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«AmericAn neighborhoods: inclusion And exclusion Volume 16, Number 3 • 2014 U.S. Department of Housing and Urban Development | Office of Policy ...»

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Services range from basic maintenance to infrastructure development, and the size of a community can be as small as 2 units and as large as 20,000 units (Foundation for Community Association Research, 2013). In Florida, for example, HOAs typically encompass single-family homes, whereas condominium and cooperative RCAs tend to apply to multifamily structures.2 These HOAs theoretically are formed in response to some underprovision or lack of heterogeneity in public services and regulation (Helsley and Strange, 1998). According to the standard median voter demand model for public goods provision, the local government will allocate its public goods evenly across neighborhoods based on a measure of median demand for services across the municipality (Barr and Davis, 1966; Bergstrom and Goodman, 1973; Bowen, 1943). If heterogeneity exists in service demand, however, certain neighborhoods and properties will be left underserved by the public sector. HOAs are a mechanism for these “overdemanders” to be satisfied with their package of locally provided services. Helsley and Strange (1998) have termed these types of HOAs “private governments,” because they are privately run but provide services often thought to be the purview of the public sector.

Membership in HOAs has grown tremendously during the past few decades, which suggests that residents are willing, and able, to pay for additional services, amenities, and, in general, more control over their local neighborhoods. The first recorded HOA was founded in Boston, Massachusetts, in 1844 (Reichman, 1976). During the past few decades, however, they have proliferated across the country as one of the fastest growing housing options and privatization efforts (McCabe and Tao, 2006). In 1962, roughly 500 RCAs overall existed nationally, and that number increased to more than 323,000 by 2012 (Foundation for Community Association Research, 2012; Gordon, 2004).3 Incorporation as a nonprofit organization is required in Florida; while other states do not always require such incorporation in the legislation, most HOAs incorporate as nonprofit organizations in practice.

This distinction is based on conversations with professionals working with HOAs in Florida and appears to be the case in other states as well.

We would like to be able to report national numbers for HOAs only, but this information is not collected; instead we report numbers for RCAs broadly, of which HOAs are some share.

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By 2012, the number of units in some kind of RCA constituted roughly 24 percent of the national housing stock and more than 60 percent of all new construction was included as part of an RCA.4 Estimates of residents living in an HOA climbed from 2.1 million in 1970 to 63 million in 2012 (Foundation for Community Association Research, 2012).

Although HOAs have grown in popularity, they are not free from controversy. Proponents of HOAs claim that they aid cash-strapped cities by providing more locally targeted services to households that value such supplements and are willing to pay for them. Some have also suggested that HOAs may reduce the cost of housing because many municipalities permit (or even encourage) developers to build HOA projects and in turn bypass certain regulations that usually increase the cost of development (ACIR, 1989; McKenzie, 2003). These concessions could mean greater HOA access to lower and middle income households (Manzi and Smith-Bowers, 2005). Others absolve local government of any responsibility regarding HOAs, however, because they are believed to be marketdriven mechanisms that merely respond to local demand for housing location and amenities (McKenzie, 2003; Strahilevitz, 2005). Indeed, the Florida legislation governing HOAs explicitly exempts these associations from layers of oversight that are believed to interfere with the efficiency of the private government operations.

Opponents, however, worry that HOAs are simply a private mechanism for residential exclusion and segregation, and that members are paying not only for extra services, but also for protection and isolation from neighbors of racially or economically different backgrounds (Blakely and Snyder, 1997; Low, 2003; McKenzie, 1994). Now residents have a mechanism to sort not only across jurisdictions, but also within them; this mechanism could lead to significant service disparities.

HOAs typically provide exclusive services and amenities to their members. The concern that HOA members will withdraw from their broader municipal civic duties, such as voting or more informal political involvement, also arises.

Most, if not all, of these concerns are empirical questions at this point; the research on HOAs is thin because of severe data limitations. Because of the private nature of HOAs, few, if any, reporting requirements exist. Therefore, little is known about the mere number of HOAs, let alone their size, yearly budgets, and assessments. In this article we discuss the modest, but compelling, collection of research to date and motivate the research question for this analysis.

Fiscal and Regulatory Effects of HOAs Here, we summarize the empirical findings on how HOAs interact with local fiscal and regulatory regimes.

Property Values The largest body of literature pertaining to HOAs (or RCAs more broadly) addresses their fiscal and regulatory implications. Because membership in an HOA comes with a binding fee (on top of any monthly mortgage payments), one of the first and most persistent questions relates to their effect on home values. The most recent documentation of this topic also boasts the most comprehensive This statistic is based on industry data from the Community Association Institute (available at http://www.caionline.org/ info/research/Pages/default.aspx), data from the American Community Survey, and authors’ calculations.





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mapping of HOAs to date. Meltzer and Cheung (2014) constructed a dataset with the HOA boundaries and parcel-level tax rolls (including property sales information) for cities in 49 of the 67 counties in Florida, which is second to California for the number of RCAs. They employed hedonic regression analysis to estimate the effect of HOA membership on property values. They found a consistently positive premium, hovering around 7 percent; in addition, they found this premium is strongest immediately following HOA formation and declines over time, which suggests quick capitalization of HOA benefits. Properties in larger HOAs sell for less, and this disparity is particularly true for properties in the biggest HOAs. Finally, properties located immediately outside an HOA sell at a premium relative to other non-HOA properties, and this premium marginally decreases (increases) in the size (frequency) of neighboring HOAs.

Other studies with more limited samples found positive premiums as well. Groves (2008) uses a dataset of 124,878 property sales in the St. Louis area to also conduct a hedonic analysis. He found that, although homes that belong to an HOA sell for more than homes that do not belong to an HOA, this premium disappears when finer characteristics of the HOA and non-HOA homes are controlled for. Groves argues that this premium is evidence that the homogeneity of homes within HOAs hides any positive gain from living in an HOA. Focusing on one type of HOA in particular, LaCour-Little and Malpezzi (2009) and Bible and Hsieh (2001) both look at the effect of a gated community on its property values. The results from both studies show that homes located inside gated communities have significantly higher values than comparable homes outside the gated communities. Neither of these studies, however, uses longitudinal data that can control for price differentials before the establishment of the HOA or gated community.

Housing Distress More recently, HOAs have come into focus as a mediating factor in the foreclosure crisis: smaller, more localized governments, like HOAs, may have more success at addressing potential negative externalities. To date, two studies empirically tested the role of HOAs in either mitigating or exacerbating the negative spillovers from neighboring distressed properties—the role of HOAs is ambiguous. They can potentially use their collective efforts to mitigate the effect of physically and financially distressed neighbors; on the other hand, their cooperative nature can exacerbate the localized externalities from neighboring distress. Cheung, Cunningham, and Meltzer (2014) examined how property prices respond to homeowner distress and foreclosure within HOA communities in Florida (one of the hardest hit states during the foreclosure crisis). They created a rich dataset of HOAs, sales, and aggregate loan delinquencies and foreclosures from 2000 through 2008. Cheung, Cunningham, and Meltzer (2014) found that properties in HOAs are relatively less affected by more distressed neighbor homes compared with non-HOA properties, but only when considering less severe delinquency rates. They also found that negative price effects from higher delinquency exposure rates are ameliorated for properties in larger and newer HOAs.

A second, closely related study by Fisher, Lambie-Hanson, and Willen (2013) examined price effects of foreclosures within condominium developments in Boston (versus the predominantly singlefamily HOA developments included in the previous study). They used a very detailed dataset of condominium sales transactions for the years 1987 through 2011 to test whether nearby foreclosures depress sales prices via the “supply effect” or an investment externality. They not only compared

Cityscape 73Cheung and Meltzer

prices for properties in distinct condominium associations, but they also compared prices within associations (but at different locations). This empirical strategy enabled them to identify different mechanisms behind any negative foreclosure price effects. They found that condo units sell at a 2.4-percent average discount when a foreclosure shares the same address (and this effect is much stronger in smaller, often single-address, associations); no price differential exists when a foreclosure is in the same condo association, but at a different address, or in a different association entirely. Together, they argue that these findings support investment externalities as the driving force behind foreclosure-related price effects.

Strategic Interaction Apart from the capitalization (and subsequent revenue) effect, HOAs can also influence the local public fisc through a mechanism known as strategic interaction. A growing body of literature examines the strategic interaction of overlapping or neighboring governments in their fiscal behavior and provision of public goods (for example, Brueckner 2003, 1998; Cheung 2008b; Helsley and Strange 1998, 2000a, 2000b). According to this framework, decisions about the service levels and investments of private government entities, such as HOAs, are made on strategically based decisions about the levels of publicly provided services. For example, the local public sector may decide to withdraw from particular services (such as street cleaning) if it knows that the HOA will provide it within its boundaries—they do so to avoid redundancies.

Cheung (2008b) has examined the effect of private government service provision on public service expenditures in the context of planned unit developments (PUDs). He used a panel of cities in California and estimated the effect of PUDs on public service expenditures across three decades.

He found evidence of service downloading, such that for a 10-percent increase in per capita PUD units in a city, local expenditures fall by 1.5 percent. The extent of service downloading depends on the substitutability of the service and the size of the city (smaller cities have less opportunity to download, or “strategically substitute”). He also found that strategic substitution is less likely to occur in smaller cities, where targeting service provision, as opposed to exploiting economies of scale, is not necessarily efficiency enhancing.

In another paper, Cheung (2008a) argued that property tax limitations, which restrict the ability of cities to obtain sufficient property tax revenue, may have prompted some jurisdictions to encourage the expansion of HOAs. He looked at the period surrounding the imposition of Proposition (Prop) 13 in California in 1978 and found that more HOAs are likely to form in cities that are more constrained by the limitation. Constraint is measured in revenue terms (through the decline in revenue likely to result from an implementation of the revenue-sharing provisions of Prop 13) and in expenditure terms (through the pre-Prop 13 level of police spending). Cheung’s paper demonstrates the importance of public institutions’ role in the formation and spread of HOAs.

As HOAs and local governments preside over land use regulations, Cheung and Meltzer (2013) extended the previous notions of strategic interaction to apply in this context as well. By combining two novel datasets on Florida HOAs and municipal regulations, they examined how HOAs affect public land use regimes for 232 cities. They found that the prevalence of HOAs is positively associated with a propensity for regulation, as are newer and bigger HOAs. Also, HOAs are positively associated with land use techniques that direct development through incentives, rather than 74 American Neighborhoods: Inclusion and Exclusion Why and Where Do Homeowners Associations Form?

mandates. These findings suggest that decisions and actions on the part of private entities, like HOAs, can generate meaningful outcomes for their host municipalities at large. Opportunities for coordination between these private and public service providers could result in citywide gain.



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