The Tipping Point…

Back in 2009, while the housing market was in the process of imploding, Capital Reserve Consultants, LLC (CRC), received an invitation from the Community Associations Institute (CAI) asking if CRC would be interested in submitting a proposal to be a presenter at the upcoming CAI national conference. Never being one to miss an opportunity CRC’s brain trust quickly responded by submitting a proposal for a presentation called The Tipping Point. After receiving a letter from the CAI thanking CRC profusely for the “exciting proposal,” we were subsequently informed that the Tipping Point proposal had not been selected, although it was one of the twelve finalists for the eight presentations that would be included in the conference.

The Tipping Point proposal had to do with the percentage of homeowner associations in the United States that were, or soon would be, at least twenty years old, much less the ones that were already well past the twenty year mark. CRC had identified a combination of factors that would inevitably lead to a concentration of HOAs, and homes within these communities, being more than twenty years old within ten years. The premise of the Tipping Point thesis was that once these older HOAs reached the twenty year milestone it would be a game changer in terms of the financial stability of many privately governed communities, due to the age of the facilities these organizations were responsible for maintaining and the lack of adequate reserves to pay for replacement and/or renovation of the common area improvements within the communities.

Fast forward nine years and the tipping point has arrived! Since the beginning of 2009 the number of new housing starts in the U.S. has ranged between 27% and 58% of the 2.06M new homes that were built in 2005, which according to U.S. Census Bureau data was the high water mark for new housing starts since 1996. This means that the rate at which new homes are being added to the U.S. housing inventory is no more than two-thirds of the historic average of 1.43M new homes that had been constructed in the U.S. every year between 1959 and 2008. With new homes being added to the existing housing stock at a significantly reduced rate it means that the concentration of older homes in older HOAs has been steadily increasing since the beginning of 2009.

Adding to this brewing tempest is the fact that the vast majority of new homes that have been constructed since 2008 are not what you would call “starter homes” or anything close to entry level housing. This means that the majority of  buyers who are actively looking for homes at the lower end of the price spectrum are more likely to purchase older homes. In those instances where the home is located in an HOA it means these buyers are more likely to end up buying into an older HOA with all of the potential problems associated with an aging community. The CAI Statistical Review for 2014 pretty much sums things up:

1) As of the end of 2014 the CAI estimated that there were a total of 333,600 HOAs in the U.S. which contained a total of 26.7M housing units.

2) As of the end of 2000 there were an estimated 222,500 HOAs that contained 17.8M housing units.

This means that approximately two-thirds of the HOAs in the U.S. will be at least eighteen years old by the end of this year, give or take the relatively small handful of new homes and new HOAs that have been created since the end of 2014. Based on the 2014 data compiled by the CAI we also know that one out of three HOAs and 43% of the homes located in HOAs were built prior to 1990. In other words, almost half of the homes located in a homeowner association will be twenty-nine years old by the end of 2018.

These older communities, which contain aging buildings, amenities and in many instances infrastructure components  that are maintained by the HOA, were to be the focus of CRC’s Tipping Point presentation back in 2009. Of specific concern was the fact that many of these older HOAs would not have the money needed to pay for renovation and replacement of aging community assets due to years of under-funding their reserves or ignoring the reserve planning process altogether…Fast forward ten years from 2009 and we are finding that for many HOAs the tipping point has finally arrived, and as expected a significant percentage of the older communities are struggling with the challenges that a lack of adequate replacement reserves presents.

In the next installment of this series we will examine some of the methods being used by HOAs to address the problem of aging community assets and lack of financial resources…

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