy. She heard that a reputable developer with a track record of successful projects was proposing a new building nearby. She and a few dozen other buyers put 25 percent down on units in an escrow account, helping finance the construction. The building will be finished next year. Across Guatemala City, hundreds of buildings are going up this way, housing a newly ascendant Guatemalan middle class.

Young middle-class Americans should be so lucky. The collapse of the American condominium is unusual, unnecessary, and easily fixed. In the meantime, Guatemala beckons.