For the first time in nine years, condos are selling above asking price, indicating a homebuyer demand shift.

Nationally, the average condo sold for 0.7% above asking price and at the fastest pace on record within 22 days in June, according to a Redfin analysis. The national median sales price for condos rose a record 20.3% year-over-year in June to an all-time high of $304,000. For reference, the median single family residence (SFR) sales price increased 27% year-over-year to $405,000.

Many of the most popular metros for condos are here in California. Topping the list as of June 2021, are:

  • Sacramento, with 76% of condos selling above asking,
  • Oakland, with 74% selling above asking,
  • Oxnard, with 67% selling asking,
  • Riverside, with 60% selling above asking,
  • San Diego, with 60% selling above asking,
  • San Francisco, with 59% selling above asking; and
  • Los Angeles, with 57% selling above asking.

The rapid price increases of the past year have pushed many low- and mid-tier homebuyers out of their preferred market. Between choosing to purchase an $800,000 SFR or a $304,000 condo, it’s clear why first-time homebuyers are forced to choose the latter.

Why homebuyers are choosing condos over houses

The past 12 months have seen home prices skyrocket, but at the same time, incomes have remained stagnant. Low-to medium- income earners simply can’t qualify for single-family homes anymore. Instead, homebuyers are turning towards condos as the first-time homebuyer choice.

Renters seeking to buy are painfully aware of increasing home prices, and rather than waiting decades trying to save up a 20% down payment on a house, the next best option for their budget is to look at smaller, less costly condos.

Also appealing to young adult homebuyers are the shared amenities and central location typical of condos in areas closer to jobs in the city. SFRs are often located in areas away from the city, in the suburbs, where commutes are long. For a young adult looking to live near where they work and have more amenities, condos are the perfect option for their first-time home purchase.

On the other side of the generational equation, condos are equally desirable for Baby Boomers near or past retirement age. Low maintenance and access to amenities make condos attractive follow-ups to the suburban McMansion lifestyle Boomers are typically associated with. As this generation continues into retirement, condo demand will continue to increase.

But will there be enough condos to go around?

Obstacles to condo growth

Despite increased demand, California’s strict zoning laws restrict building heights and limit condo construction by prohibiting denser housing. However, state legislators aware of the housing shortage are working to change these laws with bills like AB 725, which takes effect  January 1st, 2022, requiring greater, denser housing plans, and SB 166, which was passed to ensure enough housing is available for each income segment, addressing the current shortage of affordable housing units across the state.

Related page:

Legislative steps toward more affordable housing

Another limitation is that zoning requires parking requirements, and in denser housing developments parking is expensive, especially in areas where the cost of land is high. One way legislators can remedy the negative impacts of parking requirements is by encouraging cities to lean on transit-oriented development, especially for low- to mid- tier units. Developments near public transit reduce the cost per unit, making it easier and quicker to build.

Los Angeles is a prime example of a city focused on adding transit-oriented housing. LA’s Transit Oriented Communities (TOC) Affordable Housing Incentive Program encourages low- to mid- tier housing development near transit by rewarding housing developments with tier-based incentives such as density bonuses and lower parking requirements.

For an example of long-term successful transit-oriented communities, legislators can look to the country of South Korea. South Korea isn’t just known for its popular Hallyu culture and entertainment, but also for its incredibly efficient transportation system all throughout the country’s major cities. Multi-family developments — including condos — are purposefully built near subway entrances due to public demand to live near transit for its benefits of being close to the city’s amenities and jobs.

On top of adding housing units, California legislators are also trying to improve the state’s transportation. The state began construction for its high‑speed rail project in 2015, connecting San Francisco to the Central Valley, which is scheduled to open by 2029. Phase one construction includes:

  • Anaheim;
  • Los Angeles;
  • Palmdale;
  • Bakersfield;
  • Kings/Tulare;
  • Fresno;
  • Merced;
  • Gilroy;
  • San Francisco, and
  • San Jose.

Phase two construction includes:

To make the most of this new transportation system, legislators need to continue to loosen zoning restrictions to meet demand and start encouraging more cities to build near this new high-speed rail, using tier-based incentives. An investment in transit-oriented communities is an investment in the future housing market, the financial wellness of communities, and not to mention a long-term solution to the growing housing shortage.

Can you imagine it? A new transit-oriented community, built to include low- to mid- tier units, where amenities are within walking distance, and jobs are only a few minutes by public ride? The possibility is within reach.

Visit our Legislative gossip page for an up-to-date list of laws relevant to housing or real estate practice currently pending or passed.