Condominiums occupy a structurally important position on the housing affordability ladder, as they are often the most affordable ownership option in high-density, high-cost urban areas. In many markets, they are frequently the only form of ownership at a price that moderate-income and first-time homebuyers can afford. Despite their importance, the market for condos, both new construction and resales, remains depressed. Condo completions are at low levels compared with previous years, both as a share of total multifamily construction and as a share of properties built for sale. We document this and provide an overview of the issues confronting new development, conversions, and resales. We then offer suggestions to improve the condo financing system by reducing the risk for developers, increasing access to financing for buyers, and building confidence in the long-term stability of this important ownership option.

Key Takeaways

We argue that the condo market dysfunction is largely a product of the lack of standardization and coordination—that is, no entity is responsible for making the system work. Improved information flow, more consistent insurance standards, more consistent approval systems, and a liability framework that fits the product are issues that individual participants cannot solve for themselves but that can be substantially improved through coordinated institutional action. We gathered our information from numerous discussions with market participants and from news articles, and we read through underwriting guides. We recommend the following:

• Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) should move to a unified or, at the minimum, cross-recognized product approval system. Currently, a project approved under one system cannot be delivered into another without a full re-underwriting. Risk-based pricing should be used to cover incremental project-level risks, rather than hard eligibility cutoffs.
• In the wake of the 2021 condo collapse in Surfside, Florida, the government-sponsored enterprises (GSEs) require significant representations that there are no critical deferred maintenance issues and that no special assessments are imminent. The GSEs and the FHA should consider explicit mechanisms—such as a second mortgage or cash-out refinancing—that allow existing owners to finance special assessments through the agency channels. Providing financing at the homeowner’s association level could be an alternative. At the minimum, the GSEs and the FHA should price appropriately where deferred maintenance is an issue, rather than making a yes-no decision.
• The GSEs should drive the standardization of condo data throughout their existing market leverage, establishing a common digital schema, a persistent building identifier, and limited public aggregation of nonsensitive project indicators. Home Mortgage Disclosure Act data should include a condo flag.
• States should adopt construction defect liability reforms—which include notice-to-cure requirements, higher homeowner’s association litigation standards, and warranty-backed insurance mechanisms for smaller projects—to reopen the new construction channel.
• There should be an analysis of whether GSE insurance adequacy standards need to be restructured for a world of climate-disaster-constrained property insurance markets.