Housing to fall another 25% - Updated Case-Shiller

[housingcrashsurvivor]

Re: Housing to fall another 25% - Updated Case-Shiller

Again, i welcome the debate, so please dont take my responses as me saying im right and you are wrong or anything like that... I am just like you trying to reason out my thoughts and a healthy debate helps everyone...

Thank you for the clarification though I was unaware of any misunderstanding.

1) Financing affects price ceiling on purchase price and material costs going up helps put a bottom on house prices, but the real price of a home i feel comes down to how much rent it can command... As an investor why would i put money into a house (that depreciates, costs money to maintain, etc) when i can get a better return in stocks, bonds, whatever.. The way i see it; in normal markets all assets compete for capital based on ROI, risk, supply and demand, etc.... As far as can tell , there is a lot of hidden supply still about to come on the housing market... All of these In an inflationary environment with lower standards of living (meaning lower real income), the price of a house might stay the same, but if a currency devaluation happens or a fiscal crisis occurs wouldnt you be better off in something else?

I mean, look at a country like Argentina, Latvia or iceland or any country that has come to a lower standard of living (granted theirs was sudden and due to foreign currency debt, ours is not exactly the same thing) through a debt crisis, or devaluation or something along those lines... The end result being a lower standard of living for the population... Their RE markets collapse.. If you own the home outright you may be better off, but if you invested in gold or silver or foreign currency you probably came out better off than plowing cash into RE...

So are you saying that a thing will have a certain value regardless of what a thing cost? Is that more true for a house or the land it sits on or for the infrastructure which supports it or for the gold buried there?

Fix up costs add to the value of a house... But, if the house is overvalued, then it ends up netting down to where the value should be.... Go ask anyone in phoenix if the granite floors they put in brought their home values up? In the late eighties or 90s' RE had several things going for it... Strong bubbly economy, interest rates going lower, stock market boom, low house prices... My parents bought a house in Minnepolis in 97/98 for 50K (and put in another 30K in fix ups) at the time no body was chasing housing, houses were on the market and if anyone cared they bid.. It was a place to live....

I had in mind more basic structural items like roofing or windows, a proper kitchen, etc., but certainly, as you note, whether or not a property has been overdeveloped relative to the neighborhood needs be considered. How does that support your saying that past values are not so important to understanding what might be a fair current price?

I believe its 25-30% owned free and clear

I've read and surveyed about 300 houses in my own neighborhood. It is about 33%. Add those to people with enough equity still to downsize and to those who carry a mortgage even though they can afford their house without one and you can approximate an answer on who can buy with cash.

I am not being overly pessemistic I am just trying to see & list the headwinds as i see them, if you disagree outline where you see flaws, dismissing it doesnt negate it ;)... Just bc i say RE has headwinds doesnt mean it goes to zero in a hyper-inflationary seventh circle of hell , it just means that relative to other investments it doesnt seem to be the optimal thing to be invested in at the moment.....

Collapse is not pessimistic? Is okay for you to cry wolf to make a point but not okay for me to shoot the wolf to make a point?

Again, its all relative... Your income might have nominally gone up, but real income may have gone down.... If expenses rise in real terms as a percentage of nominal and real income, something has to give, no? How else can you afford something? If you make 5K/month but your electric bill goes up from 200 to 500/month i believe that would be housing negative, bc, if income (for the time being) stays where it is at and your expenses suddenly rise you only have so much income to pay your total expenses... Either in aggregate you eat and go out less or in aggregate your ability to afford the house you are in just went down.... Again, keep in mind pay raises arent as elastic as energy or other expenditures... Not everyone can go to their boss and ask for a raise every day.... When gas prices spike to $4/gallon in 08, i dont know about you but i didnt get a raise... Just made me in aggregate poorer and everyone else i work with felt the same way.....

Again that is at a certain point in time... a year later your income might go up and you can again afford the home, but at that point in time and for probably 8 or 9 months you could possibly be scrimping and saving every last cent to get by or maintain the same standard of living...

And yet when pizza was $.25 per slice, I could not afford an entire pie. Today a slice is closer to $3 and buying a pie is not a problem.

With the average student in non-bankruptable debt up to their eyeballs and for the time being diminishing job prospects, the pool of buyers is dwindiling... It doesn't mean no one is going to buy, it just means that the pool of buyers shrinks... As for psychology, at work i know 4-6 folks that are walking away from their mortgages, professionals that make in excess of 100K/year, not broke, just figured out they were shit out of luck in every gaining their original purchase price... Now, it is discussed regularly at lunch, nothing to be ashamed of... That is a shift in psychology, housing is not going to be seen as a "great investment", it will be just a house, shelter and eventually CAP rates will have to start making sense for an investor to buy....

Since when did college students graduate with their own house? I didn't even get a car. It took me years of saving after college to afford a house. Where did this entitlement come from? Can I get a refund on all that?


I don't know what luncheons you attend, but all of my friends are disgusted by what you perceive as a shift in psychology.

Are basic human needs something to walk away from? Is it human nature to evolve in a way that you don't feel better about yourself?

Sure, i didnt say that it doesnt provide an income... RE will always provide an income... But, will it be the best investment going forward that provides the best real returns, i doubt it... An imbalance 10-20 years in the making doesn't usually correct in half the time or rebound that quickly... And there is usually a bottoming out period that lasts a while....

Having just bought at an early 1990s price, just four years after peak yet at 40% less, based on rent to price, than what was had 10 years ago, before the great bubble begain in earnest, should I believe that any asset, even gold, might not drop as quickly?

Sure interest rates can go sideways for a while, but in the end they will rise and very possibly rise sharply... Why, bc of the exact thing EJ has been talking about for the last 5 or 6 years... Eventually the market will puke at accepting such low yields with the supply of treasuries being put up for sale going up each year.... It might not happen tommorrow, but i cant fathom why anyone would lend the US govt money for 30 years for such low yields when the supply is damn near infinite... What is not sustainable will not be sustained... Eventually something will give....

http://www.chartsrus.com/chart.php?i...?ticker=FUTTYX

Take a look at the link above for the 30 year treasury yield... I will leave you to make your own conclusions on where the yield will go... As i see it the downward trendline from the 1981 top has already been broken (around 99/2000, around the same time gold bottomed out) and for the last several years or so we have been in a bottoming formation.. We may have another attempt to test the 08 lows but, after that it is most likely bottomed and going higher.... Even if we go lower on yields, do you really think people will continously loan money to a govt that continues to spit out nothing but debt?

I never said rates might not eventually go up. I questioned you saying that there is only one other direction.

...I honestly dont know... It depends on your individual circumstances.. But, that doesn't sound like a bad deal.... But, we are at that point talking about different things, you are talking about your individual situation (and/or a deal you may have come across) and i am referring to a market in general... What you are doing sounds like a business deal, a business person buys/sells where ever he sees an opportunity to make money and can usually make money in any market.... The concept of buy low sell high never goes out of style You can use the same concept to trade any market... When referring to a market i believe you have to look at it overall, not individual things... Ie. its like asking i can buy gold at $500 dollars when todays market price is 1250, should i do it? Well, yeah..

I was only responding to a post above me which mentioned future Florida carnage but then responded to your response to my post. I am not a trader. I just wanted to live in an area with a lower cost of living and buy property which might produce some relatively stable income. Mission accomplished.

All i know is that my belief is that higher interest rates will/should provide headwinds for RE, i am trying to figure out how inflation will factor in to prices, but i am not there yet, bc i just dont know how inflation wil relate to incomes, psychology, housing sentiment, etc...

Probably you will find headwinds and risk in almost every worthwhile endeavor. Such is life

[dummass]

Re: Housing to fall another 25% - Updated Case-Shiller

I think in high inflation environment gold and silver and commodities go alot higher....

I'm late to the conversation, but I'll play devil's advocate.

If the Dollar cartel can maintain control, there will be no inflation in commodities and interests rates will stay low. The irony is that creating more dollars can actually reduce the price of commodities; the more dollars created, the lower interest rates will go. This is counter intuitive...(ya, I know)... it's not suppose to work that way.

Why do you think they don't want the Fed audited? They are gaming the system!

If an unlimited supply of new dollars can be used to short gold funds, the price of gold will not rise.

If an unlimited supply of new dollars can be used to buy bonds, interest rates will not rise.

If an unlimited supply of new dollars can be used to make unprofitable loans on houses, the price of houses will not collapse.

If an unlimited supply of new dollars can be used to buy stocks, the price of stocks will not fall.

The typical response to this argument is that the game can't go on forever... eventually, people will lose faith in the dollar...hyperinflation... currency collapse...

Yet, after three years of reading iTulip, you are still repeating the mainstream mantra. If this mistake can be made by the best and the brightest, how can we expect the rest of the population to lose faith in fiat currency? The dollar cartel is still in charge and nothing is likely to change for some time.

[karim0028]

Re: Housing to fall another 25% - Updated Case-Shiller

I'm late to the conversation, but I'll play devil's advocate.

If the Dollar cartel can maintain control, there will be no inflation in commodities and interests rates will stay low. The irony is that creating more dollars can actually reduce the price of commodities; the more dollars created, the lower interest rates will go. This is counter intuitive...(ya, I know)... it's not suppose to work that way.

Why do you think they don't want the Fed audited? They are gaming the system!

If an unlimited supply of new dollars can be used to short gold funds, the price of gold will not rise.

If an unlimited supply of new dollars can be used to buy bonds, interest rates will not rise.

If an unlimited supply of new dollars can be used to make unprofitable loans on houses, the price of houses will not collapse.

If an unlimited supply of new dollars can be used to buy stocks, the price of stocks will not fall.

The typical response to this argument is that the game can't go on forever... eventually, people will lose faith in the dollar...hyperinflation... currency collapse...

Yet, after three years of reading iTulip, you are still repeating the mainstream mantra. If this mistake can be made by the best and the brightest, how can we expect the rest of the population to lose faith in fiat currency? The dollar cartel is still in charge and nothing is likely to change for some time.

Hi D,

Your entire argument depends on the premise that EVERYONE involved plays along... One thing i believe is that people, businesses and governments will always do what is in their best interest... This game involves governments and politics that have interests that are at odds; how it works out; i am not that smart, thats why i subscribe here, bc to sit and think it out takes alot of analysis and effort... ;) Its partially thinking it out in game theory, bc human motives/politics are involved...

You can fool some people some times, you can fool some people all the time, but you cant fool everyone all the time... Something will give. No one can provide you with a time line, but the longer a market is manipulated the more forceful the reaction.... The longer the rates stay too low, the higher the bounce up and the more jarring...

You just need to look at the charts and the fundamentals... The 30 year yield is very low, i am not saying it cant go lower... BUT, once/if it hits zero, what next? To me its about the dumbest trade someone can put on right now.. The lowest yields in the interest rate cycle is like buying the DJI at 13/14000... You will get burned; especially with bonds, bc at least with stocks they can literally go up very high... With bond yields, it just doesnt make sense to me... What are you going to do, pay the govt to hold your money?

You might say that back in the 80's the FED raised rates, this time they wont... Well, this time the market may well do it for them. Take a look at any chart, even the interest rate chart from the 80's; market moves always end with a bang... Bull moves or bear moves never just end; they end w/ a climax.. Whether it be the dot come bubble, housing, interest rates in the 80's.

If whatever you list happens then it will be through govt intervention, in a private market it will never happen, bc why would anyone loan you money at these low rates with the prospect of govt printing tons of money, real incomes going down, etc... They can look and read charts as well as anyone.... If the govt starts handing out subsidized interest rate loans to the public (which they did in the 80s), then perhaps that could hold up housing, but that just means your dollars are worth less and you can get better returns in other investments...

Lets even forget all of the above.... Call it bogus or voodoo or mantra or stupidity, whatever... How about just doing the math, math is immutable; it doesnt depend on sentiment, or anything else.. If rates just simply normalize and go to halfway between 16% and the current 3-4%, lets say 7-8% (my parents had a mortgage at 22% in the 80's), how does that impact your financing? Also, you need to keep in mind that you also now need to put at least 25% down not the zero down.... Bottom line it takes years to undo a bubble and markets go in and out of favor and thats just how it works... Looking to recent history and assuming things can never change is very dangerous to your health and money

The entire EJ premise which seems to be playing out right now is lower standard of living, higher expenses for food, gas, utilities, etc.... Where do you suppose the money will come from to raise house prices in a rising interest rate, lower real income environment?

My thinking is that IF prices are to go up they will go up in nominal terms not in real terms and it will be bc your inflation adjusted nominal income can justify buying at 10-15% interest rates with a 25% downpayment (which in itself is a deflator from bubble prices with zero down).... You can and will have bounces, simply bc alot of folks drink the kool-aid and refuse to look at reality and do the math... Just because something seems cheap now relative to what it was 3 years ago doesn't mean it cant go lower... Just look at the Nikkie, 20 years of going down.... Which by the way looks like its bottoming out.

[ThePythonicCow]

Re: Housing to fall another 25% - Updated Case-Shiller

If the Dollar cartel can maintain control, there will be no inflation in commodities

Unless perhaps if one of the ways the Fed maintains control is by jacking the (Dollar denominated) price of oil up sharply, forcing oil importing countries to scramble for Dollars and benefiting any insider who knew the move was coming ahead of time (*).

Control doesn't necessarily require any specific direction to this or that price. It means the Fed (and it's fellow travelers) call the shots and the rest of us get jerked around.

The wagon master still has control of his team of horses if he has the reins in his hands and can jerk the team this way or that, at his will (**).

---

(*) as insiders gained from knowing ahead of time that Greece was going to be trashed, favoring a short Euro, long Dollar trade.

(**) No - you and I are not the team. We are the roadkill the team and wagon just ran over.

[dummass]

Re: Housing to fall another 25% - Updated Case-Shiller

We are the roadkill the team and wagon just ran over[/FONT].

Roadkill...that would make a good handle. When I'm ready to retire Dummass, I'll come back as Roadkill; it's a good fit.

[karim0028]

Re: Housing to fall another 25% - Updated Case-Shiller

Roadkill...that would make a good handle. When I'm ready to retire Dummass, I'll come back as Roadkill; it's a good fit.

BTW, just finished reading EJ's new book about 2 hours ago.... Very good book, i recommend folks go out and read it.

[dummass]

Re: Housing to fall another 25% - Updated Case-Shiller

Your entire argument depends on the premise that EVERYONE involved plays along...

Everyone doesn't need to play along, but the majority of us will play along, because we have no choice. The currency of the realm is forced upon us by decree.

The 30 year yield is very low, i am not saying it cant go lower... BUT, once/if it hits zero, what next? To me its about the dumbest trade someone can put on right now.

Yes, I've been calling it a bond bubble before the term was popular, but I don't believe that the bond market controls interest rates (CBs do). Low rates are necessary at the moment, so they will stay low. If bonds paying low interest rates are bad investments, sitting on cash is even dumber, no?

If whatever you list happens then it will be through govt intervention, in a private market it will never happen

This is the central point of my argument: this is not a free market; the government and Fed are manipulating...(see list above). They have the motive, the tools, the opportunity, and the will. Certainly, the circumstantial evidence is overwhelming.

Lets even forget all of the above.... Call it bogus or voodoo or mantra or stupidity, whatever... How about just doing the math, math is immutable; it doesnt depend on sentiment, or anything else.. If rates just simply normalize...

It's the new normal. Get used to it "for an extended period." They can keep rates low for as long as they deem necessary.

[karim0028]

Re: Housing to fall another 25% - Updated Case-Shiller

Everyone doesn't need to play along, but the majority of us will play along, because we have no choice. The currency of the realm is forced upon us by decree.



Yes, I've been calling it a bond bubble before the term was popular, but I don't believe that the bond market controls interest rates (CBs do). Low rates are necessary at the moment, so they will stay low. If bonds paying low interest rates are bad investments, sitting on cash is even dumber, no?



This is the central point of my argument: this is not a free market; the government and Fed are manipulating...(see list above). They have the motive, the tools, the opportunity, and the will. Certainly, the circumstantial evidence is overwhelming.



It's the new normal. Get used to it "for an extended period." They can keep rates low for as long as they deem necessary.

I dont disagree with you that they will do everything in their power to keep rates at or near zero... After all, going on crack is a lot easier than trying to ween yourself off of it... But, history is littered with governments that thought they could control the bond market... When you are a borrower, your lender owns you... As mentioned before, they can keep rates at zero, BUT there will be consequences to the dollar and EVENTUALLY the bond market... There is no free lunch. If it goes on long enough, you will hear a big sucking sound and that will be real bidders on bonds disappearing... Then its pure monetization and printing; and in front of everyone to see... At that point gold and silver go parabolic (take a look at the last gold cycle)....

They can keep the game going, housing can stay where it is at, but inflation adjusted you are still going to lose as the dollar loses quite a bit of its value...

I am just saying that there are better investments that can appreciate according to true supply and demand, during this time (ie, gold and silver, wheat, sugar, NG, etc... all just had a huge spike and are going or are already in an uptrend) against housing or any other asset and once all settles out you can buy into RE when it makes sense to buy into it based on CAP rates, interest rates, etc... Bubbles when they pop dont come back for 10-20 years, sometimes even a generation... Why keep trying to put money into something that is so obviously played out at the moment when there are so many other opportunities just getting started... When gold/silver/commodities peak we will probably be in a higher interest rate environment and at that time you sell your gold, silver and commodities and switch into stocks (at min 8-10% div yields), bonds and RE.... In high interest rate environment, cash is king and you can buy your house(s) cash at a high CAP rate.... I think we still got 5-10 years before this hard asset cycle is finished. BTW, that will be around the same time when everyone on TV is saying "gold is king", "hyperinflation is coming", "save yourself", "paper is crap", "housing is the worst investment", etc... You dont make money riding the last bubble all the way down....

One other thing about housing i am worried about is property taxation.... As a property owner you are a captive tax base, that is political influence that i am not sure how it would play out when states and counties are starving for cash.... I already talked with some county tax depts and their RE rolls are swelling with tax defaulted properties. Bc, prop tax rates dont go down with valuations as quickly (another thing i see weighing them down, as you have to count it in the cashflow scenario)... Sneaky little bastards, they lower the valuations then raise the tax rate, so net net you are still paying about the same Actually had a county tax assessor tell me "what do you expect, we still need our cash flow".....

[dummass]

Re: Housing to fall another 25% - Updated Case-Shiller

I dont disagree with you that they will do everything in their power to keep rates at or near zero... After all, going on crack is a lot easier than trying to ween yourself off of it... But, history is littered with governments that thought they could control the bond market... When you are a borrower, your lender owns you... As mentioned before, they can keep rates at zero, BUT there will be consequences to the dollar and EVENTUALLY the bond market... There is no free lunch. If it goes on long enough, you will hear a big sucking sound and that will be real bidders on bonds disappearing... Then its pure monetization and printing; and in front of everyone to see... At that point gold and silver go parabolic (take a look at the last gold cycle)....

They can keep the game going, housing can stay where it is at, but inflation adjusted you are still going to lose as the dollar loses quite a bit of its value...

I am just saying that there are better investments that can appreciate according to true supply and demand, during this time (ie, gold and silver, wheat, sugar, NG, etc... all just had a huge spike and are going or are already in an uptrend) against housing or any other asset and once all settles out you can buy into RE when it makes sense to buy into it based on CAP rates, interest rates, etc... Bubbles when they pop dont come back for 10-20 years, sometimes even a generation... Why keep trying to put money into something that is so obviously played out at the moment when there are so many other opportunities just getting started... When gold/silver/commodities peak we will probably be in a higher interest rate environment and at that time you sell your gold, silver and commodities and switch into stocks (at min 8-10% div yields), bonds and RE.... In high interest rate environment, cash is king and you can buy your house(s) cash at a high CAP rate.... I think we still got 5-10 years before this hard asset cycle is finished. BTW, that will be around the same time when everyone on TV is saying "gold is king", "hyperinflation is coming", "save yourself", "paper is crap", "housing is the worst investment", etc... You dont make money riding the last bubble all the way down....

One other thing about housing i am worried about is property taxation.... As a property owner you are a captive tax base, that is political influence that i am not sure how it would play out when states and counties are starving for cash.... I already talked with some county tax depts and their RE rolls are swelling with tax defaulted properties. Bc, prop tax rates dont go down with valuations as quickly (another thing i see weighing them down, as you have to count it in the cashflow scenario)... Sneaky little bastards, they lower the valuations then raise the tax rate, so net net you are still paying about the same Actually had a county tax assessor tell me "what do you expect, we still need our cash flow".....

You have made some very good points.

[karim0028]

Re: Housing to fall another 25% - Updated Case-Shiller

You have made some very good points.

As an example, i was looking at buying a tax forefitted gas station (there are alot these days). 60K was owed on a commercial property (Formerly 10-12K/yr in prop taxes) on a corner lot in a suburban town that several years ago used to rent for 4K/month... Business collapsed in about 06/07, owner could no longer rent it out for even 1.5-2K/month (multiple renters jumped ship), property now needs a new roof, asphalt, essentially some work... Its a small space, so i really dont feel comfortable attempting to rent it for more than 1.5/2K until it proves it sales/revenue capability...

First off, the county/state is asking for tank removal (10-12K job), roof needs to be replaced (6-10K), 60K in back taxes, possible environmental liability, etc, etc.. The list goes on and on... As a gas station, i dont think its viable, so it needs to change its line of business to commercial retail space, laundromat, or something along those lines...

But, the county is still barely willing to budge on the tax going forward.... They lowered the valuation from 450K at the peak to ~150-160K now and the tax is still about 8-10K per year... I asked how the value went down so much but the tax only went down a couple of grand and he said well we raised the rate..... Now, if i can only rent it for 12-16K/yr, am i supposed to pay (or since its NNN, ask the tenant to pay) 80% of the rent in property taxes? I told that to the assessor and he told me, we still need our cashflow... I damn near told him to shove it...

If that isn't confiscation of wealth, i dont know what is.... The former owner (poor guy) had paid in full (no mortgage bought for 500K in '04) and was begging and pleading w/the county to have his taxes lowered (property was on the market for 3 years), to no avail, since the tax assessments only go down yearly and dont go down 30-50% like the markets have been dropping... He lost the property since he couldn't keep up with the cashflow demands... Even if you own a property outright, you dont really own it....

Govt can kill an enterprise by overtaxation and i have a feeling you will see alot more properties going for tax forefeiture as well since alot of the taxes are based on bubbilicious prices and counties are fighting tooth and nail to keep the tax revenue steady.... Imagine this scenario, as an entrepenuer, you havent even started your enterprise and you are already in hock to the county for 1K/month in property taxes wether you make money or lose money... In a uncertain market, for the time being i am opting to keep my liquidity until something peeks my interest...

[dummass]

Re: Housing to fall another 25% - Updated Case-Shiller

The former owner (poor guy) had paid in full (no mortgage bought for 500K in '04) and was begging and pleading w/the county to have his taxes lowered (property was on the market for 3 years), to no avail, since the tax assessments only go down yearly and dont go down 30-50% like the markets have been dropping... He lost the property since he couldn't keep up with the cashflow demands....

From what I've read, that is how most people lost their property during the Great Depression: unpaid property taxes.

[housingcrashsurvivor]

Re: Housing to fall another 25% - Updated Case-Shiller

One other thing about housing i am worried about is property taxation.... As a property owner you are a captive tax base

Do landlords not figure taxes into rents?

Here in Florida, we've a Save Our Home amendment and its portability such that since downsizing, I pay 12% of what my property would be taxed were someone to buy in now with no long term SOH savings to port and even if they just paid a price based on the prebubble year 2000 rent to price ratio, never mind the early 1990s price I got.

Though millage might alter up or down to match the prior year's budgets, once protected by SOH, taxable values appreciate (or depreciate) with CPI (or deflation until the SOH assessed value matches market value) to a max increase of 3% per year. (There is a clawback in that assessed values continue to rise up to 3% until assessed matches market, so that even when market values decrease, taxation can increase.)

In 20 years, my annual taxes will still be the equivalent of less than half of what a month's rent produces today, regardless of what even hyperinflation might do to property values, or rents.

Sometimes there can be a measure of safety in captivity.

[don]

Re: Housing to fall another 25% - Updated Case-Shiller

In related news, and no secret to itulipers,

Financial crisis hits condo associations

As more homeowners fall behind on dues, those who are able to pay suffer

By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) -- People often buy a condo unit partly because they don't need to worry about cutting the lawn or fixing the roof -- their condo association takes care of maintenance and repairs for them, with those services paid through homeowner assessments each month. At least, that's the way it's supposed to work.

Now the economic downturn is hitting Americans hard -- and, in turn, putting stress on their condo associations. When homeowners lose their jobs and can't pay dues, or investors decide to walk away from their rentals, condo associations suffer.

That, in turn, affects everyone in the development, not just homeowners in financial straits.

"When someone doesn't pay assessments of the community, they're picking the pockets of every one of their neighbors," said Andrew Fortin, vice president of government and public affairs for the Community Associations Institute.

The current problems only exacerbate what's been an issue for years, some say. Many condo associations aren't prepared for major maintenance jobs due to ill-funded reserves and insufficient planning, said Evan McKenzie, a political science professor at the University of Illinois at Chicago, who has written about homeowner associations.

"This is a very troubled housing sector right now," he said.

To compensate for lost income, some associations are hiking assessments on all residents, said Frank Rathbun, vice president of communications and marketing for the CAI. Many are also cutting back on spending, which could mean anything from deferring capital improvements to skimping on landscaping projects.

Some are employing tougher tactics to collect dues from homeowners who are behind on payments, more frequently slapping liens on properties and in some cases foreclosing on those who are delinquent. Fortin said that usually the threat of a lien is enough to get most people to make an effort to become current on their dues.

But getting tough about collections is easier for professionally managed associations. Many smaller buildings are managed by a board comprised solely of residents, and that can get awkward because they have to enforce rules on neighbors who might be dealing, say, with a job loss, said Richard L. Thompson, president of Regenesis, a homeowner association management consulting company.

Meanwhile, windows and roofs may need to be replaced or streets repaved. If there's no money, the projects won't get done.
Lenders shun some buildings

It's also getting tougher for associations to get a loan for the extra funds they need, when drawing extra money from members isn't enough, McKenzie said.

And there's another consequence of dues-dodging neighbors: Lenders are less likely to approve a refinance loan for anyone in the building, or a purchase loan for prospective buyers, if a significant number of owners are past due on their assessments.

If dues are 30 or more days delinquent for more than 15% of the units in a condo building, the entire building earns a "non-warrantable designation," and borrowers are unable to obtain a typical mortgage loan, said Dan Green, a loan officer with Waterstone Mortgage, in Cincinnati.

"The guideline applies to all government-backed loans -- from FHA, Fannie or Freddie -- and it applies to every condo in every market," Green said in an email.

For a condo unit owner, that means your neighbors' negligence in paying their dues could put the kibosh on you refinancing your home loan at a good rate. Or, it could kill a home sale for a buyer who needs a conforming mortgage to close.
No choice but to pay

Even more frustrating, a homeowner in an association doesn't have much choice but to pay the dues -- even if they're unhappy with the management.

"When you buy into common-interest housing, you have to pay the assessments, you are bound to pay the assessments. And if you don't, they will put a lien on your property," McKenzie said. "Once you're in, there's very little you can do."

That's why it's important for people to be diligent before buying a condo unit, looking into the financials of the governing group before closing on a deal.

Before buying, find out if special assessments are anticipated, get a statement of the reserves and find out how they compare to the most recent reserve study, McKenzie said.

A reserve study will analyze the financial state of the association's reserves and anticipate expenditures that will be needed down the line. If a study hasn't been done, step back and think about what you're getting into -- an association that may not be adequately prepared for future expenses, he said. Many experts also recommend finding out how many units are being rented in the building.

"You have to protect yourself before you buy. You can't buy a cheap condo at bargain basement rates and think you got a steal," McKenzie said. If it comes in an under-funded building, it could end up being a headache -- potentially a pricey one -- in the future.

After you move in, participate in meetings and pay attention to the financials, he said. Your home's value depends on it.

Homeowner associations are designed to be "hands on," Thompson said.

That means while you might not be shoveling your own snow or cutting your own grass, you should be spending some of that extra time attending meetings and staying aware of the association's finances.


http://www.marketwatch.com/story/financial-crisis-hits-condo-associations-2010-09-08