The June 24 collapse of the Champlain Towers South in Surfside, Fla., delivered a swift kick to the anthills of thousands of condominium associations across our country. Condos, virtually unknown here 50 years ago, now house tens of millions, especially seniors. This legal institution facilitates ownership of one’s residence without need to live in a detached house. However, sharing control over the building where one owns an apartment with tens or hundreds of others gets complicated.
How well these owners’ associations function depend on how human beings actually make decisions about using resources. In other words, they are a microcosm of economic theory as a whole. They thus yield lessons illuminating deep debates in macroeconomics and finance over 45 years.
For two centuries, since British economist David Ricardo laid it out, economic theory assumed humans were rational. All other things being equal, they preferred to have higher income or wealth than lower. And they generally had good information for making decisions.
When making choices with effects over many years, such as whether to invest in railroad stocks or British bonds, or whether to re-roof one’s house now or wait till it leaked, rational humans would maximize their level of consumption or of financial well-being over time. That meant providing for the future.
Yes, people varied in their “time-preference,” on how much they would give up now to have more in the future. Similarly, information was not perfect, a railroad might not get the business it expected and rotting rafters might show up when the roof finally was done. Yet generally people were sensible and had access facts.
Government didn’t need to fix anything. Indeed, government interference would make society worse off.
That made sense for detached houses, although over time, governments enacted zoning laws to minimize “external costs,” such as to build a boiler factory amid family homes. And over time, building codes were instituted to solve asymmetric information for builders and buyers. It was hard for a buyer to know what shoddy construction might be hidden, so building codes tried to ensure minimum standards were met. Effective enforcement was always a problem.
As far as rental housing went, including all multi-unit buildings, it was in a rational, wealth-maximizing property owner’s interest to maintain buildings so they would be attractive to renters and compete in getting rented Properties were large investments. It was as irrational for the owner of rental buildings to let them rot away as for homeowners.
Yes, sometimes this didn’t seem true, but that didn’t disprove the general theory.
This became more complicated when condominiums became popular. These had a long history in Europe, but were new here. Little legislation or case law clarified what happened in case of problems.
Instead of one property owner, you might now have 10 or 20, or the 136 in the Surfside tower. Different people perceived problems differently, particularly for property owned by the association as a whole. An owner could decide when to replace the cabinets or get a new toilet. But what about the creaking elevator at the far end of the building? Some see the need for new shade trees or seal-coating parking lots. Others think monthly association fees are too high already.
Free-market devotees believed that any prudent person would put money away against the time when the shingles needed replacement rather than scrambling for cash when leaks multiplied. This belief was shaky enough for individual homes, and even shakier for multi-unit condos. Could 150 unit-owners really agree on paying more each month in fees into a reserve to replace the elevators 20 years from now or deal with a sudden boiler failure?
Again, Ricardo and his disciples would have argued yes. Deferred maintenance or inadequate reserves would scare away prospective buyers of units, hurting property values for owners. Potential buyers would understand a unit offered for $250,000 that had a $20,000 share of an association reserve fund should command a higher price than an identical one paired with $2,000 in reserves.
The real-world answer is that things seldom work out thus. Few people, other than accountants or lawyers, pay such attention. The Surfside condo debacle is silently underway in tens of thousands of associations across all 50 states.
Many condo owners increasingly face emergencies that can be catastrophic physically or financially. The 1970s boom in condos resembles the World War II boom in building aircraft carriers and destroyers. That was for the U.S. Navy until they all wore out in one decade.
States are recognizing the problem. Some are passing laws requiring better tabulation of problems and reserving of funds. These laws range from ineffective to excellent. Experts place Minnesota’s somewhere in the middle. Expect condo emergencies, physical or financial, to be more frequent.
What does this have to do with econ theory as a whole? Well, the same logic that any prudent owner would never let their building go to pot because that would lower their financial well-being over their lifetime was applied to macro policy and finance.
If government implemented Keynesian tax cuts to stimulate consumer spending and get out of a recession, it would be futile. Rational citizens, knowing that a budget deficit today would compel higher taxes in the future, would simply put away the money saved now to pay the higher future bill. They would not spend it.
Similarly, increases in the price of some stock, say of a conglomerate like TRW in the 1960s or GameStop this year, must reflect all available information about the stock. Since anyone holding adverse information would gain by selling the stock short, cashing in when it went down. A market stock price was not a perfect indication of the future, but it was good enough that no one could consistently outdo the market. A Warren Buffet, or a Peter Lynch, Fidelity’s lauded manager in the 1980s, were successful just as 100 monkeys loose in a warehouse full of computer keyboards would eventually type out the Bible or Tolstoy’s “War and Peace.”
Better theory is being constructed, but it is a difficult process.
St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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