Scott Brady is co-owner and principal of Progressive Association Management, a CACM-member HOA management company serving 228 communities and nearly 15,000 homeowners throughout Southern California. Since founding the association management division in 2020, Scott has grown the company into the fastest organically growing association management firm in California by limiting manager workloads, providing full back-office support, and holding every team member accountable to documented daily service standards. |
It is tempting to dismiss “doom and gloom” economic news. As the saying goes, “if it bleeds, it leads,” and people tend to gloss over good news and fixate on the bad. But sometimes the warnings are worth paying attention to.
I recently attended a seminar given by Dr. Christopher Thornberg, one of the few economists who predicted the Great Recession before it happened. What he shared was sobering, and because those with substantial wealth are already repositioning based on this information, I want to interpret what it means for our industry. The fact that I have received multiple offers from private equity groups in the past 12 months to buy my company at incredibly high multiples tells me sophisticated investors are already acting on what Dr. Thornberg outlined.
The Big Picture: What Is Driving the Concern
Despite a relatively robust overall economy, there is a serious problem lurking beneath the surface. The federal deficit, combined with a $3 trillion rush to invest in artificial intelligence and its infrastructure, has the potential to disrupt the current calm within the next few years.
Here are the facts:
- The federal deficit now exceeds $40 trillion.
- The deficit represents 112% of the country’s Gross Domestic Product (GDP), a level not seen since the end of World War II.
- Spending currently exceeds revenue by $1.7 trillion annually.
- The “Big Beautiful Bill” cut taxes but lost its tariff funding after the Supreme Court ruled the tariffs unconstitutional.
- Medicare expenses are growing at 8% per year, well above inflation.
- Social Security benefits, currently $1.6 trillion annually, are projected to exhaust funding by 2032, triggering an automatic 25% reduction in monthly benefits.
- If Democrats win the House in 2026 and Republicans retain the Senate, little meaningful legislation is likely to pass before the next presidential election.
- The interest cost on the current deficit is approaching $1 trillion. If the deficit grows to $44 trillion and rates increase by just 1%, that annual cost rises to $2 trillion.
- The Federal Reserve has begun exchanging long-term higher-rate debt for lower-rate short-term debt, which may work temporarily but creates additional risk if short-term rates rise.
Why This Matters for All of Us
There is no easy way out of this predicament. The analogy is simple: you can only pay your mortgage with a credit card for so long before you hit your limit. We have reached that limit.
There are really only two paths forward. You balance the budget and grow the GDP so that debt decreases as a percentage of total revenue, or you address the debt through a combination of tax increases and program cuts. Since neither party is seriously discussing the debt crisis, there is no political motivation to find a solution, which makes rising interest rates increasingly likely.
Currently, 30-year fixed mortgage rates sit at around 6.65%, close to where they were in October 2022 when rates climbed from historic lows and the housing market cooled. These are still relatively low rates historically speaking. From 1980 to 1990, rates hovered between 10% and 12% for the entire decade. The period from 2000 to 2020, when rates dropped from 6.5% down to 3%, was an aberration driven by the Great Recession and artificially low rates during COVID, not the norm.
If rates climb to 8% to 10% and stay there for the next decade, what does that mean for real estate and association management?
What Higher Rates Mean for HOAs and Property Management
Home Sales Will Slow
If rates increase sharply, meaning more than 1% in less than six months, fewer buyers will qualify for financing and many will simply wait on the sidelines. Only highly motivated sellers will reduce their prices. Many others will take their homes off the market, keeping them as rentals if they can afford to or staying put. Growth in the rental market will come largely from these “accidental landlords” rather than experienced investors.
Management Businesses Become More Valuable
Association management is a subscription business. Whether property values rise or fall, management fees continue. If prices decline or monthly assessments increase to keep pace with inflation, we still earn our fee. The multiples used to value management companies, which were historically five times net profit and are currently around seven, could rise to ten in a higher-rate environment.
Some Fee Areas Will Increase
Bank credits earned on deposits increase with interest rates. For our current portfolio, a 1% rate increase would result in a meaningful increase in monthly bank credits. Higher dues may also lead to more delinquencies, which means additional collection work and the fees that come with it.
Some Fee Areas Will Decrease
Fewer home sales mean fewer escrow documentation fees. If sales decline 10%, we would expect a corresponding drop of roughly $10,000 per month in that category. Proposed legislation to cap those fees below $500 will also reduce this revenue stream regardless of what rates do. On balance, the increases and decreases will largely offset each other for association management, though any inflation above 2% will prompt us to increase our base management fee to keep pace.
Monthly Assessments Could Rise Significantly
There is already growing pressure on boards to better fund their reserves, and conventional lenders Fannie Mae and Freddie Mac are already requiring that 15% of all assessments be directed to reserve accounts. Combine that with aging communities facing imminent repairs, elevated insurance premiums, and a potential inflationary period, and monthly assessments could double over the next ten years.
What Should You Do About It?
We have been kicking this financial can down the road since the Great Recession in 2008. There is only so much the government can spend without breaking the bank or risking rampant inflation through money printing. By 2032, when Social Security funding runs short and difficult decisions can no longer be deferred, the reckoning will come.
I shared these concerns with Dr. Deb Newell, and her advice was straightforward: “Own good real estate, own profitable businesses with recurring revenue, limit debt, and run efficiently.” Having lived through three major recessions, I have seen the same pattern play out each time. Those who lose ground hold depreciating assets and wait out the downturn. Those who thrive have strong cash flows that allow them to acquire those depreciating assets at a discount.
Positive cash flow is king, and that is true at all times but especially during periods of elevated rates. For HOA boards, that means taking reserve funding seriously, managing expenses carefully, and working with a management company that helps you stay ahead of what is coming rather than reacting to it after the fact.
Have questions about how your association can prepare for what is ahead? We are here to help.
