How does inflation impact your HOA, and management in the greater HOA industry? Considering that inflation and HOA decisions both acutely affect today's homeowners, this is an important question to ask.
Inflation occurs when the numeric value of money goes down, therefore the apparent cost of goods goes up. When inflation occurs, the cost of everyday items goes up, as does the cost of goods and services to maintain the community. Ideally, incomes also rise with inflation but this is not as tightly tied a response, so not all homeowners get an increase in funds just because costs rise.
During inflation, it can appear as though an HOA's dues and expenses both go up, when in reality it's the weight of currency that is going down. Here is what to expect from your HOA when affected by inflation.
Annual Dues May Go Up
The cost of maintenance rises with inflation, as currency is less powerful to pay for goods and services. This means the amount of money needed for annual upkeep of the community, which should result in an inflation-matching increase in annual dues to cover the costs. However, because a few communities over-increased their fees beyond the rate of inflation, many associations' founding documents require these inflation-related fee increases to be tied directly to the Consumer Price Index.
Inflation, The CPI, and HOAs
To ensure that raises to homeowner dues are fair and reasonable, governing documents often tie these increases to the CPI, or Consumer Price Index. The CPI is actually a set of indices based on the current cost to buy a basket of over 200 categories of consumer goods. When the prices on these average lifestyle goods increases, the CPI indicates this change.
From this HOAs can determine how much the local cost of living is rising, which is a good indication of the local effects on inflation in order to keep pace.
Assessments for Past Tasks will Increase
When inflation goes up, so will the general cost of assessments as well as regular dues. Assessments occur when a project needs to be priced for current or future enactment. An assessment to repaint the lobby may be higher in a year after inflation than it was years previous. Likewise, a plan made several years ago to install a feature may cost more by the time the installation is ready to take place. Part of the purpose of the reserve fund is to accommodate for these over-time changes in finances.
Reserve Fund Standards will Rise
Lastly, the HOA's reserve fund goals should increase along with dues as the CPI indicates. This is because the cost of all future projects will reflect inflation. Your margin needs to be numerically larger because maintenance and supply will cost more in the future. When the HOA responds to inflation, the reserve fund budget and standards will go up as well.
How to Adapt Your HOA to Inflation Impact
Every year, your budget should be analyzed for inflation. Determine how much cost of living is increasing based on the CPI and determine if it will be necessary to raise fees, adapt assessments, or increase the reserve. When you make the necessary decisions, let your community know and explain how it works. Reference the CPI so they can confirm it is a fair and reasonable increase and invite those with opinions on the impact to attend council meetings and get involved.
It is helpful to give homeowners a few months' warning before fees increase so they can adapt their own household budgets or scheduled finances accordingly, if necessary.
For more insights on HOA management or to find professionals to assist in managing your HOA, contact us today.