In the past I’ve shared with my friends my fears about the coming tsunami of world economic collapse and a housing bubble unlike any this country has ever seen. My degree is in Political Science and not Economics but I am a successful investor and money manager. I also do a lot of reading about economic issues.
So, what’s my concern today? A new CNBC report talks about coming interest rate increases and how that will cause ‘massive volatility’ in the markets. The interest rates that are coming will crush the mortgage and housing industry.
After years of moderating and running this blog and years of writing and researching my book, “Neighbors At War,” I firmly believe that people in Homeowners Associations are going to be the first ones slammed by the coming mortgage crisis. I’ll list the reasons why HOA properties are Bull’s Eye Number One.
1. Potential home buyers are getting a whole lot wiser about the dangers of HOA living. The HOA industry has done no favors to homeowners by earning such names as ‘the lawn Nazis,’ ‘HOA Nazis,’ ‘the HOA Mafia.’ People aren’t stupid. They read these stories of the bullying of people in Homeowners Associations, the assessing of ludicrous fines, the abusive (if not illegal) practice of artificially running up legal fees in an effort to get homeowners to try to stand their ground against bullying. The more a homeowner tries to assert his property rights in a dispute, the bigger his financial fall when the HOA wins. This kind of knowledge in the hands of homeowners and home buyers means HOA property values can only go down.
2. A massive wave of foreclosures hurts HOAs more than non-HOA property. An HOA which has 15 to 25 percent foreclosures is pretty close to bankruptcy. Lose 25 percent of your dues, you have to savage the remaining owners for dues increases. If not, the community swimming pool turns green, the lawns don’t get cut, and the roads don’t get plowed. A potential buyer won’t make an HOA investment when he sees the neighborhood falling apart. On the other hand, non-HOA property owners have no problem surviving when a large number of foreclosures hits a neighborhood. Those properties are quickly bought up, especially in neighborhoods where homeowners have voluntarily worked to keep their properties looking good.
3. HOAs which restrict the percentage of rental property do themselves no favor. Being able to rent your condo or house in an emergency is a great escape valve for a homeowner. It saves his equity and he doesn’t have to turn the property over to foreclosure. HOAs with ‘no rentals’ regulations will be the first to suffer catastrophic collapse.
4. Idiotic court decisions like the recent one in Nevada, in which a super priority lien (HOA fine) can extinguish a first deed of trust (the bank’s mortgage) create a lose/lose situation for mortgage companies. Why would they invest in such a state? Why would mortgage companies not demand massive down payments and arbitrary monthly dues to handle an HOA’s excesses. Such new mortgage requirements will crash property values, and the coming financial tsnami will ensure those neighborhoods crash first.
Readers of this blog will have many more reasons why the approaching economic collapse will hit HOAs first, and I encourage you to leave those reasons on our comments page.
(link to CNBC article on coming collapse)
In the next recession, there will be more developers going bankrupt or walking away from unfinished HOA projects. That alone will hurt home values. There won’t be enough owners to cover operating costs in many of these partially completed condominiums or subdivisions. Right now developers are grabbing land at relatively low prices, and taking advantage of low interest rates for borrowing, expecting a return on investment in the future. I think many of them are in for a rude awakening, and it is owners will bear the brunt of financial distress when the developer dissolves his construction Corporation, and transfers his assets to other LLCs.
You are correct, Deborah.
The last recession left three unfinished HOAs in my area that I know owners who bought in them. One the city made the developer finish the exteriors leaving the units as empty shells. The other has weeds growing on the land that now sits undeveloped. That developer used the dues from the HOA to pay off debt on another HOA. Those homeowners hired an attorney to fight to gain possession of the clubhouse and common grown so they could elect a board. Some of the high rise condos that were not sold were converted to some sort of “room” rental units where each bedroom door has a deadbolt and the living room and kitchen is shared. Of course this depreciated the value of the ranch style condos in the area. The other has some houses on some lots and vacant lots where the weeds grow making it look like new houses were dropped into a field of weeds.
Buying a home has become as risky as buying a used car. You never know what you are going to get. But one thing is for sure, if there is an HOA involved your chances for big problems go way up!