Accountability and Private Governments: Do Homeowners' Associations Lower Property Values?
Langbein, Laura, Spotswood-Bright, Kim, Regulation
IN A PAIR OF RECENT REGULATION ARTICLES, Robert Nelson and William Fischel discuss the emergence of private residential community associations (RCAS) as suppliers of services that historically have been provided by local government. (See "The Private Neighborhood" and "Revolution or Evolution," Summer 2004.) Nelson argues that state laws should be amended to allow subdivision residents to formally supplant local government (or parts of-local government) with RCAs while Fischel responds that, though RCAs are growing in popularity, residents seem to want the services provided by RCAS and local government in combination, rather than having RCAs supplant local governments.
Interestingly, neither author considers whether residents as a group benefit from their homeowners' associations. Instead, they both appear to assume that RCAs provide net benefits; hence their disagreement over whether residents prefer the services of an RCA by itself or in conjunction with a local government. Is that assumption correct? Do RCAs efficiently provide services to residents?
A BRIEF DESCRIPTION
RCAs are private organizations that display many characteristics of typical local governments. They supply services that are often provided by municipalities, including maintenance of common areas, roads, utility systems (water and sewer), lighting, refuse removal, and communication systems. They "tax" their residents for services through regular and special assessments, and each association holds periodic elections to choose representatives who, as a board, will make decisions on behalf of their neighborhood. Current estimates are that there are more than 250,000 RCAs in the United States and that one out of every six Americans now lives in some form of homeowners' association.
EFFICIENCY If RCAs provide a level of services with benefits equal to or exceeded by residents' willingness to pay for them, then property values in the community should remain constant or increase. But RCAs may not provide an efficient level of services because of inadequate oversight by community residents. Most residents, if not all of them, have an incentive to let someone else speak for (or against) community services. The consequences of individual inaction may be policies that reflect the preferences of community activists who have higher demands for services than the mean or median resident. In the most likely type of inefficient RCA, an increment in expenses for services reduces property values because the marginal purchaser of property gets less benefit out of the services than their cost. In that case, the excessive fee will be negatively capitalized into RCA property values.
Overprovision of services is particularly likely in RCAS because the elected members of the various association boards spend other peoples' money and residents have insufficient individual incentive to monitor their boards' activities. If the homeowners anticipate that they will each pay the average cost, then each has an incentive to demand a level of services such that the marginal benefit of that level just exceeds their anticipated average cost. The result is oversupply.
Evaluation and oversight of an association's board of directors is a problem in the management of RCAs. Many community residents are apathetic about their governance, unless policy directly affects them negatively. Our study of RCAs in Alexandria, Virginia found that resident activity in the administration of the RCA ranged from 1 percent to 38 percent. One board member explained, "As long as property values are increasing, the pool is open in the summer, and the snow is removed in the winter, residents don't feel a need to come to the meetings."
Those who choose to run for the board are unlikely to represent a random sample of the preferences of RCA residents. Instead, board members are most likely to represent residents who prefer particularly high service levels. …