The Townhouse Trap

Ryan Heshmati

November 25, 2022

A lower price per square foot, enjoyable amenities, and community frontage maintenance are all aspects of an increasingly popular form of residence: the townhome. Construction for townhomes has risen with the housing market in recent years. Builder Magazine’s Aly Yale notes their share of new structures is approaching its former height from 2008. The townhome’s affordability is a significant draw; look to Zillow listings in Silicon Valley. In Los Gatos, a four-bedroom and bath townhome, built in 2021, with around 3,200 square feet of living space, is (as of October 2022) currently listed at about three and a half million dollars. For reference, a single-family home in the area, with around the duplicate square footage, is (as of October 2022) listed for almost a million more. The seven-figure savings sound fantastic initially, but there is much more to consider.

Townhomes are less expensive for a reason: land. This detail is imperative, as land is where the bulk of property appreciation generally comes from. With this in mind, townhomes are by no means cheap. With the above example, a buyer will pay about three and a half million dollars for a structure but little else. The lack of land is problematic because buildings age and are not sources of value long term. In thirty years, the opportunities to build on the traditional home will not be comparable to the limited update options the townhome owner will have.

To start, however, there is a solid case for townhomes. Young singles and couples may not need or want the responsibilities of large lots and no homeowner’s associations. In addition, a more affordable price tag puts townhomes within reach of more young Americans. As a transitory choice, they present a value proposition, just not as an investment. However, one could argue that the savings between a townhouse and a traditional detached single-family home, if invested in the stock market, especially if with index funds, with solid returns, might make up for the lagging returns of the property.

With interest rates as high as they are, and no signs of a return to the previous low-interest environment, buyers may be looking for every opportunity to save on costs. If not being looked at as a long-term investment, a townhome is worth consideration. Otherwise, sacrificing the square footage and age of the property may yield better long-term returns. Whether or not one is currently in the market for real estate, the potential townhouse trap or opportunity depending on perspective, is vital to ponder.