By Deborah Goonan, Independent American Communities
To follow up on yesterday’s post on ULI’s push for more HOA-governed common interest communities, let’s examine ULI’s standard myth that smaller, attached housing is more affordable or attainable than a detached home that is not HOA-governed.
Purchase prices of new homes
There’s no question that townhouses, in general, have lower sale prices than detached single family homes. But the main reason for the lower sale price is the fact that attached housing tends to be smaller.
As U.S. Census figures show, townhouses are 23% smaller, on average, than single family homes.
Townhouse sizes, square feet (2017)
Median — 1,959
Average — 2,099
Single family detached home sizes, square feet (2017)
Median — 2,543
Average — 2,713
In terms of purchase price alone, a townhouse can be more “attainable” than a detached house.
However, although a townhouse can be more “affordable” or “attainable” at the time of purchase, that doesn’t mean it’s the best overall value in terms of price per square foot of living space.
Townhouses cost more per square foot
Statistics show that the sale price per square foot of a townhouse is significantly higher than price per square foot of a single family detached home.
For example, in 2017, 13 percent of new detached single family homes sold for more than $150 per square foot, while 31 percent of attached houses sold at more than $150 per square foot.
Here’s how detached single family homes compared to attached townhouses on Median and Average price per square foot in 2017:
Median price/sq. ft. — $112 (12 percent higher)
Average price/sq. ft. — $128 (16 percent higher)
Single Family Detached
Median price/sq. ft. — $100
Average price/sq. ft. — $110
It’s important to note that government fees and permits are among the primary factors driving the rising costs of new construction.
At a recent Innovative Housing event in D.C., Federal Housing Finance Agency Director Mark Calabria said that government regulation and fees account for nearly one-quarter of the cost of building a new single family home, and nearly one-third of the cost of building new multifamily properties.
That explains, in part, higher sales prices per square foot for townhouses vs. detached homes, as confirmed by U.S. Census statistics.
HOA fees add to cost of home ownership
Most home buyers underestimate the impact of HOA fees on the cost of homeownership.
The more “maintenance-free” the lifestyle, the more a homeowner pays for services in HOA fees.
And, when the maintenance services are provided by a homeowners or condo association, the homeowner has no direct control over the quality or price of services.
Even if the Association neglects maintenance, the homeowner must continue to pay HOA fees, to avoid HOA collections, liens on the home, and possible foreclosure by the HOA.
When a home is not HOA-governed, an owner has the freedom to choose providers as needed and desired.
HOA fees – facts & figures
Census Statistics show that attached townhouses are more likely to be HOA-governed than single family detached homes. In 2017, 86 percent of new attached housing sold was HOA-governed vs. 73 percent of new detached single family housing.
Attached or detached, the majority of homes built in the past 2 or 3 decades are HOA-governed. That means more Americans are paying HOA fees in addition to property taxes, insurance, and regular home maintenance that is not provided by the HOA.
As previously noted, each of ULI’s recommended “attainable” housing solutions assumes new housing will be part of a master planned community, a homeowners’ association, or a condominium association.
In some planned communities, it’s common for a homeowner to be a mandatory member of two nested Associations. So, be warned that some “attainable” homes require homeowners to pay not one, but two HOA fees.
Furthermore, HOA fees are on the rise in communities across the U.S. According to a 2017 Trulia report, the increase in HOA fees has outpaced home prices. HOA fees rose 32.4% between 2005 and 2015. During the same decade, U.S. median home prices increased only 15.1%.
The same Trulia study also indicates that HOA fees are higher for condominium associations than HOAs in planned communities; that high-amenity communities tend to have higher HOA fees; and that larger condos and townhouses have higher fees than smaller.
More notable U.S. Census facts and figures:
In 2017, only 4 percent of of new housing was age-restricted for older adults.
In 1986, 20% of new homes sold were townhouses, but only 11% of new homes sold in 2017 were townhouses. Nearly 1.3 million townhouses were sold at the peak of the market in 2004, but only 613,000 townhouses were sold in 2017. That’s less than the number of sales for 1986 (750,000).
Why such low numbers?
Perhaps planned communities of senior housing and townhouses are costly to build, and builders cannot realize a healthy return on investment, due to low buyer demand.
Proposed alternatives: attainable and affordable housing without the HOA
The Attainable Housing study points out that today’s homes are larger than ever. That’s supported by Census data. The average size of a home in 1978 was 1,750 square feet. By 2017, average home size increased to 2,645.
The bigger the home, the more it costs to buy and to own. Common sense, right?
Obviously, there’s also a need for smaller homes to accommodate the increasing number of one and two person households in the U.S., as recommended by the ULI report.
But, here’s the obviously missing solution in ULI’s strategy: smaller detached homes that do not require common ownership, community-based services, or mandatory HOA fees.
Which leads to the question:
Why doesn’t ULI recommend solutions that avoid HOAs?
Part of the reason for that, in this writer’s opinion, comes down to political influence of real estate developers. Local governments have a bad habit of encouraging and enabling what I call land hoarding of residential real estate developers.
A developer buys parcels of land, subdivides them, and then negotiates a construction and development plan with local government officials. Once a plan is approved, it might take years, if not decades, until the planned community is completely built.
During that time, a developer controls the finances of the community, including the annual budget and HOA fees. That generally reduces the developer’s risks and increases profit margins.
And, if economic conditions change, the developer can easily change plans for the community. And plans almost always change over the course of build-out.
Sometimes a developer will sell undeveloped lots in a planned community a new developer or investment corporation. When that happens, the new land owners will inherit the original developer’s rights, often changing the construction plan in ways that early buyers did not expect.
Limited supply of land
Dozens, hundreds, or thousands of lots can remain vacant for years.
But as long as they are part of a planned community, home buyers don’t have the option to buy a lot for a custom built home, with a builder of their own choice, and without future obligations to an HOA.
The supply of vacant land that is not burdened by a development plan is low, and therefore, the cost of HOA-free land tends to be high.
So planned development benefits large scale developers and investors a lot more than it benefits home buyers.
Covenants and restrictions guarantee market segments and taxable values
Something else to consider. Many home buyer think Covenants, Conditions, & Restrictions (CC&Rs) are necessary to protect property values.
And they are — but not necessarily for homeowners.
The main purpose of CC&Rs is to protect property values for developers and local taxing authorities.
Nearly all CC&Rs in planned communities dictate the minimum size of new homes. And that’s part of the reason that average home sizes in the U.S. have increased over time.
The larger the home, the more profit potential for developers and home builders. Also, the higher the taxable value, generating more property tax revenue for local governments, including municipalities, counties, and school districts.
Homeowners have also been conditioned to believe that each new home built on their street must be at least as big as their own home.
Over time, all of these factors have pushed home sizes in one direction — up.
CC&Rs don’t guarantee high property values
Interestingly, regardless of size, most homes still lost value in the 2008 recession. It’s true that many homeowners have regained lost equity. But no homeowner is immune to up and down price fluctuations in the real estate market.
In a recession, larger, more expensive homes tend to lose more equity than smaller homes. Proving that CC&Rs cannot protect property values from falling due to uncontrollable factors, such as a bad economy.
What are the alternatives to HOAs?
From the housing consumer’s perspective, common ownership and HOA-governed communities almost always increase the cost of home ownership.
It’s time for some thinking outside the HOA box. Here are a few solutions that would work better for home buyers and homeowners.
1) Land for sale. Homebuyers need available land to purchase that is NOT burdened by any type of HOA. Americans need an ample supply of vacant residential building lots that are not tied up with a development plan.
And, no, land leases are not a good value. As many mobile home owners have discovered, owning a home on leased land creates windfall profits for landowners, and way too much risk for homeowners.
2) Smaller homes with flexible floor plans.. Smaller homes are practical options for single adults, couples and young families, and retired Americans.
Ideally, the real estate industry would supply expandable home models such as raised ranches, bungalows, or Cape Cod style homes. These could be purchased with one level unfinished, to be completed in the future as needed, when the homeowner can afford to do so.
For this option to work, local governments would need to change zoning to allow smaller home sizes. States would also have to prohibit deed restrictions that dictate minimum home sizes, effectively preventing construction of smaller homes.
Local governments should also consider reduced permit costs for smaller homes.
3) Built-to-last quality construction. True “value” housing is built with time-tested, durable materials, with future ease of maintenance. Homes need to be energy efficient, but with short return-on-investment windows for equipment and appliances. Most importantly, builders should put less emphasis on “status” finishes that look good when new, but cost more, and don’t last as long as more modestly-priced alternatives.
4) Single owner live/rent and live/work options. Instead of organizing duplexes, triplexes, fourplexes, and apartments over commercial storefronts as condominiums, sell these multifamily homes to one owner as a live/rent or live/work option.
For housing consumers, these options would be best offered as stand alone properties — not part of a mixed use community — subject solely to local government and local landlord-tenant housing regulations.
5) Maintenance cooperatives. As an alternative to paying an owners’ association, this business model would allow completely voluntary participation of housing consumers. It would eliminate ties of maintenance services to deed restrictions through CC&Rs.
This option would gives the homeowner total control over when to hire help and who to hire, combined with potential benefits of discounted pricing from service providers.
6) Rethink ownership of amenities. Amenities don’t have to be part of a planned development. Many outdoor spaces and sports facilities already exist to benefit the general public (trails, parks). Alternatively, business owners can offer ompetitively-priced private for-profit membership clubs.
From the homeowner’s perspective, there’s absolutely no need to create a “captive consumer” class via an association-governed community.
That status quo arrangement primarily benefits developers and HOA management companies. ♦
Attainable Housing: Challenges, Perceptions, & Solutions
(Urban Land Institute and Terwilliger Center for Housing)
Ducker, Adam, Kelly Mangold, and Lorry Lynn. Attainable Housing: Challenges,
Perceptions, and Solutions. Washington, DC: Urban Land Institute, 2019. ISBN: 978-0-87420-450-6
HOA fees are on the rise
by MARCUS PAUL, Boston Magazine, MARCH 28, 2017
Attack of the Killer HOA Fees (Trulia)
U.S. Census Survey of Construction tables: