The circular firing squad
Via the New York Sunday Times (subscription probably required) comes this interesting tale that illustrates how subtle differences in housing tenure can remarkably influence housing choices and housing market prices:
Though fortunate enough to be able to afford today’s sharply higher sticker prices, these apartment-hunters are denied entrance to co-ops despite comfortable incomes of six figures or more, excellent credit, and credentials as citizens in good standing. They are unable to buy simply because they don’t have enough left over (typically in cash, stocks and bonds) after the down payment to meet the requirements of the co-ops they want to join.
For the preceding to make sense, you need to distinguish between two forms of multi-home ownership, superficially similar but profoundly different in effect:
1. In a condominium (called, in the UK and elsewhere, sectional title), under the condo rules, the condo association owns the common areas but a buyer legally owns his or her cubic space, and in general can independently sell it.
2. In a co-operative, the association itself owns all the homes, and rents them to shareholders. A buyer legally owns shares in the corporation, each set of which are associated with a particular unit, which the buyer then rents.
A condo owner may sell her unit at any time; a co-op owner, may sell the shares only in conformity with the shareholders’ agreement — and these typically give the board of directors veto power which they may exercise in their absolute and arbitrary discretion.
Some boards, therefore, impose financial burdens above merely paying the purchase price:
What’s deemed enough varies among the caste system of the city’s co-op buildings, but at the lowest end, it includes a year or preferably two of maintenance and mortgage. In the pricier buildings with the kind of family-sized apartments coveted by up-and-coming professionals, “enough” equals one, two or three times the purchase price of the apartment – and keeping up with multiples in a spiraling market can be a daunting feat.
“People tell us all the time: ‘I don’t understand. I make $1 million a year and you’re telling me I cannot buy an apartment?’ ” said Jacky Teplitzky, an executive vice president at Prudential Douglas Elliman.
“That’s why you won’t let me buy into your co-op?”
As you might expect, those rejected for co-ops go buy something else, the easier tenure:
As more buyers discover they are co-op unworthy, they are turning to condos – even though it almost always means spending more for less space.
The resulting deflection of demand distorting the market, raising the price for condos:
With their broker, they concluded that their chances were slim with any co-op board. “At best, they were topping out at $650,000 for a co-op,” said Mr. McCabe, their broker.
Last summer, they paid $785,000 for a similar-sized two-bedroom condo – farther uptown and minus outdoor space – in Ruppert Towers at East 91st
‘Brutalism’ style refers to the building’s architecture,not its co-op board.
Meanwhile, it isn’t just that condo prices are inflated, co-op prices are depressed:
It’s not just buyers who find their options drastically narrowed by liquidity requirements. Sellers are feeling the pain, too.
“The boards are out there putting these rules in and they’re not really benefiting the people who live in the building,” said Mr. Cole,
The combined effect of these distortions leads to an insider-outsider self-reinforcing cycle:
“There is a phenomenon that happens when people are outside the fence,” Ms. Teplitzky said. “They hate the situation. But when they are inside they become the social club. It’s almost like an epidemic.”
It won’t be corrected until the market tanks:
On the other hand, she said, “if the market goes down and people need to sell, and because of the restrictiveness of the board, they are basically tied in with their buildings, then those sellers will put pressure on the board.”
The artificial blockage leads to aspirant-homeowner queuing:
What happens to the insufficiently liquid? Some find alternatives, such as co-ops with fewer restrictions, Mr. Rasmussen said, but “I would say the vast majority just ends up renting and waiting.”
What makes this tragic more than merely nutty is that
Among the many morals of this story:
- Tenure forms drive not only stakeholder behavior but market prices for equivalent housing consumption.
- Dysfunctional blockages nevertheless create marginal winners, and if those winners control the flow, they perpetuate (and even increase) the blockage, to the ecosystem’s severe detriment.
Lastly, don’t buy a co-op in
