Thursday, September 15, 2011

Beyond Foreclosure: The Future of Suburban Housing: Places: Design Observer

Beyond Foreclosure: The Future of Suburban Housing: Places: Design Observer
All of which is to say that entire neighborhoods are frozen in a state of functional deficiency by restrictive municipal zoning and especially by what are known in real estate law as the "covenants, conditions, and restrictions" that govern new residential developments. Builder-developers establish CC&Rs to reassure prospective homebuyers that their investments will be safe. Once the neighborhood is occupied, the developer establishes a homeowner association, which then administers and enforces the CC&Rs; as millions of Americans know well, it's not uncommon for HOAs to restrict the choice of exterior paint colors, prohibit boats or RVs from parking in driveways, ban outdoor clotheslines, limit structural modifications, forbid modes of occupation (like rentals or granny flats), etc. In recent decades the number of common-interest developments governed by HOAs has increased exponentially, from fewer than 500 in 1964 to more than 300,000 today, encompassing an estimated 24.8 million housing units and 62 million residents (20 percent of the population). CC&Rs provide the legal basis by which homeowner associations can levy fines and place liens on homes in violation. Thus property owners are guaranteed that the neighbors won't, for example, double the size of their house or rent out spare bedrooms or build an outhouse on the front lawn. It's a classic compact: you submit to restrictions on your own rights in exchange for stability and to protect your investment. [7]

But the foreclosure crisis has made it painfully clear that such culturally accepted and legally sanctioned resistance to change might be as much a liability as a benefit. We're at a pivotal moment, when thousands of neighborhoods will need to adapt in order to accommodate current realities and correct deficiencies in the housing market.

Read the whole thing. The link to this peer-reviewed article by Aron Chang came to me from editor Josh Wallaert. Very interesting observations on the suburban single-family home in general and on HOAs in particular. If you look to my previous post on the piece by Bob Bruegmann, you can see that there is a controversy in academia about the future of suburbia. HOAs and condos are a huge part of that future, which is something that Bob overlooks or at least never really acknowledges. I have discussed this issue with him, and his free-market orientation seems to place HOAs in at least as positive a light as cities, a view with which I strenuously disagree.


The Right To Own Your Own Home said...

"the developer establishes a homeowner association, which then administers and enforces the CC&Rs"

Putting aside the fact that I have not seen any evidence that CC&Rs "protect property values," --

It is not necessary to have a homeowners association to enforce CC&Rs.

As a web commenter named "texan99" wrote last year on another forum:

"I do understand your point about keeping up the deed restrictions, but careful, because you may be falling into a common error. Restrictive covenants are one thing, and HOAs are another. In order to enforce a neighborhood's restrictive covenants, it is NOT necessary to have an HOA. It is true that having a HOA can make it easier to enforce the covenants, in several ways. For one thing, you don't need to find a homeowner to be a plaintiff, although any homeowner will do and it shouldn't be that hard to find one if anyone's really interested. For another, if you have an HOA, you can bill all the neighbors and force them to help pay for the lawsuit. For another, you can enforce the collection of this bill with a lien against everyone's house. Finally, if the HOA wins the dispute with the homeowner whose grass is too high, or whatever (and the HOA always wins, because the rules and vague and discretionary and totally in its favor), the HOA has a lien against the homeowner for the penalties and legal expenses. As in, $700 for the pain and suffering caused by the too-high grass, and $15,000 for the lawyers.

"The question is whether all this is a good trade-off. Without the HOA, the neighbors have deed restrictions and any one of them (or group of them) can sue if someone violates the restrictions. The concerned neighbors will have to pass the hat to pay for the lawsuit, so they probably won't sue if it's not pretty important. They can always coordinate all this through a civic club, which probably will be funded by voluntary contributions, which are a pain to collect -- but all these factors make it likely the lawsuits won't get out of control and people won't be losing their homes to foreclosure over silly disputes. Oil stains on the driveway, flagpole too tall, mailbox in non-approved location, shrubbery not up to snuff, miniblinds in front windows not approved shade of ecru -- and I'm NOT making those up, they are from real court cases."

Or, as Tyler Berding put it:

"Owners can sue each other directly to enforce the rules but most would rather not do that. It’s messy and expensive and personal. Instead the corporation does it. But that doesn’t change the essential character of the dispute; it just makes it less intimate. Associations, like governments, provide the anonymity and security that prevent street brawls."

The mere existence of the H.O.A. "community association" creates perverse incentives and moral hazards that inevitably result when one group has the ability to use other people's money against them.

Without an H.O.A. corporation, a homeowner(s)/neighbor(s) would have to decide to initiate and bear the costs of a civil suit -- in their own name -- to enforce CC&Rs.

As regular readers of The Privatopia Papers know, the decision to take legal action against a homeowner in an H.O.A. is currently made by the professional property managers and H.O.A. lawyers, who have every incentive to create conflict within community associations. The profit motive ensures it can be no other way.

This inevitably leads to excessive litigation for frivolous reasons, zero tolerance, and lack of common sense that conservative/libertarian pundits and politicians frequently criticize -- except when done by an H.O.A.

Anonymous said...

Interesting article ... but a number of places indicate a lack of understanding by the author.

For example:"Once the neighborhood is occupied, the developer establishes a homeowner association"

This may have happened but usually the developer does not wait to establish an HOA. To the contrary, the HOA is a liability shifting mechanism for the developer. The homeowners are the sole mandatory funders of the HOA and the HOA is under the control of the developer. The developer utilizes the HOA to do all the dirty work and the homeowners have to pay, pay, pay.

"CC&Rs provide the legal basis by which homeowner associations can levy fines and place liens on homes in violation"

No, not really. "Fining" is of dubious legality to begin with. There are laws that provide property owners with the ability to seek redress in court to enforce restrictive covenants. "Fining" is a more recent phenomenon that is being challenged in various jurisdictions throughout the country since states have not delegated governmental police powers to private corporations.

"To reduce or eliminate extralegal housing will require that we repeal federal subsidies that incentivize current patterns of suburban development..."

Huh? The example given regarded extralegal conversions in an urban environment. How would reducing subsidies for suburban housing alter extralegal conversions in an urban environment? In fact, it would seem that lack of such subsidies would make suburban homes even less affordable. This in turn would mean more people sharing fewer spaces in the city, i.e., more extralegal urban housing. Just sayin'.

Anonymous said...

Suburban HOA-burdened housing was actually a critical part of Wall Street's securitization scheme. They needed large dollar notes (like those associated with houses) and lots of them. When a developer first sells homes in a "master planned" subdivision, the developer often utilizes a mortgage company subsidiary to establish an artificial economic baseline for home prices. The "master planned" subdivisions always also start out with a developer-controlled HOA.

Once the pump is primed, other entities will finance home purchases at that price level based upon "comps". In many of these places, every 3-8 houses is exactly the same model. The commoditization was ideal for a Wall Street securitization machine. These are ALL HOA-burdened homes that were overpriced to begin with.