The wealth effect is a behavioral economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before.
Owners of real estate in Southern California, almost any real estate, are feeling good right now. Prices have increased 15% in one year and almost 25% in two. This includes owners of homes in associations. When I say they feel good, they feel wealthy. Their $500,000 townhome they purchased in 2019 is now worth $600,000 or more. Since they feel more wealthy, they should be less adverse to an increase in their dues, particularly if that increase will improve the community and make their property even more appealing.
If the board were to increase the monthly dues from $350 to $400, which is an annual increase of $600, that is a fraction of what they have experienced in price appreciation. This is the time to make increases while this perceived wealth increase is on everyone’s mind. If mortgage interest rates increase to 5% or higher and prices soften and even decrease, your owners may not be as ambivalent about a dues increase.
I am not suggesting a board raises dues arbitrarily or unnecessarily, but we are advising all of our associations to keep pace with the rate of inflation and increase dues a minimum of 5%. But if your reserves are not at least 50% of full funding, or if there is a major project on the horizon, this is the time to increase dues or consider a special assessment. Don’t discount the wealth effect and the opportunity to improve the balance sheet of your community.