Why Homeowners And Renters Are Struggling In The U.S. | CNBC Marathon

Introduction (0s)

• The typical home in a Homeowners Association (HOA) in the U.S. pays between $200 and $300 per month in fees, acting as hyper-local governments that supersede existing laws when a homeowner signs into a covenant that runs with the land. (11s)
• Home insurance companies are becoming increasingly hesitant to insure homes due to rising climate-related risks, resulting in higher costs for insuring assets. (21s)
• A group of large landlords is facing a lawsuit for their business approach, with Realpage allegedly facilitating a housing cartel. (31s)
• The U.S. is experiencing a housing shortage, which benefits large landlords who own a significant number of well-located apartments. (34s)
• The use of software in the housing industry is criticized for removing empathy from the equation, potentially leading to a more impersonal and profit-driven approach to housing. (42s)

How Homeowners Associations Took Over American Neighborhoods (Published October 2023) (51s)

• In 2022, 84% of newly built single-family homes sold belonged to a homeowners association (HOA), which oversees properties in a community and provides value to owners, but has also faced backlash due to negative experiences (51s).
• Homeowners associations are rooted in the desire for municipalities to offload their responsibilities, such as taking care of things normally associated with paying taxes, and are often required by local governments for new construction (57s).
• HOAs are run by a board of directors made up of volunteers who own property in the community, and typically handle communal responsibilities, such as managing amenities and enforcing home maintenance rules (2m1s).
• Homeowners in the community pay into a fund for the HOA to have an operating budget, with the typical home in an HOA paying between $200 and $300 per month in fees (2m22s).
• HOAs have the authority to hand out fines to residents who do not follow the rules, which may accrue interest in some cases, and can escalate to debt collection, such as foreclosing on the home or garnishing wages (2m32s).
• The Inostroza family had a negative experience with their HOA, which fined them for a balance attached to their home when they moved in, and eventually put a lien on their home, leading to wage garnishment and a debt of over $1,600 (2m55s).
• The Inostrozas tried to contact the HOA from 2008 to 2014 but received no reply, and by August 2015, the HOA had put a lien on their home, which led to a court case and an agreement to pay $3,200 in debt (3m19s).
• Despite paying off the agreed-upon debt, the HOA continued to add fines and interest, claiming the Inostrozas owed almost $8,000, and the family estimates they have paid around $12,000 in fines and garnished wages, along with thousands of dollars in legal fees (4m42s).
• A homeowner received an invoice stating they still owe $8,000 despite paying $12,000, with the issue dating back around 10 years (5m8s).
• CNBC reached out to Homeowners Management LLC for comment but received automated responses directing them to contact the current management company, Century Management, as of August 2023 (5m16s).
• Century Management stated they have little ability to comment on historical facts regarding the case due to recently becoming the management company for the community (5m25s).
• The former director of the HOA board declined to comment, and the attorneys representing the HOA board did not respond to repeated requests for comment (5m38s).
• Homeowners Jessica Navas and Matt Bozzone began investigating their HOA and discovered a history of at least 25 foreclosures in the community over the past 15 years (5m53s).
• Navas and Bozzone found that some houses in the community had multiple foreclosures within the 15-year period (6m4s).
• The homeowners felt that the community was unaware of the issues with the HOA, as they were not actively involved in the community's activities (6m22s).
• A common sales pitch for HOAs is that they can help increase property values, but there is mixed evidence to support this claim (6m48s).
• A 2019 study found that HOA homes cost at least 4% more than non-HOA homes, but property values can vary significantly by location (7m4s).
• A different 2019 analysis found that home values in HOA areas were less than those in neighborhoods without HOAs (7m16s).
• The Inestroza property value increased between 2008 and 2023, but the homeowner does not believe the HOA contributed to the increase (7m24s).
• HOAs can be necessary for managing shared amenities or land, which can be a value-add for homeowners (7m45s).
• Management companies can help a community function smoothly, especially when a board of volunteers needs assistance (8m0s).
• However, relying too much on a property management company or homeowners to run their own association can cause problems (8m23s).
• The management company is a contractor to carry out the board's direction, and the board remains the decision-making authority and is legally and financially responsible (8m32s).
• Homeowners associations (HOAs) can be beneficial, but their abuse negates their benefits, and many people struggle to think of them as businesses, despite being statutorily recognized as such in many cases (9m14s).
• Professional involvement in HOAs is increasing, with the for-profit homeowner association industry growing to $38 billion, and association management companies typically charge a flat fee for their management services (9m44s).
• Homeowners like Jessica and Matt have fought for transparency in their HOA, discovering discrepancies in the HOA's finances and leading to a recommendation to remove the board and freeze the account (9m52s).
• HOAs have significant power, with 57% of homeowners polled disliking living in an HOA and more than 3 in 10 homeowners feeling like the HOA has too much power (10m55s).
• Governments give HOAs the power of a municipality, allowing them to act as hyper-local governments and supersede existing laws, with homeowners signing into covenants that run with the land (11m7s).
• Covenants, conditions, and restrictions (CCNRs) outline the HOA board and homeowner's rights and obligations, typically enacted by the HOA board and the bylaws when the subdivision is incorporated by the developer (11m21s).
• Homeowners who have disputes with their HOA often struggle to get help from official government channels, with only seven states having an office of HOA Ombudsman, which is usually underfunded and has limited jurisdiction (12m6s).
• Regulation of HOAs is predetermined by existing laws, with the court system providing checks and balances in case of disagreements, and education is key to understanding the role and power of HOAs in communities (12m39s).
• Homeowners often have limited options for resolving disputes, with civil court being the only answer in many cases, and small claims court not being a viable option for certain community issues (13m1s).
• Lawmakers in states such as Texas, North Carolina, and Florida have introduced policies to address homeowner concerns, but these efforts have been met with backlash from the professional management industry (13m20s).
• Finding a solution that garners 100% support from everyone is unlikely, so the goal is to find a middle ground that ensures the association runs effectively and protects people's investments (13m35s).
• Currently, change must happen at the grassroots level, with homeowners fighting through the court system and voting for a board that represents them (13m51s).
• Matt, who was elected president of the board in October 2023, feels a sense of duty to fight for the rights of homeowners, regardless of his economic condition (13m59s).
• Matt's motivation for taking action is partly driven by a sense of responsibility to inform potential buyers about the issues in the neighborhood, rather than selling the home without disclosing the problems (14m15s).

Why Americans Are Suddenly Losing Their Home Insurance (Published February 2024) (14m38s)

• Darlene's dream house, which she has owned for 18 years, is at risk due to a non-renewal notice from her insurance company, Allstate, citing the home as too risky to insure (14m55s).
• State Farm, the nation's largest homeowner's insurance company, has stopped accepting new applications for property in California due to high risk, and other companies like Allstate are also pulling out of certain markets (15m10s).
• The main reasons for this trend are the increasing number of buildings being destroyed by catastrophes, inflation making it expensive to rebuild, and rising losses related to climate risk, making it difficult for insurance companies to protect their investments (15m26s).
• Without homeowners insurance, many homeowners can face significant financial trouble, and Darlene is struggling to find alternative insurance, with one company quoting a premium of $12,000 per year, up from her current $2,000 (15m49s).
• Receiving a non-renewal letter from a private insurance company can result in a 12% loss of property value, making it difficult for homeowners to sell their properties (16m3s).
• This issue is not limited to California, as states like Louisiana and Florida are also experiencing similar problems due to flood risk (16m10s).
• Darlene's house, which she bought for $420,000, is now at risk due to the insurance issue, and she still owes $360,000 on her mortgage (17m8s).
• Most mortgage lenders require home insurance as a prerequisite for the loan, and 58% of Americans hold mortgages on their homes, making insurance a crucial aspect of homeownership (17m14s).
• Insurance acts as a risk transfer tool, allowing banks to recover their investments in case of a catastrophe, and the insurance business model is based on assessing risk, collecting premiums, and investing funds to make profits (17m31s).
• The insurance rate is a reflection of the risk, and companies adjust their rates accordingly to operate their business in a profitable manner (18m9s).
• Private insurance companies are withdrawing insurance in high-risk areas due to climate risk, resulting in increased premiums in the public market, with every state experiencing an increase and 12 states seeing their average premiums more than double (18m44s).
• The insurance industry is regulated at the state level, with some researchers referring to aspects of the regulation as "premium suppression," which may result in climate risk not being fully priced into the market (18m52s).
• California's Proposition 103, passed in the 80s, does not allow climate to be included in the calculation of insurance premiums and sets a limit on annual premium increases, currently at 7% (19m10s).
• If insurance companies cannot charge adequate rates, they may choose not to do business in certain areas, leaving homeowners like Darlene with non-renewal notices and significant mortgage debt (19m35s).
• Homeowners who receive non-renewal notices may have options, such as residual or excess markets, which have higher costs and rates not approved by regulators (19m46s).
• Some states, including California, offer government-assisted insurance options, such as the state-run insurer of last resort, known as the Fair Plan, which can be expensive and have high deductibles (20m29s).
• The average cost of a state Fair Plan premium in California is around $3,200, and government-assisted insurance options can extend the burden to taxpayers or put it back on insurers operating in individual states (21m12s).
• Homeowners may try to mitigate wildfire risks by taking measures such as trimming trees or replacing fences, but these efforts may not impact an insurer's decision not to renew coverage (21m30s).
• Darlene's insurance agent quoted her a premium of $12,000 per year, with deductibles of $15,000, making it unaffordable for her, and she is exploring other options (20m11s).
• A homeowner experienced difficulties in obtaining insurance due to climate change, with the insurance company stating there was nothing they could do, amidst a 270% increase in the cost of wildfires and a 335% increase in the number of structures destroyed by wildfires since 2009 (22m3s).
• For every additional building destroyed, there is an associated 1.9 additional non-renewal notices issued from an insurance company, with Florida's largest insurance company now being the state-run Citizens Insurance Agency, which has become the largest insurer in the state (22m33s).
• The state of Alabama is an example of a state that has taken a collective and communal approach to risk management, allowing consumers to take grants up to $40,000 to make themselves more resilient (23m20s).
• The insurance mechanism is the first to really price in climate, which will have big implications for the US real estate market and the US economy, as the insurance sector was 2.6% of US GDP in 2022 and housing accounts for around 15 to 18% of the US GDP (23m58s).
• Insurers need to be able to charge for risks like inflation and increased climate, and the insurance industry wants to be able to do business in states like California, but needs better regulation to reflect the risk (24m39s).
• Communities need accurate data to understand where the risk exists and to efficiently allocate resources to protect and suppress the risks, and the insurance industry would like to see more emphasis on physical infrastructure resilience (25m6s).
• The government can help incentivize physical infrastructure resilience through the tax system, which is a great incentivization tool (25m39s).
• Insurance companies have been trying to adequately price in climate risk for years, using their own underlying models and maps to understand which areas are most at risk. (25m47s)
• A correlated model was produced, showing high correlations between extreme wildfire risk, wind risk, and flood risk, and non-renewals or increases in premiums on plans across states like Florida and Louisiana. (26m9s)
• Rethinking how we account for climate risk is key to keeping communities safe, as risk management often comes into play too late, typically when a mortgage provider requires it. (26m28s)
• The cost of insurance reflects the risk, serving as an alarm for consumers to consider reducing that risk or relocating to a safer area. (26m43s)
• Many Americans, like Darlene, do not consider climate risk when purchasing a home, but may struggle later on despite doing everything right, such as paying bills on time and taking care of their property. (26m56s)
• Darlene's experience highlights the need for insurance companies to provide consumers with options and alternatives, rather than simply giving them no choice but to accept increased premiums or non-renewal. (27m22s)

Why Renters Are Taking Landlords To Court In The U.S. (Published February 2024) (27m45s)

• The average rent in the United States is over $1,950 a month, with prices falling in the west and south but still rising in the Midwest and Northeast (27m50s).
• Experts say the US needs to build over 4 million new apartment homes by 2035 to keep pace with demand, otherwise, the pricing power of landlords may grow (28m12s).
• A group of large landlords, including JBG associates, Avalon Bay, Mid-America Apartment Communities, and Equity Residential, is being sued for their approach to business, specifically their agreements with RealPage, a major provider of property management software (28m28s).
• The lawsuits focus on the alleged facilitation of a housing cartel by RealPage, which could mean landlords owe their tenants money and impact the future of home rental prices in the United States (28m39s).
• The lawsuit brought by the D.C. attorney general covers over 50,000 apartment units in the district, which were allegedly charged inflated rents for years (28m57s).
• The District of Columbia is facing an affordability challenge in housing due to a lack of supply, resulting in ever-increasing pressure on pricing and high rents (29m7s).
• The concentration of multifamily units, particularly in large apartment buildings with more than 50 units, is a significant issue in the District of Columbia, with companies like Besuto allegedly using RealPage recommendations to set prices on over 15,000 housing units (29m20s).
• The market concentration of large apartment buildings in the city is over 50%, and when including the total DMV, it's close to 80 or 90% concentration of units in the named defendants (29m53s).
• The defendant landlords, including Greystar, which managed over 700,000 units in 2023, have filed motions to dismiss the case, with an initial conference scheduled for May 2024 (30m14s).
• RealPage products are used to set prices on roughly 4.5 million housing units in the United States, including units with rents starting at just under $3,000 a month in January 2024 (30m46s).
• Property managers started using RealPage products in the mid-2000s, which takes empathy out of the equation, allowing them to charge whatever the software tells them to charge (31m3s).
• The inventor of Yieldstar, Geoffrey Roper, combined his model with another software, Lease Rent Options, and reintroduced it in a new AI tool called AI Arm (31m33s).
• Yieldstar's design is not directly looking at what other landlords are doing to determine rents, but rather uses pieces falling into vacancy points in time (31m54s).
• RealPage, a software company, claims its product can increase a landlord's revenues by 2 to 7% and charges a fixed fee for each unit it helps manage, regardless of rent price (32m8s).
• Thoma Bravo, the private equity giant that acquired RealPage for $10.2 billion in 2021, claims it's not liable for the acts of its subsidiary (32m22s).
• The attorney general in D.C. alleges that local landlords comply with RealPage's recommended prices over 90% of the time, and the terms of agreement compel landlords to charge the rents suggested by RealPage's algorithm (32m36s).
• RealPage argues that its landlord customers are under no obligation to take their price suggestions, and the algorithm may suggest downward price revisions depending on the context (33m10s).
• The lack of new developers entering the market and low new construction in key housing markets have contributed to the housing shortage and high prices (33m32s).
• The dynamic between tenants and massive landlords can be unfair, with landlords having more power to increase rents (33m58s).
• RealPage started implementing apartment pricing software between 2005 and 2008, which checks rents daily and can lead to stressful and worsening situations for tenants (34m9s).
• Tenants across the United States have launched numerous lawsuits against their landlords for using RealPage, with at least 34 landlords involved in litigation in 2023 (34m48s).
• The Justice Department has filed a statement of interest in the class action, arguing that the complaints adequately alleged violations of the Sherman Antitrust Act (35m0s).
• The lawsuit aims to put an end to the practice, seek a monitor to oversee landlords and RealPage practices, and seek monetary damages, penalties, and restitution for tenants who have been unfairly required to pay inflated rents (35m32s).
• RealPage argues that its systems are designed to avoid collusion, conflict with fair housing, and other regulatory environments (35m59s).
• Roper, the inventor of Yieldstar, has shifted focus to developing revenue management software for the e-commerce industry, with similar products being used in hotels, grocery stores, and to set prices on toll roads. (36m22s)
• Tenants at Portside Towers in Jersey City believe their building is subject to rent control, a decision supported by the local housing authority, which ordered restitution potentially worth millions of dollars. (36m34s)
• Equity Residential has filed a lawsuit in federal courts challenging the decision, separate from the complaints against RealPage. (36m46s)
• The lack of enforcement by the city led to the implementation of RealPage software and market rate pricing, which would not be applicable under rent control. (36m55s)
• Tenants at Portside Towers expressed the loss of not only their homes but also their community due to the situation. (37m2s)
• The attorney general in D.C. aims to preserve housing affordability in the district through an antitrust lawsuit, deeming the current situation "illegal, unlawful, immoral, and wrong." (37m6s)