Condominiums (Condos) and Townhomes have historically been entry level options for first time buyers with smaller household size. We see a lot of building going on (a ton here in La Mesa) but almost 100% of construction is either apartments or more pricey single family homes. Why?
There are basically two constraints here in California: 1) Lending guidelines and 2) California’s construction defect laws.
Lending guidelines for FHA and VA mortgages are in need of an overhaul. They are much more restrictive when it comes to condos/townhomes, requiring approval and recertification (in the case of FHA). FHA also has restrictions based on how many units are owner occupied, etc. This prohibits many buyers from even purchasing new condo construction, and puts the builder in a worse position, possibly having to hold the units longer than sustainable.
Construction defect laws in California can last up to 10 years and this is one of the harshest in the country. I have never met an HOA that didn’t sue the builder in year 9, often getting very large settlements. This is a big insurance issue for builders, which makes it way more expensive to build condos.
FHA and VA are not only limiting of financing condos, they are also making it more difficult for entry level buyers of single family homes. Homes must have appraisals specifically geared toward FHA/VA guidelines, and the appraiser can call out “repairs” that may not have any real correlation to the livability of the home. Many homes in the lower price ranges are older and in need of upgrades that buyers would be perfectly happy with making over time while living in the home. Depending on the appraiser and what may be called out in the appraisal, this is often not possible.
Real reform in these area would make huge progress toward solving our housing crisis in California.