As the real estate market recovers from the effects of COVID, U.S. housing consumers are rejecting HOA-governed communities

By Deborah Goonan, Independent American Communities

What a difference a year makes. As the U.S. begins to return to “normal,” the housing market is in a state of turmoil. Millions of folks want to buy a home, and competition is fierce in some markets.

IAC takes a look at some current trends, and the changes occurring in the market for HOA-governed housing.

More than ever, U.S. homeowners are rejecting invasive rules, dictatorial HOA boards

In April 2021, as the housing market started to heat up, Kris Frieswick published a startlingly accurate tongue-in-cheek article about ‘dreadful’ homeowners associations in the Mansion Global. The article was picked up and published in the Wall Street Journal, reaching millions of readers and would-be homebuyers worldwide.

Here’s one tidbit that just about any current or former owner of HOA-governed property can relate to:

HOAs were created, as are most hellish things, with the best of intentions. When people own contiguous properties and share common spaces, they have the ability to negatively affect each others’ property value and quality of life. It is a good idea, in theory, to have agreed-upon rules of conduct and a method to pay for shared expenses. The HOA board makes sure everyone plays along. But like any humans given power over others, HOA boards inevitably get drunk on the stuff, so HOA rules and fees proliferate like perfectly fertilized weeds.

Source: Joining an HOA? There Will Be Hell to Pay – All of the downright dreadful things you need know if you’re buying a property governed by a homeowners association BY KRIS FRIESWICK  |  ORIGINALLY PUBLISHED ON APRIL 15, 2021  |  THE WALL STREET JOURNAL

Frieswick goes onto to describe the various hellish experiences one can expect in a common interest community governed by a power hungry, dictatorial HOA board. It’s a witty and concise summary, but it barely touches the surface.

The fact that the WSJ picked up such a feature article, in light of its reliance on ad revenue from real estate developers and brokers, is significant. It shows that mainstream media is more willing to expose the flaws of the trillion dollar HOA industry.

Ten years ago, the WSJ and other business media mainstays would regularly downplay the abuse, exploitation, and sheer idiocy of HOAs. Readers were bombarded with HOA industry talking head claims that HOA dysfunction was rare, and that corruption and embezzlement were “isolated incidents.”

Then in 2016, Judy L. Thomas, Kansas City Star, published the HOAs from Hell Series. Since then, more and more business journals have begun to acknowledge that HOA problems and complaints are quite common. It’s no longer taboo to discuss the dirty business of HOAs in a widely-read public forum.

Slowly but surely, the word is getting out about life in HOAville, USA. And it’s starting to take its toll on the market for HOA-governed homes.

To prove my point, let’s look at some hard data and industry statistical reports.

Percentage of new single family homes in HOA-governed communities is on the decline

In December 2020, the National Association of Home Builders (NAHB) published a report that doesn’t bode well for the HOA industry. For the first time in decades, the percentage of new homes started in HOA-governed communities has declined.

This trend is not surprising, because IAC has been tracking the market for HOA-governed homes over the past decade. Looking at hard Census data, it’s clear that the demand curve for HOAs has been flattening since the housing market recovery of 2013.

Specifically, during the six-year period between 2013 and 2019, the percentage share of new construction homes built under HOA restrictions and governance has ranged from 58 – 62.5%, with a statistical margin of error of 3%. In other words, the share of homes built in HOA-governed communities has barely budged in more than 6 years years.

Notably, according to data provided in the U.S. Census Survey of Construction, between 2009 and 2013, the share of new single family homes built in HOA-governed communities was on the rise, from 47.6 – 59.1%. Prior to 2009, the U.S. Census did not track new single family home construction in HOA-governed communities.

Nearly all multifamily housing built for rent, not for sale, in last decade

According to Census Survey of Construction data for multifamily housing, only 8.8% of new housing units built in 2019 were put up for sale as condominiums or housing co-ops. More than 90% were built as rental apartment units.

The National Association of Realtors (NAR) data of home sales for the past three years also reveals limited and declining homebuyer interest in condos and co-ops. Nearly nine in ten existing home sales are single family residences. Specifically, the percentage of all existing home sales of condos and co-ops for the 2018, 2019, and 2020 was 11.25%, 10.8%, and 10.2%, respectively.

Overall, U.S. residents are far more likely to rent an apartment, townhouse, or investor-owned condo, than buy into a condominium or housing cooperative.

HOA homes sidewalk

HOA industry’s data confirms the downward growth trend in HOA-governed housing

The HOA industry trade group, Community Associations Institute (CAI) maintains a statistical estimate of HOA-governed communities in the U.S., with data as far back as 1970. According to CAI’s research foundation’s 2020 statistical update, the growth rate of HOA-governed housing is indeed leveling off.

To illustrate, let’s analyze CAI’s statistics to compare the growth of HOA housing in the past two decades.

In 2010, the U.S. had 311,600 HOA-governed community associations, compared to 222,500 in 2000. That represents a whopping 40% growth rate in HOA housing in just ten years.

As of 2020, CAI estimates there are “between 352,000 and 354,000” HOA communities in the U.S. Let’s split the difference, and assume there are 353,000. Doing the math, that represents a growth of 13.2% in HOA-governed communities in between 2010 and 2020.

That very substantial reduction in the growth of the industry is an inconvenient fact that’s glossed over by CAI.

Delving deeper into CAI statistics, in the past decade, the growth rate of HOA housing has continued to steadily decline, as follows: Between 2010 – 2015, a growth rate of 8.5%; between 2015 – 2020, a growth rate of 4.4%.

Despite the pre-pandemic economic recovery in the housing market, the year-on-year growth rates of HOA-governed housing have seen very small increases for the past 5 years. CAI’s estimated small increases in HOA-governed communities are consistent with U.S. Census Survey of Construction data. Here are the data for the past 5 years:

  • 2016: 1.2%
  • 2017: 0.7%
  • 2018: 0.7%
  • 2019: 1.2%
  • 2020: 0.6% (assuming 353,000 community associations)

The COVID effect: Increased demand for single family homes leads to rapidly rising prices

So, even before 2020, buyer interest in HOA homes was starting to wane. Then COVID hit last March, just before the usually busy spring home buying season. Lockdowns, work from home orders, and business restrictions made it next to impossible to buy or sell a home for several months.

At the same time, residents of expensive and crowded cities suddenly found life in their small condos and apartments very unappealing.

Cities became ghost towns overnight, as restaurants, bars, cafes, coffee shops, book nooks, and entertainment venues were shut down by order of city and state governments. No one wanted to use mass transit, including many of the “essential” employess who were still expected to show up for work. Residents had to fight for supplies of toilet paper, chicken breast, butter, and hand sanitizer — if they could find any — at their neighborhood grocers and pharmacies.

As the rise in COVID hospitalizations and deaths led to extended pandemic-related restrictions, millions of U.S. residents left their expensive urban homes — mostly rental apartments and condos — and moved to single family homes in less-populated, more affordable areas of the country.

In the early stages of the pandemic, some fortunate folks sought refuge in their second homes or vacation properties. Young adults moved back to their home towns to stay with family members. Others looking to escape pandemic hell, and needing a quiet place to work from “home,” took advantage of short-term rental properties away from crowded city centers.

Everyone thought, at the time, life would get back to normal in a few weeks.

But the pandemic dragged on. Work-from-home became the new norm for employees in the administrative service, sales, and technology sectors. By summer, many temporary relocations became more permanent. For workers who were forced to go on unemployment, and then retire early, it was time to move on to greener pastures — literally — with more affordable housing.

The resulting migration increased demand for single family detached homes with plenty of space for home offices, remote learning, and fun and relaxation in a private back yard. The second wave of COVID, which began in the fall, motivated more people to seek out suburban havens and small towns.

As a result, the short supply of active real estate listings has made existing housing more expensive than new construction in some real estate markets, according to one analysis in Bloomberg News.

But there are other critical factors leading to rising home costs.

Are investors driving a housing bubble?

In a recent Forbes analysis of the housing market, the author blames high home prices in migrate-in markets on a lack of supply of available homes in relation to demand. Predictably, Forbes calls for an increase in new construction to fill the gap.

But the analysis ignores the fact that high demand for single family homes has once again drawn investors into the real estate market, who are competing as cash buyers against ordinary home buyers.

According to National Association of Realtors,

Individual investors or second-home buyers, who account for many cash sales, purchased 15% of homes in March, down from 17% in February and up from 13% in March 2020. All-cash sales accounted for 23% of transactions in March, up from both 22% in February and from 19% in March 2020.

NAR, Existing-Home Sales Decline 2.7% in April (May 21, 2021)

With such a significant percentage of investors and cash buyers competing against buyers who actually want to live in their homes, we have an artificially-induced inflation of home prices in desirable housing markets.

It’s not only the fact that there’s a “low supply” of homes for sale that’s driving a decrease in housing affordability. It’s also the fact that a significant number of homes are being purchased by investors and people who already own a home elsewhere.

The upward pressure on home prices prevents existing homeowners from putting their house up for sale, because they cannot afford to buy up or replace their current home with another affordable option. Thus, the low supply of active listings on the market.

Nevertheless, many financial experts fear another housing bubble is about to burst. And when that happens, the investors and cash buyers won’t be adversely affected. It’s the regular folks with a mortgage that will feel the pinch, especially if they find they are forced to move before they’ve gained sufficient equity in their properties.

Unfortunately, homeowners in HOA-governed communities, where investor-buying is quite common, are likely to notice a reduction in owner-occupancy rates in the next year or so. That’s potentially problematic for an owner occupant seeking a peaceful refuge, with the ability to rely on long-term equity growth in a primary home.

Allow me to explain why.

Investor vs. owner-occupant disputes growing in HOA-governed communities

Supporters of the HOA industry don’t want homebuyers to know the truth. With few exceptions, the corporate governance structure of a homeowner association favors investors, particularly “bulk” or large-scale investors with the bankroll to purchase multiple homes or condo units within the same community.

Many home and condo owners have learned, the hard way, that voting “rights” in an HOA are tied to the quantity of properties one owns in the community association. To put it bluntly, in mandatory-dues-paying HOAs, there’s no such thing as one vote per registered voter, based solely upon residency in the community.

That’s because an HOA isn’t chartered as a local government. It’s more than likely incorporated, and almost always classified as a private, non-profit organization.

Homeowners may be surprised to learn how voting rights are allocated in their HOA-governed community

In a community association that requires mandatory payment of dues and assessments, each vote in the HOA is directly tied to property ownership.

If you own one home, you get one vote, no matter how many registered voters live in your household. If you rent the home, or you live there, but your name isn’t on the deed, you generally don’t get a vote at all in the HOA.

On the other hand, you don’t necessarily have to reside in the community to gain voting rights. And, generally, you get one vote for each home you own, with no limitation on the number of votes you may cast. Ten homes, ten votes. Fifty homes, fifty votes.

It’s a corporate voting structure.

In a condominium, the number of votes you are entitled to cast is determined by your percentage ownership in the condominium association. A larger condo equates to a larger share of votes than a smaller condo. And the more condos you own, the greater your voting clout in the condo corporation.

The corporate voting structure is a key factor that makes HOA-governed communities attractive to investors. It’s entirely possible, and increasingly common, for one or more investors stage a hostile takeover of any HOA board, and seize control of the community.

Investors threaten residential nature of HOA-governed communities

It seems unbelievable, but it’s true. In condominium associations — which now includes many townhouse communities — a hostile condo board can force owner-occupants to sell at a low price, so that investors can dissolve the condo association and turn the units into rental apartments.

Many bewildered owners have learned, to their dismay, that it’s all perfectly legal. State laws provide minimal or no legal protection for the minority of homeowners who want to continue to own and reside in their condos.

IAC has covered the topic of condo terminations and deconversions at length, featuring multiple examples in Florida, Arizona, and Illinois. No condo association can absolutely ensure it is immune to a hostile takeover of this kind.

A very recent report from ABC15, Phoenix, features the Citi on Camelback condominium, where dozens of condo owners, including a 91-year-old woman, are being forced from their homes by investors who have taken over their HOA board.

But homeowners in HOA-governed planned communities must also beware! Hostile investors can take over single family home communities as well as condominiums.

Although they cannot easily dissolve the HOA, the board of a planned community that is controlled by investors can make life very unpleasant for owner-occupants. Many owners choose to sell and move out of the community to escape public nuisances, rising crime, deferred maintenance, high HOA fees, or a tyrannical HOA and its management company.

For a typical example of a hostile HOA board controlled by investors, be sure to read a recent report in the Gilbert Sun News, about homeowners attempting to save the peace and integrity of their 2000-home HOA-governed neighborhood, where one out of four homes is now an investor-owned short-term-rental property.

Consider the big picture. Every investor owned home is one that is not available to buy (or rent) as a primary home. And, adverse effects on affordable homeownership are multiplied exponentially, when homebuyers seeking a place to live are also forced to avoid investor-controlled HOA-governed communities.

Other reasons to avoid HOAs — deferred maintenance, rising HOA fees

Several additional reports shed light on the reason that savvy homebuyers are reluctant to purchase an HOA-governed home.

Fox4, Kansas City, recently featured a Johnson County (Kansas) HOA-governed community, Lido Villas. Homeowners there complain of rising HOA fees, despite deferred maintenance. Leaky rooftops, faulty rain gutters, and poor drainage are causing extensive damage to townhomes in the community. The HOA is responsible for exterior maintenance, but its apparent lack of maintenance is leaving owners on the hook for loss of personal property and expensive repairs. According to the report, one unfortunate homeowner is considering a lawsuit against her HOA, after a leaky exterior building envelope has caused severe water damage and mold in her townhouse unit.

A similar situation is playing out at Sterling Commons Condominiums in Aurora, Colorado. Denver7 reports that condo residents have endured potholes, lawns that aren’t regularly mowed, rotten wooden stairs and railings, and even mushrooms growing inside carpets, due to water intrusion within living units. All this community “service” is supposed to be paid for with $300 monthly condo fees. Owners and residents wonder where all their money is going, because it’s clearly not being spent on maintenance.

In Florida, in one of the largest HOA-governed planned communities in the nation, WFLA recently highlighted a problem with illegal dumping of trash in the Poinciana community. The HOA says that Polk County is in charge of trash pickup in the community. But Polk County officials have not been proactive about preventing the problem — they rely on Poinciana residents to file formal complaints with Polk County, before they’ll investigate illegal dumping.

In the same master planned community, hundreds of frustrated Poinciana homeowners were also recently informed that they must pay an additional $58 per month for their new Spectrum internet service contract. The fee will increase HOA dues, and all homeowners must pay the fees, even if they don’t really want or need Spectrum’s internet service. The deal was negotiated by the HOA board a few weeks ago. Homeowners object to the fact that they did not have an opportunity to vote on these additional mandatory HOA fees.

Residents don’t have the ability to opt out of the service and could face steep penalties, such as a lien on their home, for not paying when the service starts in August.

As reported in the Osceola News-Gazette, May 26, 2021

And then there’s a recent survey of the top 100 metropolitan areas of the U.S., conducted by Inspection Support Network, which reveals the worst cities for high HOA fees. According to survey results, the most expensive HOAs charge owners 12-26% of their monthly household costs, and the median monthly HOA fee in the cities surveyed were 17% of housing costs. That exceeds median utility costs for many homeowners.

Ouch! No wonder more and more homebuyers want to avoid HOAs.

Change on the horizon? Decentralized work centers increase housing options, affordability

There are many disadvantages and financial liabilities associated with living in HOA-governed housing communities. COVID has highlighted major disincentives to reside in densely-populated cities in small townhouses or apartment-style condos. So it’s no wonder that many Americans are moving to the suburbs, in search of single family detached homes.

At the same time, the COVID pandemic hastened an already growing movement for the work-from-home professional. Now that many employees wish to continue to work from home (either part of the week, or all the time), they’ll undoubtedly seek work or entrepreneurial opportunities that allow them to continue this new live-work lifestyle.

While some business CEOs insist they can force everyone to come back the office full-time, IAC doubts things will ever go back to the way they were pre-COVID. Managers and corporations will have to adapt to workforce changes. Accustomed to their new-found independence, millions of workers are very likely to reject working for managers who are more interested in exerting their own power than in empowering the people on their teams.

IAC believes that means we are likely to witness a transformational decentralization of both labor and housing — fewer big city dwellers and workers, more people living and working in suburbs, small cities, and small towns across the US.

But don’t expect the major financial stakeholders in real estate to start planning and building neighborhoods of modest starter and downsize homes, even though these are in high demand in most housing markets.

Urban developers, HOA-industry stakeholders favor limiting the supply of single family homes

Let’s face it. America’s urbanists and HOA promoters don’t like the current transition away from expensive cities. These are the real estate stakeholder who decry suburban “sprawl.” They tend to label any single family homeowner who objects to multifamily housing development as “racist,” if not also intent on destroying the environment with their large carbon footprints.

Never mind that the vast majority of wealthy, influential real estate developers and managers own multiple properties, and maybe even a yacht and a private plane. And they are likely to live in non-HOA-governed estate homes, behind locked security gates to their private compound.

The folks behind the anti-suburban movement won’t acknowledge that the densely populated cities they’ve created over the past several decades are, in fact, the least affordable, most-gentrified, highly polluted real estate markets in the country.

That’s why so many people are moving out of crowded cities and high tax metros, to more affordable, less crowded towns across the U.S.

For small-town dwellers, and those who have escaped the big city, a word to the wise.

To perpetuate their enormous flow of revenue from real estate development and management, keep a watchful eye for urban developers offering “economic development” to your new (smaller) city or town. Developers and HOA supporters will be coming to your town, seeking to urbanize quiet single family home areas with construction of hundreds or thousands of HOA-governed condos and townhouses. They’ll also pitch development of scores of new apartment communities, whether or not your community needs or wants them.

These anti-suburbanists have a strategy: to convince your local government to completely do away with single family residential zones. Keep in mind, the anti-single family zoning trend was already underway prior to the COVID pandemic. But, unless large numbers of concerned citizens and voters vocally and actively oppose the loss of local control over zoning regulations in their municipalities, IAC expects the trend to accelerate in the next several years.

Political backlash against the industry’s push for nothing but multifamily housing

Fortunately, homeowners and courageous legislators are already fighting to keep their single family residential neighborhoods — which is often equivalent to rejecting HOA-governed housing and common interest developments.

For example, in Washington state, some Lynwood City officials, influenced by financial stakeholders in the real estate industry, appear to be leaning toward zoning virtually all future housing development as apartments and HOA-governed townhouses or condominiums. In fact, in 2020, stakeholders lobbied for state legislation to eliminate single-family only zoning in most of Washington’s municipalities, statewide.

However, Lynwood Today reports that residents recently attended a public hearing to voice their opposition to a development plan that disfavors single family homes. One homeowner correctly pointed out that single family homes can be affordable to own or rent. At this time, renting or owning a single family home is affordable in smaller Washington cities. Low income families need not be limited to small apartments with no outdoor space of their own.

But when local housing policy supports and promotes mega landlords and real estate developers, who then gain control of the local housing market, home purchase prices and prevailing rents tend to quickly rise higher than the rate of inflation. So much for affordable housing.

Even worse than the fight for local control at the state level, is the threat from our federal government.

A few weeks ago, Congressional House Representative Beth Van Duyne (Irving, TX) posted a persuasive op-ed entitled Biden’s war on suburbs – here’s how admin hopes to control you, your community It’s the beginning of the end for America’s suburbs. Van Duyne writes that Joe Biden’s American Jobs Act includes federal policies that will incentivize cities and towns to “cancel single family zoning.”

In other words, the current federal administration wants to make it easier and more profitable for real estate developers to urbanize and densify small cities, towns, and even rural areas. That would make living in a single family home even less affordable for the majority of U.S. residents, forcing many more into cramped apartments and condos, with no individual ownership of land.

Biden’s housing policy, buried in the American Jobs Act, would create an artificial “demand” for HOA-governed communities — despite the fact that the free market rejects housing with shared walls, no land ownership, and HOA boards charging high fees and enforcing onerous restrictions.

Further reading:

Increasing number of bills proposed to rein in HOA dysfunction and abuse. It’s an uphill battle, though, frustrating to consumer advocates and property owners alike. (link to category page for Legislation)

Some courts are deciding in favor of HOA-governed property owners and residents, but not without great cost to litigants trying to assert or defend their rights. See HOA Lawsuits: A Reality Check.

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