The June 24 collapse of the Champlain South Towers in Surfside, Florida, kicked off the anthills of thousands of condominium associations across our country. Condos, virtually unknown here 50 years ago, are now home to tens of millions of people, especially the elderly. This legal institution facilitates home ownership without having to live in a detached house. However, sharing control of the building where you own an apartment with dozens or hundreds of others becomes complicated.
The proper functioning of these landlord associations depends on how human beings actually make decisions about the use of resources. In other words, they are a microcosm of economic theory as a whole. They thus deliver lessons that have illuminated deep debates in macroeconomics and finance for 45 years.
For two centuries, since British economist David Ricardo exposed it, economic theory has assumed humans to be rational. All other things being equal, they preferred to have more income or wealth than less. And they usually had the right information to make decisions.
When making choices that have effects over many years, like investing in rail stocks or UK bonds, or whether to re-roof their house now or wait for a leak, rational humans maximize their level of consumption or financial well-being. overtime. It meant predicting the future.
Yes, people varied in their “time preference” on what they would give up now for more in the future. Likewise, the information was not perfect, a railroad might not get the business it expected, and rotten rafters might appear when the roof was finally finished. Yet, in general, people were sane and had access to the facts.
The government didn’t need to fix anything. Indeed, government interference would worsen the situation of society.
This made sense for single-family homes, although over time governments enacted zoning laws to minimize “external costs,” like building a boiler factory in the middle of family homes. And over time, building codes were instituted to resolve asymmetric information for builders and buyers. It was difficult for a buyer to know what shoddy construction could be hidden, so building codes tried to ensure that minimum standards were met. Effective enforcement has always been a problem.
With regard to rental housing, including all multi-unit buildings, it was in the best interests of a rational and wealth-maximizing owner to maintain the buildings so that they were attractive to tenants and compete for themselves. to rent. The properties were big investments. It was as irrational for the owner of rental buildings to let them rot as it was for the owners.
Yes, sometimes it didn’t seem true, but it didn’t disprove the general theory.
It got more complicated when condominiums became popular. These had a long history in Europe, but were new here. Little legislation or case law has clarified what happens in the event of a problem.
Instead of just one owner, you could now have 10 or 20, or the 136 from the Surfside Tower. Different people saw the problems differently, especially for property owned by the association as a whole. A homeowner could decide when to replace cabinets or buy new toilets. But what about the creaky elevator at the back of the building? Some see the need for new shade trees or parking lots covered with a waterproof coating. Others think the monthly membership fee is already too high.
Free market followers believed that anyone who was careful would put money aside for when the shingles needed to be replaced rather than looking for money when the leaks multiplied. This belief was quite fragile for single-family homes, and even more fragile for multi-unit condos. Could 150 unit owners really agree to pay more each month in fees on a reserve to replace elevators in 20 years or face a sudden boiler failure?
Again, Ricardo and his followers would have argued yes. Deferred maintenance or inadequate reserves will scare off potential unit buyers, thus hurting property values for owners. Potential buyers would understand that a unit offered for $ 250,000 that had a $ 20,000 share of an association reserve fund would cost more than an identical unit with $ 2,000 in reserves.
The real world answer is that things rarely happen this way. Few people other than accountants or lawyers pay such attention. The Surfside condo debacle is silently underway in tens of thousands of associations in all 50 states.
Many condo owners are increasingly faced with emergencies that can be physically or financially catastrophic. The condominium boom of the 1970s resembles the WWII boom in the construction of aircraft carriers and destroyers. It was for the US Navy until they all wore out in a decade.
States recognize the problem. Some pass laws requiring better tabulation of issues and the reservation of funds. These laws range from ineffective to great. Experts put Minnesota somewhere in the middle. Expect condo emergencies, physical or financial, to be more frequent.
What does this have to do with economic theory as a whole? Well, the same logic that any prudent owner would never leave their building in ruins because it would reduce their financial well-being over their lifetime has been applied to macroeconomic policy and finance.
If the 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 lead to higher taxes in the future, would simply put aside the money saved now to pay the higher future bill. They wouldn’t spend it.
Likewise, increases in the price of certain stocks, say of a conglomerate like TRW in the 1960s or GameStop this year, must reflect all the information available about the stock. Since anyone with unfavorable information would gain by selling the security short, cashing it when it went down. A stock price was not a perfect indication of the future, but it was enough that no one could consistently outperform the market. A Warren Buffet, or a Peter Lynch, the famous manager of Fidelity in the 1980s, were successful just as 100 monkeys roaming free in a warehouse full of computer keyboards would end up typing the Bible or “War and Peace” of Tolstoy.
A better theory is being built, but it is a difficult process.
St. Paul’s economist and writer Edward Lotterman can be contacted at [email protected]