Studies conclude that HOAs, CC&Rs have little to no impact on property values of mature communities

 

By Deborah Goonan, Independent American Communities

 

I recently became aware of a white paper produced for trade group Community Associations Institute in 2015. Today’s post shares highlights and analysis of the study entitled, The Impact of Community Associations on Residential Property Values: A Review of the Literature. (Prepared by: Erin A. Hopkins, Assistant Professor, Virginia Tech, Blacksburg, VA)

Thanks to homeowner and IAC reader, Margaret Dutton, for sharing a link to the study.

 

Purpose of the White Paper on association-governed communities and property values

Looking at the Executive Summary, it’s apparent that this white paper is a literature review of previous research, requested by, and prepared especially for, trade group Community Associations Institute (CAI) and other industry stakeholders:

This paper should be helpful to the members of the Community Associations Institute as they are involved in crafting, implementing and managing community associations. To preserve their industry, they are likely interested in determining how this type of governance and organizational structure can be optimized in order to maximize residential property values.

As community associations continue to permeate the U.S. housing stock, further research on property valuation impacts is imperative. Specific recommendations include looking at specific covenants and their linkages to residential property values as well as the organization of these types of private governments to ensure efficient operations. This new knowledge will assist community association stakeholders in adopting the most appropriate CC&Rs and organizational structure.

One shortcoming of Hopkins’ white paper is that it conflates “community associations” with restrictive covenants, failing to acknowledge that covenants, rules and restrictions can and do exist independently of a private governance body (homeowners, condominium, or cooperative association). While deed restrictions have been around for more than a century, community associations as “enforcers” of standards only became common after the mid-1970s.

Prior to the institutionalization of HOAs, enforcement of deed restrictions was limited to affected land owners and neighbors, sometimes through private litigation in small claims or civil court. There was no collective funding of a governance body to enforce restrictive covenants and rules on behalf all members of a private association of owners or shareholders.

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Nevertheless, several interesting points are summarized in Hopkins’ review of limited research on the relationship between association-governed communities, underlying restrictions, and property values.

To start, the author of the white paper explains that association-governed communities have the potential to impact property values through implementation of building and use restrictions. She also describes them as “private governments” with the power to enact rules and enforce restrictive covenants.  Hopkins cites ten studies published between 1989 and 2015, which she says, collectively, have concluded that the restrictions themselves increase home prices, by 2% – 17%.

Overall governance within a community association is designed to place constraints on homeowners in order to decrease building and use risks. As community associations act somewhat as a private government, they can pass association rules which can place constraints within the community. These restrictive covenants have been shown to benefit homeowners limiting their exposure to negative externalities generated by nearby properties. This benefit tends to get capitalized into housing prices, with an observed price impact ranging from 2% to 17% in different market settings (Agan and Tabarrok, 2005; Hughes and Turnbull, 1996; Scheller, 2015a; Speyrer, 1989; Cheung, Cunningham and Meltzer, 2014; Meltzer and Cheung, 2014; LaCour-Little and Malpezzi, 2001; Rogers, 2006; Rogers, 2010; Groves and Rogers, 2011).

According to Hopkins, the relative size of the effect varies with the type of restriction. For example, previous studies have shown that strict design standards for homes and landscapes tend to decrease home values, while unique homes tend to command higher prices. In other words, most buyers prefer to purchase a home with individuality and character, as opposed to the standard builder grade “cookie cutter” home.

With regard to pet ownership, previous studies have shown that allowing residents to have cats increases property values, while allowing dog ownership decreases property values. Presumably, these studies were limited to multifamily community associations, where properties tend to lack adequate outdoor space for dogs to run free.

But take note of one of the most notable conclusions of the white paper: the value of restrictive covenants (CC&Rs), and association governing bodies that enforce these restrictions, has been shown to decrease over time.

Although private contracts with restrictions lessen the housing consumption risk faced by all users within the subdivision, the value of deed restrictions decreases over time and over- restrictive covenants can negatively impact property values (Hughes and Turnbull, 1996; Dehring and Lind, 2007). For example, 10 year old neighborhoods based on restrictions were found to have a 6% housing value increase, but a 20 year old neighborhood was found to have only have a 2% housing value increase (Hughes and Turnbull, 1996). In years 25-27, deed restrictions actually had a negative impact on deed-restricted subdivisions (Rogers, 2010). Additionally, it has been shown that the premium of an HOA on housing values decreases over time at approximately .4%/year (Meltzer and Cheung, 2014). Furthermore, younger HOAs seem better shielded from negative price effects due to higher delinquency exposure rates (Cheung, Cunningham and Meltzer, 2014). In regards to excessive private land use controls, zoning must be taken into account to ensure that public zoning regulations coupled with private covenant regulations are not over burdensome to future homeowners. This burden can erase any positive property value impacts of community associations; or worse, generate a negative property value effect (Dehring and Lind, 2007).

This conclusion is particularly noteworthy, because, as previously explained here on IAC, attorneys who actively advocate on behalf of trade group CAI have been quietly enacting legislation to ensure that CC&Rs can never expire. Early CC&Rs for planned communities were designed to expire after 30 years, but new legislative advocacy efforts have focused on making is easy for the HOA board to renew CC&Rs prior to expiration, without requiring a vote of all members in the association.

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In addition, most community associations created in the past decade and a half are based upon Declarations with Covenants and Restrictions that perpetually renew, without any action from the HOA, unless a supermajority of property owners take the initiative to amend the covenants or dissolve the association by membership vote.

Newer covenant and restriction language and state laws have, therefore, made the process of voluntary dissolution of CC&Rs exceedingly difficult and costly. Dissolution of HOAs has become nearly impossible, because of community entanglements with ownership and maintenance of private infrastructure and amenities. The larger and more elaborate the community, the more difficult it is to totally eliminate the homeowners’ association.

On the other hand, condominium associations are more easily flip-flopped to apartment communities when the association becomes insolvent or too costly to maintain. Indeed, this trend is becoming more common as struggling condo associations continue to fail.

Interestingly, the author’s suggestion is to “modify CC&Rs within aging associations,” presumably in reference to planned communities with homeowners’ associations. The suggestion seems to make the case for CAI attorneys to push association boards to amend their restrictive covenants, rather than simply allowing them to expire.

Here’s another perspective.

This white paper strongly suggests that it is in the public interest for all restrictive covenants to automatically expire roughly 20-25 years from establishment of a community association, because perpetually renewing such restrictions is likely to harm property values, and put a drag on fiscal health of local governments, hampering economic development.

 

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A handful of studies explore the value of services provided by HOAs

Hopkins cites a single 2014 study by Meltzer and Cheung, which concluded that the services provided by HOAs increased property values by 4.9%, in comparison to non-HOA homes.

A handful of additional studies have examined the relative impact of gated entries, private roads, and community size on property values.

Gating has been seen to increase property values 7%-24% within different regions in the United States (LaCour-Little and Malpezzi, 2001; LaCour-Little and Malpezzi, 2009). Even when there are no additional amenities within the gated community as compared to their ungated neighbors, a 6.07% price premium is observed (Bible and Hsieh, 2001). Private streets seem to add virtually no further value beyond the HOA (LaCour-Little and Malpezzi, 2001). Although an increased HOA size does not negate the premium of being located within an HOA, it has been observed that relatively larger HOAs command lower sale prices which may be due to their less exclusive or intimate nature (Meltzer and Cheung, 2014).

However, a closer look at the studies reviewed indicates that 55% found that community associations have a positive effect on property values, 10% found a negative effect, and 35% found mixed results. (See Exhibit 4 on page 13)

Stated another way, a full 45% of studies did not conclude that association-governance improve property values.

Another observation: studies on gated communities were conducted more than a decade ago, previous to the most recent recession that severely impacted the real estate sector, and HOAs in particular. In the past decade, housing consumers have recognized that the added value of perceived security does not necessarily offset the high cost of maintaining gated entries.

Indeed, more recent research, conducted in 2013 and 2016, by National Association of Home Builders (NAHB) listed “gated communities” and “golf communities” in its top ten list of new home features that home buyers do NOT want. Those market research studies show that home buyers are becoming much less interested in living in exclusive communities and paying for expensive amenities.

RULE blackboard authority Know the rules
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White Paper notes several significant limitations of previous research on the impact of association-governed communities and deed restrictions on property values

Although CAI has been fond of proclaiming that community association protect and enhance property values, and several studies appear to support that claim, Hopkins cautions against relying too heavily on conclusions of limited research.

Although it certainly is a worthy endeavor to attempt to measure the value added by community associations, there are concerns when performing this type of analysis. Firstly, knowledge on private governments is limited. As government services continue to become privatized on a regular basis, learning more can help us to understand the effect they can have on property values. Secondly, there is a lack of data. More time and energy is recommended to improve data availability to further the knowledge on the linkages between community associations and property values. Thirdly, this lack of data leads to a dearth of empirical studies. And much of the extant literature is geographic specific and does not take into account controlling variables such as neighborhood characteristics, number of bedrooms, and number of bathrooms. This can overstate results and make them less accurate. It is recommended that future studies control for more variables.

Aha!

As stated here on IAC numerous times, there’s no conclusive, scientific proof that association-governance, underlying restrictive covenants, or private provision of services have any significant positive impact on property values.

A few studies looking at data from specific metropolitan regions cannot be used to generalize a positive effect of community associations.

Common sense tells us that most association-governed homes are newer than existing non-HOA homes in the U.S. Most homes in community associations have been constructed since 1970. Most existing homes have been constructed prior to 1970.

With more modern construction, features such as additional bedrooms and bathrooms, garage space, more energy efficient construction, and comparatively larger home sizes, homes in association-governed communities may command higher prices based upon the features of the dwellings themselves, and not necessarily in relation to the home’s location or presence of a community association.

At the same time, there has been little to no empirical research on the impact of inefficient management or deferred maintenance of common property in association-governed communities. A plethora of anecdotal evidence exists to suggest that poorly managed and maintained communities significantly reduce property values by removing the incentive for individual homeowners and residents to maintain their private properties, and by motivating housing consumers to “vote with their feet” by moving out of a dysfunctional community to a more desirable home in a better location.

Considering that many important factors were not considered in previous research, and the author’s conclusion that, as a result, the positive effect on property values might be overstated, CAI’s white paper offers weak evidence that community associations protect and enhance property values.

Reference:

 

The Impact of Community Associations on Residential Property Values:
A Review of the Literature

Prepared by: Erin A. Hopkins, Assistant Professor, Virginia Tech, Blacksburg, VA, November 2015.

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