As the U.S. housing market continues its so-called “recovery” after the 2008 implosion of the sub-prime mortgage market, one thing is becoming increasingly clear. In many areas of the country it is now the case that the average working class American cannot afford to own a home.
With the median home price in the U.S. fast approaching $200,000 and median income as of September 2014 at just under $52,000 a year, it means the cost of a median priced home is three to four times the annual earnings of half the population.
This situation is precisely what led to the need for sub-prime mortgages in the first place, as it has long been the rule of thumb in the mortgage industry that a borrowers mortgage debt should not exceed twice their annual income.
So, if Joe Six-Pack doesn’t earn enough money to comfortably be able to mortgage a typical $200,000 home (to say nothing of the fact that he can’t get a mortgage in the first place) then who is it that is purchasing all of these homes, which in turn has led to the housing market “recovery” that you keep hearing about in the news?
The answer to the question is of course…INVESTORS! Sure there are those homeowners who are simply tired of the old place and those who have been transferred to another city by their corporate paymasters and must sell the current homestead and purchase a new one in their destination city.
However, these transactions are not what is fueling the rampant buying frenzy that is taking place in most of America’s more desirable locales. What is currently fueling the residential real estate market are investors.
This investor class includes large Wall Street investment cartels that have used equity raised through bond issues and/or the sale of common stock to purchase residential real estate in wholesale lots, often times acquiring hundreds if not thousands of homes in a single city.
It also includes foreign investors who are accustomed to much higher housing prices in their native countries and as such they find the U.S. housing market to be an attractive alternative to low return investments or riskier deployments of their investment capital.
It also includes many of what might be termed “mom and pop” investors from right here in the good old U.S. of A. These are the folks who are fortunate enough to have equity capital in sufficient amounts that they can afford to own more than one home at a time.
In many instances these investors are choosing to purchase condominiums rather than traditional single-family detached homes for a variety of reasons. One is that condominium properties are, in some ways, a safer more secure investment because vandalism is less likely to occur in a condominium where multiple units are located in the same building.
Another is that if you are an absentee investor who does not live near the property, it is easier to manage the property, in particular the building maintenance process. Which in the case of exterior building maintenance is often the responsibility of the HOA. All that the investor/absentee owner has to do is pay their monthly HOA assessments and someone else cleans the gutters, paints the exterior of the building and performs a host of other maintenance tasks, all while the happy investor is lounging on a beach somewhere in Hawaii, collecting the rent check.
Perhaps this is a bit of an exaggeration, but in theory at least this is what could happen if the HOA is a well-run organization with adequate funds and sufficient oversight to ensure that the maintenance is properly executed in a timely manner.
For the absentee investor this is, of course, the big concern; i.e. is the HOA an adequately funded, responsibly governed organization? Or is it a haphazardly run, poorly funded fiscal calamity that is being poorly maintained and/or taken advantage of by opportunistic vendors, who are not held accountable because no one is minding the store?
In the case of owner-occupants a high rate of absentee ownership presents other problems, some of which can have an adverse long-term impact on the livability and sustainability of the community.
With the high percentage of homes (including condominiums) that investors are purchasing these days, it is often the case that a condominium association will have an absentee ownership ratio that is as high as 40% or more of all the units in the building.
The current FHA underwriting requirement is that at least 50% of the units in a condominium must be owner-occupied. That’s great except that it also means that 50% can be occupied by renters.
Not that there is anything inherently bad about people who rent homes verses buying them, but it is a long-held axiom of real estate investing that developments with a high percentage of owner-occupied housing units are a more stable investment than properties that are largely occupied by tenants.
High levels of absentee ownership also make it more difficult to find owners who are willing to serve on the Board of Directors of the HOA. If you are an absentee owner and you live a 1,000 miles away from the property, what is the likelihood you are going to want to serve on the Board of your HOA?
Since renters cannot serve on the Board it means that high rates of absentee ownership serve to reduce the pool of available candidates for membership on the Board.
This situation does not serve the interest of the owner-occupants or the absentee owner; in particular the absentee owner who is reliant on effective governance of the Association in order for their investment to be successful.
In conclusion, it is generally not a good idea in any common interest setting for there to be a high percentage of non-owner occupants or absentee owners.
HOAs are dependent on volunteer participation in the governance process and a willingness by the owners to contribute financially so that the long-term fiscal stability of the organization is guaranteed.
Both of these objectives can, and often are compromised when there is an inordinately high percentage of absentee owners and non-owner occupied units.