Houses, Apartments and Condos: The Governance of Multifamily Housing

In the U.S., homeownership is strongly correlated with the type of building that households occupy. Data from the national American Housing Survey (AHS) indicate that 83 percent of occupied single-family, detached housing in the U.S. is owner-occupied while only 12 percent of units in multifamily buildings are owner-occupied. This paper fills a gap in the homeownership literature by considering the relationship between building size and governance. A portfolio model of investment choice in risky housing assets trades-off a free-rider problem in joint ownership against economies of scale that are obtained in larger buildings with respect to the cost of third-party management. Our results show that the smallest multifamily buildings are particularly disadvantaged for purposes of condo ownership, because free-riding reduces contributions of investor effort while third party management is still relatively expensive. The empirical portion of the paper uses AHS data to estimate the bids of condominium owners with respect to marginal quality, as measured by interior floor space. We confirm that low wealth households are outbid for space in larger condominium buildings by higher wealth households, as predicted by the model.