Updated Surplus Numbers

Updated Surplus Numbers
Updated Surplus Numbers: Actual surplus 2018 per audit was $85,163.
Boards 2011-2018 implemented policies and procedures with specific goals:
stabilize owner fees, achieve maintenance objectives and achieve annual budget surpluses.
Any surplus was retained by the association.
The board elected in fall 2018 decided to increase owner fees, even in view of a large potential surplus

Average fees prior to 2019

Average fees prior to 2019
Average fees per owner prior to 2019:
RED indicates the consequences had boards continued the fee policies prior to 2010,
BLUE indicates actual fees. These moderated when better policies and financial controls were put in place by boards

Better budgeting could have resulted in lower fees

Better budgeting could have resulted in lower fees
Better budgeting could have resulted in lower fees:
RED line = actual fees enacted by boards,
BLUE line = alternate, fees, ultimately lower with same association income lower had
boards used better financial controls and focused on long term fee stability

Monday, July 7, 2014

Housing Update - Rents Continue to Increase


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From a July 2 article in the Wall Street Journal:
"Apartment landlords continued to push through hefty rent hikes in the second quarter, squeezing U.S. households that already are struggling financially after four years of steady increases.

The average monthly rent for an apartment rose to $1,099 in the second quarter, up 0.8% from the first quarter, according to data to be released Wednesday by real-estate research firm Reis Inc. That was the 18th consecutive quarter of rent increases. For the 12-month period ended in June, rents rose 3.4%."

This is good news for those who have been buying rental units since the real estate crash of 2008. Of course, it's not such good news for the tenants. Local factors influence the cost of rentals. However, the article pointed out that "Effective rents—which tend to be lower than asking rents—were up in all 79 U.S. metro areas tracked in the Reis report."

In other words, the rental increases appear to be geographically broad.

Factors Contributing to Higher Rents
It's all about supply and demand. Owning a home fell into disfavor when the "I'll get rich with my home" bubble popped. As we all must live somewhere and overall the population is increasing, there is a need for more housing. But we massively overbuilt for a decade, and when the bubble popped, builders stopped building while lenders and the government tightened lending standards. However, I have concluded that the primary problem we face today is the simple fact that home purchasing has fallen into disfavor. This has put pressure on availability of suitable housing and so rents are going up, and up. [Note: According to the U.S. Census Bureau the population has increased by 17 million since mid-2007.]

There has been a resurgence in home construction in the area. However, far too much is not affordable for the first time home buyer. Tear downs continue in neighboring communities such as Glen Ellyn and are welcomed by the municipal authorities as this guarantees higher real estate tax revenue. Geographically constrained, these communities can no longer annex property as Naperville did and so the next best thing is building a bigger, more expensive home on an existing piece of property.

However, higher rents are not simply about the cost of homes and condos.  It is also about the financial capacity of new buyers. That capacity, or ability to purchase, has apparently diminished in recent years. This is after factoring income, savings, debt and monthly expenses. Particularly hard hit are the millennials, or 20-somethings.

Caught in the "Permanent Debt" Trap
Many younger people now find that they cannot afford the things they want. After paying student loans and related debt, what is left goes to housing, food, entertainment and a car. Housing costs may be reduced by living with family. That may be prudent if that $1,000 per month is saved. But far too often it is spent on lifestyle options. 

However income is spent, there is apparently little left for amassing a down payment for residential real estate, or little interest to leave the nest. Some potential buyers discover there is are insufficient funds to cover the true cost of owning. For the residential buyer that cost includes servicing the mortgage, real estate taxes and maintenance.  For the condo buyer maintenance also includes HOA fees. While some think owning a condo is like owning an apartment, it isn't, While it is true that those HOA fees cover some of the things that homeowners maintain, there are a lot of items fees don't cover. For example, owners at BLMH are aware that their personal maintenance responsibility includes the HVAC system, water heater and fireplace. It also includes the unit plumbing and all fixtures, electrical, interior doors, floors and all windows and the patio door. 

There is a reason the units at BLMH may rent for $1,400 per month. It is not only because of market forces, but the landlord must collect at a minimum sufficient rent to cover all costs and make a modest profit.

Some who are caught in the debt trap realized that a home purchase was a mistake. Unable to escape the debt cycle they have foreclosed. Some have simply done the numbers and walked. Some have let the clock run out. Others who have recently discovered the full magnitude and consequences of their education debt have decided that the best solution is to press our politicians for debt forgiveness. What an elegant solution! Then the same people who overpaid for a college education can make another grand financial mistake, and buy a home or condo they possibly can't afford. And so the cycle continues. 

This is called the "debt trap." It is why the average personal debt of every man woman and child over the age of 16 in the U.S. today is about $10,000.

One of the consequences of that trap is more rental demand which has provided an incentive for investment buyers. Some people have snapped up condos and are now renting them. As is so true elsewhere, in housing there are winners and there are losers. Now, being a tenant is not necessarily a bad thing. However, paying $1,400 a month for life for a rental unit may not be the shrewdest financial move. Living in such an apartment for 50 years will require $840,000 even with absolutely no rental cost increases.

What About Your HOA?
Now the question that most owners in a HOA never ask is this "How many units are owned by offsite owners?"

I've made some predictions to members of the BLMH board about what the owners at BLMH can expect. I won't print it here, but let me simply say that some of our onsite owners, specifically those who think they live in an apartment complex, may get their wish.

Notes on Student Debt and Job Opportunities
There have been some recent changes to federal student loans. There are programs called Pay As You Earn (PAYE) and the Income Based Repayment (IBR) plan. I'm not promoting these, merely pointing out that they exist. I have great concern about deferment plans which accrue interest, add it to principal and then drive up the debt of the borrower. If this seems familiar, it was the ploy that was used to great success by the lenders during the housing boom. So "buyer beware" is in order or as I like to say "There is no free money." Regarding PAYE and IBR; the U.S. Department of Education website says "Most federal student loans are eligible for at least one income-driven repayment plan."  Clicking will open a New Window> IBR Plan

As you may recall, in 2008-9 there were articles about how college students were opting to continue to get a Masters or other advanced degree. The plan was to ride out the bad economic times and get that swank job when the economy improved. At the time there were caution flags raised and I was of the opinion caution was in order and such thinking was overly optimistic and short sighted. Yes, continuing in college for another two years does give a student somewhere to live and something to do. On the other hand. that approach does carry risk and can be very costly. Not only is work income lost, but the total costs of achieving that education increases. The plan was based upon the assumption that the skill gained would be of increased value and the economy would be much improved in two years. With that enhanced education the student would finally graduate and get that dream job. Ah, yes, the "build it and they will come" mentality.

This type of thinking assumed that the cost of borrowing for college would be more than offset by a much better job. Not only did many of those jobs never materialize but on graduation the student discovered that they now owed far more in college debt, in the form of student loans and credit cards. Some found they have a serious skill-employment mismatch. For example, there is only so much one can earn in certain specialties. This is again an issue of "supply versus demand."


The Real Costs of Higher Education
Of course, the real cost of pursuing that higher degree is more than simply the out of pocket costs. That two to four years spent pursuing an advanced degree is time not spent earning and saving for retirement; it represents several years of lost income. It may mean working longer in one's lifetime to amass sufficient retirement savings. "That won't be necessary" or, "It won't happen to me" say the optimists. Yes, just as some believed that more education would provide a stellar job, and they would then be better able to manage their debts.

When considering an education it's prudent to look beyond "What do I want to do and where do I want to go to school?" An important question is "What will make me employable?" It's also prudent to consider education as preparing one for a lifetime of work. Not a year or two or ten. Spending 4 to 8 years in college as the final step in acquiring a useful job skill is an expensive proposition. Particularly expensive if the job evaporates in 5 years, or does not provide sufficient wages. "A living wage" is a wage relative to gross income minus all costs, including debt. Graduate at 25 and plan on retiring at 60? That gives one 35 years to pay off any debt, get the things one thinks they need or want, and save for retirement. 

There are many resources available to help plan a career. I for one am skeptical of guidance counselors provided by the schools. After all, those counselors are possibly biased in their assessment or have limited real world experience. I am an advocate of co-op programs, wherein the student works in their chosen field while attending college. This may require giving up those relaxing summers, and it may take an additional year to complete a four year program. On the other hand, costs are not necessarily higher as alternating semesters are spent as an employee, and real cash is earned. 

Another resource is the U.S. government. The U.S. Department of Labor publishes data on careers, hiring practices and wages for everyone from doctors to entertainers. There is simply no excuse for making terrible education decisions. These statistics are what parents and students should be tracking year by year, and educational decisions should be based in part of the ability to pay back that education AND earn a living wage. Reported mean wages range from $9.07 to $113.01 per hour.    Clicking will open a  New Window> Occupational Employment Statistics. This link provides detailed data by occupation



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