Mortgage Market News and Insight

For the Weekend of March 9^th, 2024

 

Hawaii’s Most Read Mortgage Publication for 16 Years

 

Volume 16 – Issue 27

Condo Maintenance Fees & The Reserve Analysis

I was speaking with a friend that is one of the top Allstate agents in Hawaii this past week.  He wanted me to correct some information I wrote a couple of weeks ago.  Allstate is not dropping any of their current condo policy holders, but they are not taking on new condo policies either.  Don’t let your policy expire!

 

We went into a deeper conversation as to why our state has such a high percentage of insurance claims for the condo policies they write.  He echoed comments offered by Sue Savio I shared a few weeks ago.  Many of Hawaii’s large condos are older and are not spending enough to mitigate problems.

 

I have sat on condo boards and once stupidly accepted being a condo board President for a couple of years.  I resigned in frustration because too many board members and condo owners don’t truly understand how condo maintenance and upkeep are to be performed, only focusing on keeping monthly HOA fees as low as possible.  While it is always good to keep an open eye for wasteful spending, the real issue is that most current monthly HOA dues do not collect enough from current owners to bank for future repair costs.

 

The Reserve Analysis, which is mandated in Hawaii’s laws governing how condos are supposed to be run, is the tool associations use to forecast future expenses.  It’s a good system, when done properly.

 

The association is required to study each material component of the project to determine its expected life cycle.  Things such as roofs, how often do they need to be replaced?  How about repainting the walls, or repaving asphalt roadways?  Each item must be listed, along with its life expectancy.  They also need to estimate what it would cost to replace that item today, then factor in an amount for inflation each year to estimate the real cost down the road.

 

Let’s use a new roof as an example.  If the new roof costs $200,000 today, and must be replaced 20 years from now, using 3% annual inflation, that roof will cost $361,222 in 2044.

 

How the association budgets for that future expense is probably the most important decision the board will make and should be heavily scrutinized by all owners or prospective buyers.

 

The proper way to budget for that expense is to collect 1/20^th each year and bank it in the “Reserve Account” when needed.  But not all associations do that.  Some fudge the numbers and say the roof will last 25 years.  Or they play with the rate of inflation to make the bill 20 years from now smaller.  Some also play with the estimated rate of return they earn from the money sitting in the reserve account.

 

When condo boards bend to pressure from owners to keep maintenance fees low and defer collecting enough for future repairs, they are unfairly burdening owners that will be there longer than those who will sell in a couple of years.  In the example of the roof above, while that roof won’t get replaced for years down the road, every owner in that project is utilizing a certain percentage of that component’s useful life everyday they own that condo.  A portion of your monthly maintenance fee is supposed to include funds to account for that usage.  If the association defers collecting for repairs to keep the maintenance fees low, the current owners are not contributing as they should and placing the burden on future owners.

 

You would think that being required by law, Hawaii would be fairly strict on how associations do their reserve studies, but you are wrong!  Hawaii only requires an association to collect enough to fund what’s needed to be fixed/repaired/replaced for the next 12 months.

 

There are also some items that are completely missing from the Reserve Analysis.  Part of Hawaii’s insurance problems is that sprinkler systems were never required.  Also, who thinks about waterlines and drainpipes?  How long do they actually last?  Water damage due to leaking old pipes accounts for a majority of the claims insurers now pay.

 

 

My advice to anyone looking to buy a condo or owns one, should read the budget, reserve analysis, and the board meeting minutes.  Is the project putting enough in the kitty for future expenses?  Will your future be met with an assessment to cover “unexpected” expenses?

 

For those old enough to remember the old Popeye cartoons, Wimpy’s famous request was “I’ll gladly pay you Tuesday, for a hamburger today.”

 

Don’t let your association be a Wimpy.

 

 

 

 

 

 

 

And now the week’s economic news…….

 

Unemployment Rate Climbs

This week, the major economic data was weaker than expected, and there were no unfavorable surprises from the Fed.  As a result, mortgage rates ended a little lower.

 

Following very strong gains in January, the economy added another 275,000 jobs in February, well above the consensus forecast of 200,000.  The largest gains were seen in the healthcare, government, and restaurant/hospitality sectors.  However, the results for prior months were revised lower by a massive 167,000, more than offsetting the strength this month.

 

The other major components of the report also revealed unexpected weaknesses.  The unemployment rate rose to 3.9%, the highest reading since January 2022.  This is up from 3.4% in April 2023, which was the lowest level since 1953.  Average hourly earnings were 4.3% higher than a year ago, below the consensus forecast.  Fed officials carefully monitor wage growth because it generally raises future inflationary pressures.

 

Another major economic report released this week also fell short of expectations.  Since services account for roughly 75% of economic activity in the US, investors closely watch key data on the sector from the Institute of Supply Management.  The latest report revealed that the ISM national services index fell to 52.6, below the consensus forecast.  Still, readings above 50 indicate an expansion in the sector.

 

In his semi-annual testimony to Congress, Fed Chair Powell stuck to the same script as in other recent speeches.  He continued to emphasize that future decisions on monetary policy would be determined by incoming economic data and that officials would carefully consider the risks of waiting too long to cut rates versus loosening too soon.  Most investors now anticipate that the first rate cut will take place in June.

 

 

 

 

 

Next Week

Investors will continue to watch for Fed officials to elaborate on their plans for future monetary policy ahead of the next meeting on March 20.  For economic reports, the Consumer Price Index (CPI) will be released on Tuesday.  CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.  Retail Sales will come out on Thursday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.  Import Prices will be released on Friday.

 

Until next week…….