Condominium conversions are a heated topic of discussion among those who believe strongly in home ownership and those who don’t.
Market Pointe Realty Advisors has now completed its 1st quarter 2006 audit of new construction and conversions. The result of that survey is that in 2005 almost 9,000 condominiums were sold in the county and of those almost 5,000 were condominium conversions. This is a record for our County and represents almost half of the conversion homes sold in Southern California.
To date, due to product supply limitations, sales in 2006 have fallen substantially.
The conversion sales are not just a number. They are a bonanza for thousands of households that can now afford a home in this County. The production of conversion homes at an average of $300,000 can be considered a minor miracle, considering that the average new detached home is priced over $900,000 and the average new condominium well over $500,000.
We know from our in-depth survey of condominium buyers that 75% were former renters. The average time lived in the County was 15 years and they had never owned a home before. Most were young singles and marrieds. About 15% had children living at home.
Most of the cities in the County have taken a strong anti-conversion stance, but there are others that are enlightened and are encouraging them. Among them are Escondido, National City, Chula Vista and El Cajon.
The City of San Diego can’t make up its mind whether conversions are good or bad. They know that home ownership is a worthy goal (after all, all the City Council members, save two, and the Mayor, own a home). They have all built up substantial equity in their homes and recognize that their primary net worth and what they will leave to their heirs results from long-term appreciation of their homes.
They are also bright enough to recognize that when an apartment converts to condominium status, it means that the project undergoes a dramatic improvement in its appearance and becomes a major benefit to the neighborhood and encourages other neighbors to fix up their properties. They also instinctively know that owners an therefore stakeholders stabilize a neighborhood, eventually creating an environment where crime wanes, school grades increase and there is strong neighborhood camaraderie.
And, from the standpoint of our destitute City of San Diego, it is important to note that property tax revenue typically quadruples when a project moves from apartment status to ownership status. That’s because the typical seller of the apartment project has owned it for 8 to 10 years and has a very low tax base.
Let me give an example why I am against the proposed City of San Diego ordinance change: If the City increases the parking ratio, converters would, by necessity, combine a sufficient number of units until they reached the point where the project qualifies for conversion. That means that where a converter was once able to offer the majority of its units as entry-level one-bedroom models, it would change the mix to include many more two-bedrooms which by necessity would have to sell for far more money.
The other aspect of increasing the parking ratio is that most of the projects that have less parking than the present code requires are specifically those projects that desperately need conversion because they are aging and often functionally obsolete. The typical converter invests $40,000 to $60,000 per unit to bring the projects back to life.
If projects remain as rentals, they will continue to age poorly, as rental owners could never afford to invest that much money to bring it up to today’s standards. So they just get older and increasingly dowdy. And the neighborhoods deteriorates.
Now let’s look at 2006: In 2006, there will be a major decline in the number of condominium units sold in San Diego County. The decline is due to several factors, including that fact that most of the major modern projects have been converted.
The remaining convertible inventory consists mostly of small projects and sufficient volume cannot be generated in these projects to produce the type of volume that we experienced in 2005. If you look at the list of projects that are going through the City of San Diego’s processing mill, the vast majority are fewer than 20 units.
From a macro-economic perspective, the condominium conversion provides the first rung of the home ownership ladder. If San Diegans are not able to purchase their first home, then the enormous economic housing machine that fuels much of this economy’s strength and tax dollars, falters. We know that every time a new home sells, there are four resales that occur in the same relative time frame. As families strive to improve their living environment, they move up the housing chain, but if they can’t get on the first rung, then the economy suffers gravely. We can’t afford to let that happen.
This article written by Alan Nevinwas published in The San Diego Daily Transcript on July 20, 2006 as part ofthe Forensic Consultants Association Newsletter. Mr. Nevin is the Director of Economic Research with Market Pointe Realty Advisors
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