What Drives Condo Prices: The Rental or Single Family Housing Market? by James D. Hughes B.S., Civil Engineering, 2007 University of New Hampshire Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September, 2013 ©2013 James D. Hughes All rights reserved The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author_________________________________________________________ Center for Real Estate James D. Hughes July 30, 2013 Certified by_______________________________________________________________ William C. Wheaton Professor of Economics Thesis Supervisor Accepted by______________________________________________________________ David Geltner Chair, MSRED Committee, Interdepartmental Degree Program in Real Estate Development What Drives Condo Prices: The Rental or Single Family Housing Market? by James D. Hughes Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate on July 30, 2013 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development ABSTRACT This paper seeks to answer a question that real estate developers have wrestled with for years: apartment or condo? Given that the two types of residential units typically occupy similar buildings and structures, the goal of this research is to determine if condo prices follow rents. If a correlation is found it could have significant impact on the development of residential housing. To answer these questions historical housing prices from 1996 to 2012 for 44 of the largest metropolitan statistical areas in the U.S. will be studied. Linear regression analysis will be utilized at the metro level to understand how condo prices are influenced by apartment rents, single family home prices, the housing price index (HPI) and the yield on the 10-year U.S. treasury. The results of the analysis tell us that condo prices have followed and acted very much like single family home prices during the last 16 years. The easy credit and cheap lending that was available during the housing boom separated the single family and condo markets from the rental market by turning renters into owners. During this time rental prices remained relatively flat whereas condo and single family prices moved together and were correspondingly hit harder as a result of the financial crisis. The main implication of these findings is that it appears the type of tenure associated with a housing product has a measureable effect on the price. The physical similarity between condominium units and apartment units in large metropolitan markets does not necessarily signal a relationship in price and thus, apartment rents typically do not represent the present discounted value of condo prices. Thesis Supervisor: William C. Wheaton Title: Professor of Economics Table of Contents Chapter 1: Introduction .......................................................................................................7 1.1 Research Motivation ................................................................................................7 1.2 Background ..............................................................................................................7 1.3 Research Methodology ............................................................................................8 1.4 Thesis Structure .......................................................................................................9 Chapter 2: Literature Review ............................................................................................10 2.1 Introduction ............................................................................................................10 2.2 Housing Market Dynamics and Trends .................................................................10 2.3 Single Family Homes .............................................................................................11 2.4 Condos ...................................................................................................................12 2.5 Multifamily ............................................................................................................14 2.6 Competition between Condo, Single Family and Multifamily ..............................15 2.7 Price-Rent Ratios as a Forecaster of Price Movements .........................................17 2.8 Tax and Capital Market Impacts ............................................................................18 2.9 Chapter Summary ..................................................................................................19 Chapter 3: Methodology and Data ....................................................................................20 3.1 Definition ...............................................................................................................20 3.2 Data ........................................................................................................................20 3.3 Regression Analyses ..............................................................................................21 3.4 Chapter Summary ..................................................................................................25 Chapter 4: Data Analysis & Interpretation .......................................................................26 4.1 Definition ...............................................................................................................26 4.2 Regression Results .................................................................................................26 4.2.1 Model 1 ..........................................................................................................26 4.2.2 Model 2 ..........................................................................................................30 4.2.3 Model 3 ..........................................................................................................33 4.2.4 Model 4 ..........................................................................................................37 4.3 Chapter Summary ..................................................................................................40 Chapter 5: Conclusion .......................................................................................................42 Bibliography .....................................................................................................................44 Appendix A .......................................................................................................................46 Appendix B .......................................................................................................................80 Appendix C .......................................................................................................................96 Appendix D .....................................................................................................................113 Figures Figure 4-1: Model 1 – HPI Coefficient ( β1) Distribution .................................................26 Figure 4-2: Model 1 – R2 Results by Market ....................................................................28 Figure 4-3: Model 1 – HPI Coefficient ( β1) by Market ....................................................29 Figure 4-4: Model 2 – Single Family Coefficient Distribution ........................................31 Figure 4-5: Model 2 – Single Family Coefficient by Market ...........................................31 Figure 4-6: Model 2 – R2 by Market .................................................................................31 Figure 4-7: Model 3 – Rent and Treasury Coefficients by Market ...................................34 Figure 4-8: Model 3 – Rent Coefficient Distribution .......................................................36 Figure 4-9: Model 4 – Rent Growth and Treasury Coefficients by Market .....................38 Tables Table 3-1: Variable Legend ..............................................................................................22 Table 3-2: Variable Mean by Market ................................................................................23 Table 4-1: Model 1 Results ...............................................................................................27 Table 4-2: Model 1 Statistics ............................................................................................27 Table 4-3: Model 2 Results ...............................................................................................32 Table 4-4: Model 2 Statistics ............................................................................................32 Table 4-5: Model 3 Results ...............................................................................................34 Table 4-6: Model 3 Statistics ............................................................................................34 Table 4-7: Model 1 Results ...............................................................................................38 Table 4-8: Model 1 Statistics ............................................................................................38 Chapter 1: Introduction