Reality check: HOA managers face decline of their industry, like it or not

By Deborah A Goonan, Independent American Communities

 

How many times have we heard representatives from HOA industry trade groups utter the words, “Homeowner Associations are not going away?”

But that, dear readers, is nothing more than wishful thinking. Let’s start with the facts.

The construction industry is building fewer new HOA homes and condos

As explained in a previous post (Are homeowners, condo associations in a period of market decline?), the rate of new construction for single family homes with HOAs is leveling off or decreasing in recent years, in spite of the overall recovery in the real estate market.

Analyzing statistics compiled by Community Associations Institute (CAI), during and following the most recent deep recession, the rate of growth for new HOA communities and housing units is down by 25% and 61% respectively, showing signs of market decline. Growth in residency has remained relatively unchanged, while size of HOA households has increased by about 5%.

Furthermore, U.S. Census Survey of Construction (SOC) data indicate that the percentage of new single family (SF) homes in homeowners associations (HOAs) is leveling off. Specifically, the percentage of new construction of SF homes in the U.S. for sale remained steady at 73% for 2015 (no change from 2014) with Relative Standard Error (RSE) of 3%.

As for new condominium construction, SOC statistics are even more dramatic. Of multifamily units constructed in 2015, 94% were built for rent, and 84% contain at least 20 units per building. Less than 7% were built for sale as condominiums, cooperatives, or townhouse style condominiums.

To shed more light on the condo construction trend, here are some statistical highlights, noting number of new construction units:

Year: 1999 – 55,000

Year: 2006 – 127,000 PEAK

Years 2011 through 2015 range – 11,000 -15,000

 

Existing communities seek escape from HOA obsolescence

As for existing association-governed communities, many are approaching functional obsolescence.

Looking at CAI statistics once again, 65% of association governed communities were established prior to the year 2000, 38% were created prior to 1990, and 11% were built prior to 1980. As each association approaches its 20th, 30th, or 40th anniversary, its members will face the daunting challenge of paying for repair or replacement of common amenities or basic infrastructure.

Although statistics are not readily available, it has been widely reported that many Associations lack financial resources to make necessary repairs and improvements, especially condominium associations.

As a direct result, older, run-down condo associations in financial distress are increasingly resorting to voluntary termination of condominium. Other low owner-occupancy condo associations have faced hostile takeover of condo corporations by investors and developers, who then deconvert the association to rental apartments. (See Hot Topics: CONDO TERMINATION / CONVERSION / DECONVERSION / EMINENT DOMAIN)

And we are starting to see more and more reports of mature HOAs that are exploring a range of options for doing away with HOA governance in addition to dissolution, for example, annexation or incorporation as municipalities. (See: INCORPORATION, UNINCORPORATED MUNICIPALITIES, & ANNEXATION)

Older HOAs are also burdened with expensive infrastructure they can no longer afford to manage and maintain – private roads, dams for private lakes, storm water management culverts and retention ponds, private water and sewer treatment plants. Many are approaching their municipal and county governments for financial assistance, or insisting that the local government fix the problems and take over future maintenance. Some homeowners are considering or creating SPECIAL TAX DISTRICTS to take over HOA maintenance responsibilities. Others are working with their local government to bring roads and storm water infrastructure up to acceptable standards, so that they can be dedicated for future public maintenance.

As HOAs offload maintenance duties to special purpose and local governments, it becomes easier to wind down the affairs of the Association, and to covert to a truly voluntary organization.  In some cases, HOAs are simply allowing their covenants to expire, as explained in one recent report from the Orlando Sentinel.

These structural changes in local governance are not yet widespread. But after the first batch of HOAs blazes the trail, creating an escape route from mandatory HOA membership and all of its financial burdens, I expect many other HOAs to follow suit and fall over like dominos.

And while some local government officials fear that assisting homeowners and residents of private communities will lead their constituents in other HOAs to request the same help, others are acknowledging that owners of association-governed homes are taxpayers, too.

In fact, the local government that steps in to help struggling residents of HOAs can cast itself as the Hero who has come to Save the Day.

And, let’s face it. Some elected officials just might be getting sick of hearing repeated complaints about corrupt and dysfunctional HOAs.

Go figure.

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