For an active young couple, a condo or townhouse in a complex with onsite facilities such as a swimming pool may sound quite appealing. As you start to accumulate things or have children, you may find that you outgrow your condo. Real estate agents and bearish market analysts may argue over whether condos and townhouses rise or fall in value over the course of time. Since gaining or losing equity could prove crucial in your ascent up the housing ladder, you must understand the dynamics of the real estate market before you buy one of these homes.
The factors of inflation and supply and demand determine whether a condo or townhouse will appreciate or depreciate in value over time.
Considering Effects of Inflation
Throughout history, the prices of everything from real estate to commodities, such as gold and oil, have gradually risen. If you look at real estate over the course of several decades, you may assume that prices – including those of townhouses and condos – will probably rise to some extent.
However, while capitalist economies are designed around the notion that inflation drives growth, occasionally that growth can spiral out of control and before long, real estate and other goods become prohibitively expensive. Eventually, prices have to drop, and economists refer to this as a deflationary cycle.
Needless to say, condos and townhouses are impacted by both inflation and deflation just as much as other marketable commodities.
Understanding Supply and Demand
While various factors can influence the real estate market, prices are ultimately determined by supply and demand. In some areas, the supply of condos and townhouses far exceeds demand.
If you own such a home, you may have to drop the asking price to sell it. Once one seller drops the price, a knock-on effect causes all other condo prices to drop, since real estate appraisals are based on recent sales of comparable properties. Conversely, if you live in an area with too few condos to satisfy demand, the value of your home may rise yearly as more people compete for these homes.
Obtaining Financing Options
Many couples rely on financing when buying a condo or a townhouse. Government-sponsored entities Fannie Mae and Freddie Mac buy the vast majority of first-lien mortgages written in the United States. However, Fannie and Freddie have strict rules for loans on condos and townhouses. In many cases, you must make a down payment of 10 to 20 percent or more to buy a condo. By contrast, Freddie Mac allows you to put down just 5 percent on a single-family home.
During economic booms, lenders relax loan guidelines, so it becomes easier to obtain financing. This drives up prices, which tend to fall during recessions, when loans – particularly for condos – become harder to obtain.
Making Your Purchasing Decision
While some real estate agents and investment brokers may make claims to the contrary, there are no sure investments in this world. You could buy a condo in an area where demand far outstrips supply only to see property value fall as the result of an unforeseen event, such as a major recession. However, the same rule applies to mobile homes, site-built houses and every other type of marketable commodity. Therefore, if you want to buy a condo or townhouse as your home, the fact that its value may fluctuate should not detract from your enjoyment of the property.