Do Homeowners Associations Mitigate or Aggravate Negative Spillovers from Neighboring Homeowner Distress?

Experiences reveal that the monitoring costs of the foreclosure crisis may be non-trivial, and smaller governments may have more success at addressing potential negative externalities. One highly localized form of government is a homeowners’ association (HOA). HOAs could be well suited for triaging foreclosures, as they may detect delinquencies and looming defaults through direct observation or missed dues. On the other hand, the reliance on dues may leave HOAs particularly vulnerable to members’ foreclosure. We examine how property prices respond to homeowner distress and foreclosure within HOA communities in Florida. We combine datasets of HOAs, sales and aggregate loan delinquency and foreclosures from 2000 through 2008. We find properties in HOAs are relatively less impacted by more distressed neighbor homes compared to non-HOA properties, but only when considering less severe delinquency rates. We also find that negative price effects from higher delinquency exposure rates are ameliorated for properties in larger and newer HOAs.

Research findings and highlights:

• • We examine how property prices respond to homeowner distress and foreclosure within homeowners association (HOA) communities in Florida.

• • We find that a one-standard-deviation increase in localized 30-day delinquency lowers HOA property prices by 1.5 percent less than it does non-HOA prices.

• • Larger HOAs play an important mediating role: negative price effects from higher delinquency exposure rates are further ameliorated for properties that are located in relatively larger and somewhat newer HOAs.

• • We do not find any positive spillovers from HOAs to neighboring non-HOA property, confirming the prediction that any positively mediating effect is exclusive to the HOA properties.