Why Did California Stop Building Condos? The Disappearing Starter Home

For generations, there was a fairly straightforward path into homeownership.

You didn't necessarily buy your dream house first.

You started smaller.

Maybe it was a two-bedroom condo.

Maybe a townhome.

Maybe a modest starter house.

You built equity, increased your income, saved more money and eventually moved into something larger.

That first property was a rung on the housing ladder.

But in California, one of those lower rungs has become increasingly difficult to find.

We aren't building nearly as many condominiums as we used to.

A recent Los Angeles Times examination of California's condo market highlighted a remarkable decline in new condo construction since the early 2000s. Housing advocates argue that this decline has reduced one of the state's traditional entry points into homeownership.

That's a much bigger problem than whether somebody personally likes living in a condo.

Because when California talks about housing affordability, we usually focus on two things:

Home prices.

Mortgage rates.

Those obviously matter.

But there's another question we don't ask enough:

What kind of homes are we actually building?

If almost everything being built for ownership is expensive, it shouldn't surprise us when homeownership becomes expensive.

The Starter Home Was Never Supposed to Be Your Dream Home

I think we've distorted the idea of the first home.

Your first home doesn't need to have four bedrooms, a three-car garage, a giant kitchen and the backyard you'll eventually retire in.

Historically, plenty of people started with something much simpler.

That's where condos matter.

A condo can potentially provide a lower purchase price than a comparable detached single-family home because you're buying the individual unit and sharing certain common elements and expenses.

That can reduce the amount of land associated with each residence.

It can allow substantially more housing on the same amount of land.

And in expensive California communities, that matters enormously.

Think about San Francisco.

Oakland.

San Jose.

Los Angeles.

Orange County.

San Diego.

Marin.

The land itself is incredibly valuable.

Building only detached single-family houses on expensive California land makes creating lower-priced ownership opportunities extremely difficult.

Condos are one way to divide that expensive land across more homeowners.

Yet we're building far fewer of them.

So What Happened to California Condos?

There isn't one single explanation.

Construction costs have increased.

Land is expensive.

Financing developments is complicated.

Regulatory requirements matter.

Insurance matters.

Market conditions matter.

But California developers and housing advocates have also pointed to another significant issue:

construction-defect litigation.

California's rules allow condominium homeowner associations and owners to pursue builders over alleged construction defects.

Protecting homeowners from legitimate defects is obviously important.

Nobody wants to buy a brand-new condo and discover major water intrusion, structural problems or other expensive defects with no recourse.

But developers argue that California's litigation environment has made condominium projects substantially riskier to build.

According to the recent LA Times reporting, many developers have responded by favoring rental apartments rather than for-sale condominiums.

Think about the strange outcome that creates.

California desperately needs housing.

A developer builds a multifamily building.

But instead of selling 100 units to 100 potential homeowners, the developer may decide it makes more sense to operate the building as apartments.

We created housing.

But we didn't create homeownership opportunities.

That's an important distinction.

Apartments and Condos Can Look Almost Identical

Here's something consumers don't always realize.

A condominium complex and an apartment complex can physically look almost identical.

Same number of floors.

Same basic construction.

Same parking garage.

Same elevators.

Same pool.

Same hallways.

But economically, they're completely different.

With apartments, one owner generally owns the entire property and residents rent their individual units.

With a condominium, individual buyers can own their units.

That means a 100-unit condo development can potentially create 100 individual homeowners.

A 100-unit apartment development creates rental housing, which California absolutely needs too.

But it doesn't create the same ownership opportunity.

We need both.

Why Does This Matter for First-Time Buyers?

Because the math is brutal.

California home prices are high.

Mortgage rates are high.

Insurance costs have increased.

HOA dues can be significant.

And incomes haven't kept pace with housing costs in many parts of the state.

Now take away one of the historically lower-cost ownership options.

What happens?

The first-time buyer is increasingly asked to jump directly from renting into a much more expensive single-family home.

That's an enormous leap.

It's especially difficult for younger buyers who haven't had decades to accumulate equity or investments.

This is why I think the conversation around California affordability needs to go beyond:

“Rates need to come down.”

Lower mortgage rates would certainly help.

But lower rates don't manufacture houses.

California needs more housing at different price points.

That includes condos.

The Missing-Middle Problem

There's a broader concept in housing called the “missing middle.”

The idea is that American communities often have plenty of detached single-family houses and large apartment complexes but relatively little in between.

Duplexes.

Triplexes.

Fourplexes.

Townhomes.

Courtyard housing.

Smaller condominium buildings.

Those types of properties can create more housing density without requiring every neighborhood to become Manhattan.

And they can potentially create ownership opportunities below the cost of detached single-family houses.

California's ADU boom is another version of this idea.

We're asking:

How can we get more housing out of land that already exists?

Condos should be part of that same conversation.

But Condos Come With Another Problem

Here's where my world as a mortgage lender intersects with this.

Finding an affordable condo doesn't automatically mean the buyer can finance it.

When you buy a detached single-family home, the lender is primarily evaluating:

You.

Your income.

Your credit.

Your assets.

Your debts.

And the property.

With a condo, there's another layer.

We're also evaluating the condominium project.

That can include the HOA's finances, insurance, litigation, owner occupancy, assessments, deferred maintenance and other project characteristics depending on the loan program.

In other words:

You can be a perfectly qualified borrower and still have a condo that creates financing problems.

That's why I've spent so much time working with non-warrantable condominium financing.

Sometimes the issue isn't the buyer.

It's the building.

What Is a Non-Warrantable Condo?

The term sounds scarier than it needs to.

A “warrantable” condominium generally means the project meets the applicable requirements for conventional financing through Fannie Mae or Freddie Mac.

A “non-warrantable” condominium doesn't meet one or more applicable conventional project requirements.

That does not automatically mean it's a bad property.

It means traditional agency financing may not work.

For example, a project could have characteristics involving commercial space, investor concentration, litigation, HOA matters or other issues that affect eligibility.

Depending on the situation, alternative financing may still exist.

This distinction is important because consumers sometimes hear:

“We can't finance this condo.”

And interpret that as:

“Nobody can finance this condo.”

Those aren't necessarily the same statement.

HOA Health Matters Too

The HOA isn't just somebody who sends you a bill every month and tells you what color you can paint your front door.

The HOA is effectively responsible for significant portions of the property's shared infrastructure and financial obligations.

Roofs.

Exterior structures.

Elevators.

Pools.

Parking garages.

Landscaping.

Insurance.

Reserves.

Major repairs.

If those finances aren't healthy, the homeowners ultimately have to deal with the consequences.

That can mean higher dues.

Special assessments.

Deferred maintenance.

Or potentially financing difficulties when someone tries to buy or sell a unit.

This is why I've said before:

When you buy a condo, you're buying the HOA too.

The unit might be beautiful.

The kitchen might be remodeled.

The view might be incredible.

But you still need to understand the financial health of the project.

Does That Mean Condos Are Bad First Homes?

Absolutely not.

For the right buyer, I think condos can be an excellent way to enter homeownership.

You may get:

A lower purchase price than nearby detached homes.

Less exterior maintenance responsibility.

Amenities.

A more desirable location.

Potential equity growth.

And, most importantly, a realistic entry point into a market where detached houses may simply be out of reach.

But buyers need to evaluate the total housing cost, not just the price.

That means looking at:

Mortgage payment.

Property taxes.

Insurance.

HOA dues.

Potential assessments.

Maintenance responsibilities.

And the HOA's overall financial condition.

A $650,000 condo isn't automatically cheaper to own than a $750,000 house if the condo carries extremely high monthly dues and other expenses.

Run the complete numbers.

What About HOA Dues?

This is one of the most common objections I hear:

“Why would I pay $600 a month to an HOA?”

Fair question.

But compare apples to apples.

A homeowner without an HOA still pays to maintain the property.

Roof.

Exterior paint.

Landscaping.

Pool.

Driveway.

Insurance.

Fencing.

Plumbing.

Structural repairs.

The difference is that those costs aren't necessarily presented as a neat monthly bill.

With a condominium, some expenses are pooled among owners.

That can be efficient.

It can also become expensive if the HOA is poorly managed or the building requires major work.

Again, the answer isn't:

HOAs are good.

Or:

HOAs are bad.

The answer is:

Read the numbers.

California Tried to Address the Condo Problem

State lawmakers and housing advocates have been discussing reforms intended to reduce litigation risk while maintaining protections for homeowners.

According to the LA Times, legislation aimed at reforming the construction-defect framework failed during the current legislative session.

So the underlying problem isn't necessarily going away immediately.

And that's unfortunate because California needs more pathways into ownership, not fewer.

We spend enormous energy discussing how to subsidize homebuyers after homes become expensive.

There's another solution worth discussing:

Build more homes people can actually buy.

This Is Also Why ADUs Aren't Enough

Yesterday I talked about California potentially expanding the ability to build detached ADUs.

I'm a huge believer in ADUs.

They can create housing for parents.

Adult children.

Renters.

Caregivers.

Multigenerational families.

But an ADU typically doesn't solve the same problem as a condominium.

Most ADUs remain part of an existing property.

They create housing.

Condos can create independently owned housing.

California needs both.

We need rental housing.

We need ADUs.

We need apartments.

We need townhomes.

We need condos.

We need detached houses.

A healthy housing market needs different options for different stages of people's lives.

We Keep Telling Buyers to “Start Small”

This is the part that bothers me.

People love giving young adults financial advice.

“Don't expect your first house to be your dream house.”

“Start small.”

“Buy a starter home.”

“Get your foot in the door.”

Fine.

I agree.

But then we have to actually build starter homes.

You can't simultaneously tell a generation to lower its expectations while eliminating the type of housing that would allow them to do exactly that.

If the only ownership options being produced are increasingly expensive homes, we shouldn't be shocked when the average first-time buyer struggles.

The California Housing Ladder Needs a Bottom Rung

Homeownership isn't appropriate for everybody at every moment.

I've said before that renting isn't throwing your money away.

Sometimes renting is absolutely the smarter financial decision.

But people who want to become homeowners should have realistic options.

For some buyers, that first property will be a detached house.

For others, it might be a duplex.

For others, a townhome.

And for a huge number of Californians, the logical first step could be a condo.

But that requires having condos available to buy.

The California housing affordability conversation therefore can't only be about making mortgages cheaper.

It has to be about increasing the variety and quantity of housing available for ownership.

Because there's a limit to what financing can solve.

I can help someone structure a mortgage.

I can't manufacture the house.

The Bottom Line

California has an affordability problem.

But underneath it is also a housing-type problem.

We haven't simply failed to build enough housing.

We've struggled to build enough housing at the lower end of the ownership ladder.

Condos historically helped fill that role.

And their decline matters.

If California wants younger families and first-time buyers to have a realistic path into homeownership, we need to think about more than rates, down payments and mortgage programs.

We need to ask a much simpler question:

Where did all the starter homes go?

Part of the answer may be sitting in plain sight.

We stopped building them.

FAQ

Are condos usually cheaper than houses in California?

They can be, particularly compared with detached homes in the same area, but buyers should compare the total monthly cost including HOA dues, taxes and insurance.

Can a first-time buyer finance a condo?

Yes. Conventional, FHA, VA and other financing may be available depending on the borrower, property and condominium project's eligibility.

What is a non-warrantable condo?

Generally, it's a condo in a project that doesn't satisfy one or more applicable conventional agency project requirements. Alternative financing may sometimes be available depending on the issue.

Can I qualify for a mortgage but still be denied because of the condo?

Yes. Condo financing involves both borrower qualification and project eligibility.

Should I avoid condos with high HOA dues?

Not automatically. Review what the dues cover, the HOA's reserves, insurance, planned repairs, assessments and the property's total ownership cost.

Why Did California Stop Building Condos? The Disappearing Starter Home

California is building far fewer condos than it once did. Here's why the decline matters for first-time buyers, housing affordability and condo financing.