Opinion: U.S. housing market long overdue for shift away from mass-produced, HOA-governed housing

By Deborah Goonan, Independent American Communities

For fifty years, local governments across the U.S. have created a complex web of zoning policies that favor mass-produced residential housing, most of it HOA-governed.

Those policies have led to rising home prices and rent payments, well beyond the means of many Americans.

That’s the consensus of opinion among economists, urban planning professionals, and the National Association of Home Builders.

Why is housing so unaffordable?

Consider the fact that, for decades, we’ve all been led to believe that developers would be able to keep construction costs low by following a standard formula. Build city blocks of dense urban condominiums and townhomes or, alternatively, acres and acres of cookie cutter homes in suburban subdivisions.

Government leaders might have hoped that the larger home builders would pass on their construction savings to home buyers, in the form of lower purchase prices.


Turns out, that was purely wishful thinking.

In the long run, planned development increases the cost of homeownership, especially when you add up the total of a home’s purchase price, financing, property taxes, insurance, and — most notably — HOA fees.

And it can be difficult to avoid HOAs for newer construction.

According to Census data, the vast majority of new homes in the U.S. (currently more than 70% nationwide), are subject to some level of double taxation by homeowners, condominium, or cooperative associations. In many parts of the country, owners in each new community must also pay one or more development or special tax districts.

No bargains here.


Higher density leads to higher housing prices

So, the New Urbanism movement that began in the 1970s and 1980s created more problems than it solved.

History has proven that increasing the housing supply in concentrated urban areas, or building instant master planned communities on large swaths of land doesn’t  result in lower prices.

So why continue with the status quo?


Density benefits real estate developers

The truth is, developers often favor higher housing density and mixed use urban plans for one simple reason: to increase their return on investment.

Put another way, increasing the number of housing units per acre translates to more potential profit for home builders.

Housing density sometimes has short term benefits for local governments, too. Elected leaders see tract home subdivisions and urban condominiums as the path to maximize property tax revenue per acre.

Government also generates a lot of revenue through the permitting process. Commonly, the government convinces a developer to build public and private infrastructure and amenities in return for allowing higher density.

So, the more HOA-governed common interest development they can fast track, the better.


A win-win for stakeholders

The housing model has been a win-win for stakeholders, but not necessarily for taxpayers and housing consumers.

When undeveloped land is zoned for high density housing, it naturally becomes more attractive to developers and investors — but only if they have the resources to pay for it.

And that’s the catch. You see, in the majority of U.S. housing markets, only a handful of real estate corporations can actually afford to buy land and develop it.


The disappearance of a free market for U.S. housing consumers

In the current U.S. economic environment, instead of a free market with dozens of home builders to serve buyers, most metropolitan areas are served by what economists refer to as real estate oligopolies.

The result: A few large developers choose to build whatever kind of housing is most convenient and profitable for them, ignoring the fact that housing consumers want and need substantially different kinds of homes.



Mismatch between home buyer needs and housing supply

For example, dozens of senior home buyers often end up competing for a handful of one-story homes. Likewise, first-time home buyers find themselves competing against empty-nesters for smaller “starter” homes.

In the hottest real estate markets, investors are scoffing up fixer-upper homes to renovate them and flip them, or perhaps to divide them into 2 or 3 rental income units.

All of this increased buyer competition for housing inevitably leads to higher home prices — and higher rent, too. Housing industry and government stakeholders win. Housing consumers lose.


The problem with real estate oligopolies

When a few real estate companies, developers, and investors dominate a local housing market, property values can be distorted.

Oligopolies explain, at least in part, why the housing market in the U.S. has become a volatile cycle of booms and busts.

In boom times, home prices rise faster than household incomes. Savvy investors and homeowners who are able to buy low and sell high can make a fortune. But eventually, prices reach the point where very few people can afford to buy a home or condo. That’s when prices “bust” and drop dramatically.

The bust cycle only benefits a few investors with the cash to buy distressed properties at artificially low prices, at bank foreclosures, tax sales, and HOA foreclosures.

By contrast, most homeowners lose a lot of equity.


Domino effect on housing affordability

In the last recession, plummeting home values left millions of owners underwater on their mortgages, or unable to pay their taxes, HOA or condo fees. Due to foreclosures, many were forced out of their homes and into rentals.

That, in turn, drove up the cost of rental housing, to the point where millions of Americans now pay 30 to 50 percent of their income in rent alone. That leaves little money left over for other essential living expenses.

At the same time, as the economy has improved in the past decade, home prices have increased in many markets, surpassing prices seen right before the bottom fell out of the market in 2007 and 2008.



What’s the solution to the housing affordability crisis?

The U.S. is now grappling with a housing affordability crisis. Some say it’s because the the supply of new housing has lagged behind demand, particularly at lower price points.

The solution to the affordability problem, according to some local politicians and experts in urban planning: build more housing.

But history has proven that the build-it-and-they-will-come solution is not that simple. Five decades of saturating housing markets with HOA-governed communities has only increased the cost of homeownership.


The decline — or utter failure — of HOA-governed housing

Since 2015, IAC has followed and documented various reports of social and economic chaos, a result of poorly-constructed and/or poorly-managed HOA-governed communities.

Condominium associations are particularly vulnerable to decline, mainly because co-owners rarely cooperate with each other. The heart of the problem: Homeowners seldom agree on how much they are willing to spend to repair, maintain, or update their shared housing components.


Common condo HOA complaints

Examples of common complaints I hear from condo and co-op homeowners:

Unit owners who experience water leaks and property damage are willing to pay for a new roof. But other unaffected condo owners insist on putting off the expense with temporary repairs.

Condo owners aren’t willing to compromise on updated design standards, so they cannot move forward and renovate their building’s shabby, dated lobby.

Townhouse owners cannot agree on new lamp posts or street lights to replace old ones that no longer work.

As you might imagine, the list of maintenance and capital improvement projects that create conflict in condo and co-op communities is endless. More often than not, these conflicts result in deferred maintenance, declining property values, and lawsuits between HOAs and homeowners.


Investors vs. owner-occupants

Another potentially destructive pattern in condo associations is the shift of majority HOA control from owner-occupants to investor-landlords. This change often occurs about a decade or so after construction — even when most original buyers were owner-occupants.

And it’s not just long-term rental property investors displacing owner-occupants.

With the growing popularity of Airbnb, VRBO, and HomeAway, most condo associations are unable to stop owners from turning their units into short-term rental properties. There’s simply too much money to be made.

And, because most HOAs are governed by corporate law instead of Constitutional law, the property rights of investor shareholders often dominate, depriving the minority of individual shareholders (homeowners) of their rights.




The fall of utopia?

As for planned communities, homeowners face similar challenges with short-term rentals, especially in communities near popular vacation or weekend destinations.

And in HOAs, members also disagree about how — or if — they should maintain important infrastructure such as community roads, stormwater pipes, retention ponds, and neighborhood lakes or swimming pools.

Die hard New Urbanists don’t want to talk about it, but even Disney’s utopian Florida town, Celebration, has transformed into a dystopian neighborhood.

Celebration’s decline started after Disney sold its interest in the planned community, in 2004, to Lexin Capital, a real estate investment/private equity firm owned by Metin Negrin.

After the buyout, Lexin collected millions in HOA fees from homeowners each year, then deferred maintenance on the residential properties. Condo and homeowners accuse Lexin of diverting their HOA dollars toward its private commercial interests instead.

In 2016, Town Center Condo Association owners sued Lexin. Ever since, they’ve been trapped in a slow, expensive litigation process, while they stand by helplessly and watch their homes rot.

In light of all these problems with mass production housing and suburban sprawl, today’s urban engineers are pitching a new agenda, promising more affordable housing.  


Push for a different kind of high density housing, more affordability

Instead of pushing for “instant” new neighborhoods in the form of high density apartment, condo, townhouse, and single family home communities, the new political agenda calls for smaller, incremental housing redevelopment and construction.

Specifically, there’s a growing trend toward relaxing local and state zoning laws, with the goal of eliminating exclusive detached single family housing requirements. The goal is to return to a time when individual property owners had the right to divide their homes into two or three separate housing units.

Separately, the manufactured housing industry is lobbying state Legislatures to allow property owners to add backyard cottages, also known as Accessory Dwelling Units (ADUs), as a way to increase the number of available housing units in existing single family home neighborhoods.

For example, California statute now prevents HOAs from prohibiting ADUs, despite restrictive covenants that limit each lot to “single family use.”

Urbaneers call this type of small scale housing density the “missing middle.”


Zoning changes a first step toward more affordable housing

And, while many experts agree that zoning changes won’t be the magic bullet to the affordability problem, they insist it’s a necessary first step.

IAC agrees, with caveats.


IAC’s suggested changes to local zoning and state laws

Let’s address an obvious problem. Local governments should stop mandating, or heavily encouraging, common interest development and mandatory homeowners associations.

Policy makers should also look outside the HOA box for ways to provide more housing choice for home buyers.

State law should preempt local zoning law that requires anything that makes it harder to build housing at lower sale and rental price points.

For example:

Zoning that requires minimum detached home sizes, typically higher than 2,000 square feet.  That’s often more space than singles and couples want and need. And it’s less affordable, because it costs more to buy, rent, heat, cool, and furnish a larger home.

Unreasonable parking requirements. This is a double-edged sword. Requiring too much parking (such as a 2-car garage for every house), adds to the cost of building single family homes, increasing the list price.  Local zoning should allow smaller homes with a one-car garage or carport instead.

On the other hand, state law must prohibit local governments from approving denser residential development without sufficient parking. That would avoid another set of common HOA problems highlighted here on IAC:

  • garages and driveways that are too small for today’s larger vehicles,
  • garages that don’t offer enough room to store of trash and recycling bins or outdoor equipment, and
  • streets that aren’t wide enough for on-street parking, combined with inadequate off-street parking.

And there’s one more common sense solution.


End land hoarding by developers

When land owners purchase large swaths of land, then hold onto it for generations before ever breaking ground on the next phase of development, it creates a shortage of buildable land.

As a result, it’s nearly impossible for individual home buyers to hire a small home builder to construct a new home that is not part of a common interest community or planned development.

Millennials can’t build starter homes, and Baby Boomers can’t build new homes for their changing needs.

It’s another adverse side effect of oligopolies in the housing industry. And, With the supply of land constrained, it’s more expensive to build rental housing, too.


Homeowners, buyers rejecting common interest development?

Despite every effort of urban planners to nudge homebuyers away from detached single family homes and toward multifamily housing in a duplex or triplex, 85% to 90% of home buyers still prefer a detached home. That includes millennial home buyers, according to a recent Redfin survey.

In fact, most consumers are still willing to put up with long commutes to avoid multifamily housing.

Considering the added costs of condo, co-op, or HOA fees, for a few dollars more, a buyer can choose a detached house with more privacy, friendlier neighbor relations, and substantially less personal financial risk.


Time for systemic change in U.S. housing policy

In conclusion, the U.S. housing market is long overdue for a shift away from mass-produced, HOA-governed housing.

Policy makers must stop dancing around the affordability issue.  It’s time to acknowledge that it will be impossible to eliminate oligopolies without also ending the institutionalization of privatized, developer-controlled HOA-governed housing. ♦





Census Survey of Construction Stats



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