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Abstract:
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"Common interest housing developments (CIDs) are the predominant form of new residential housing construction in most major metropolitan areas in the US. Condominiums proliferate in large central cities and the inner suburban ring, while the outer ring and the exurbs are replete with subdivisions of single-family homes run by homeowner associations. These private organizations, numbering nearly 350,000 nationwide, perform many of the functions of local government for an estimated 70 million Americans, making CIDs perhaps the most dramatic unplanned privatization program ever witnessed. It has been argued that the rapid spread of CID housing since the early 1960s is evidence of market sovereignty in operations. Home-buyers, it is said, are “voting with their feet” and choosing private over public local government in a process much like the public choice theories advocated by Charles Tiebout and James Buchanan. Industry-sponsored surveys show that most CID unit owners appear to be contented enough with their association and its activities. For those reasons, believers in market sovereignty insist that only the most minimal regulation of private government activity is needed, or even justified. Standard state regulation covers the major internal processes of condominiums and HOAs, such as assessment collection, elections, and architectural review. However, there is almost no meaningful governmental oversight of the financial health of associations. This reflects the widespread belief that no such regulation is necessary. In this article I argue that the foregoing picture, is fundamentally flawed. In reality, the entire institution of common interest housing rests on the resources of the owners, and there are good reasons to believe that these resources are too often inadequate. By “resources” I mean not just the money that is needed to maintain the properties, but also the organizational abilities, the knowledge, the wisdom and judgment, and the loyalty to the community that this form of housing requires of the people who run them. As I show, there are many examples of large-scale failure of CID government, including financial fraud and embezzlement, disastrous decisions, underfunding of necessary reserves, and hostile takeovers. Moreover, the aging of the entire CID housing stock means that financial challenges are becoming a structural feature of this housing sector. When associations fail, the consequences harm all the owners, and often extend to entire neighborhoods or even cities. I argue that increased state oversight and regulation of CID finances should be instituted to prevent more widespread problems, which are increasingly likely as these properties age and major building components require costly repair and replacement, but the funds to make those repairs are not available."
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