Published on: June 30, 2020
Housing industry executives who have been looking for signs of recovery got one in June, and a significant one, at that. Pending home sales, which have been trending steadily downward for months, soared, pushing the National Association of Realtors index up by 44.3 percent over the May reading, producing the largest month-over -month increase since the NAR created this index in 2001. The June rebound followed pandemic-induced plunges of 20.8 percent in March and 21.8 percent in April that drove the index nearly 70 percent lower than it was a year-ago. “This has been a spectacular recovery for contract signings, [reflecting] the resiliency of American consumers and their evergreen desire for homeownership,” Lawrence Yun, the NAR”s chief economist, said in a press statement. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery,” he added.
Existing home sales, by contrast, continue to reflect the pandemic’s bruising. Sales tanked in April, falling nearly 18 percent below the March total – the steepest monthly decline in nearly a decade, according to the NAR. Inventories also continued to shrink that month, with 1.47 million homes available for sale, 20 percent below the year-ago level. Industry analysts generally agree that the continued increase in home prices reflects a shortage of existing homes for sale rather than an increase in demand for them.
The new home market seems to be benefitting from that shortage. Sales in this segment of the market for the second consecutive month in May. The annualized rate of 623,000 units was 16.6 percent above the April pace and almost 13 percent higher than the year-ago level. That generally upbeat report was leavened somewhat by a significant downward adjustment in April’s initial sales estimate, bringing that month’s annualized total down from 623.000 to 580,000 units. Still, the stronger than expected performance encouraged industry analysts, who noted evidence of strong and increasing homebuyer demand.
“We have definitely seen green shoots in the last month,” Margaret Whelan, chief executive of Whelan Advisory, told the Wall Street Journal after the April report. “The question is whether or not that is going to be sustainable.”
DOING WHAT IT TAKES
Underscoring its previously stated commitment to “do whatever it takes as long as it takes” to cushion the economic effects of the pandemic, the Federal Reserve announced recently that it will leave interest rates at their current level (0 to .25 percent) level and increase continue buying Treasury securities and commercial mortgage-backed securities “at least at the current pace” until the economy has recovered and the labor market has stabilized.
The Fed “will closely monitor developments and is prepared to adjust its plans as appropriate,” the Federal Open Market Committee, the Fed’s policy-making arm, said in a statement following its June meeting.
Fed economists are far from bullish about the likely pace of the recovery. The Central Bank’s first economic forecast of the year predicts that the unemployment rate will improve over the next several months, falling from 13.3 percent to 9.3 percent by year-end, but will remain well above pre-pandemic levels for two more years.
An equally grim Congressional Budget Office analysis concludes that it could take close to a decade for the economy to recover fully from the pandemic’s effects.
“We have to be honest that it’s a long road,” Fed Chairman Jerome Powell told reporters after the FOMC meeting. “Depending on how you count it,” he noted, “well more than 20 million people [have been] displaced in the labor market.”
In an unusual departure for the politically neutral agency, Powell highlighted the racial disparity in the employment statistics. “Unemployment has gone up more for Hispanics, more for African-Americans, and women have borne an extraordinary and notable share of the burden beyond their percentage in the workforce,” he noted. “And that’s really, really, really unfortunate.”
EASING THE RULES
Congressional changes in the Payroll Protection Program (PPP) will make it easier to use and increase its benefits – at least for some business borrowers. Congress enacted the program earlier this year to help businesses cope with the pandemic-triggered economic downturn, providing potentially forgivable loans if the funds were used primarily to avoid layoffs or salary reductions.
Revised rules, outlined in the bipartisan Paycheck Protection Flexibility Act, give employers more time to spend the money and allow them to allocate less of it to payroll expenses. Under the old rules, employers had to use at least 75 percent of the funds for payroll and spend it within eight weeks of obtaining the loan in order to qualify for full forgiveness of the loan . The new rules increase the time frame to 24 weeks and reduce the payroll requirement to 60 percent, allowing businesses to allocate a larger proportion for overhead costs. Other changes:
- Give employers until December 31, rather than June 30, to restore their payrolls to the level at which they stood on February 15th, with at least the same number of employees paid at the same rates.
- Extend the period for repaying the unforgiven portion of the loan from two years to five years. That new deadline applies only to loans obtained after June 5th, however. For loans obtained after that date, analysts say, borrowers may be able to negotiate a longer repayment period with their lenders.
Businesses that were forced to close during locally mandated lockdowns and relatively low payroll costs will probably benefit most from the program changes, analysts say; businesses that obtained their loans early and have spent most of their funds are likely to benefit least.
Fannie Mae and Freddie Mac are taking some initial steps toward ending their years-long operation under federal conservatorship. The two secondary mortgage market cornerstones announced that they plan to retain financial advisors to help them navigate their exit from government control.
“While we are fulfilling our mission and helping to keep people in their homes during this national emergency, we also remain committed to ensuring a responsible exit from conservatorship,” Hugh Frater, Fannie Mae’s CEO, said in a press statement. “Today’s announcement is a significant step on that path, and we look forward to making a timely selection in the competitive process,” he added.
In another indication that the conservatorship, imposed to rescue the GSEs from the effects of the 2008-2009 financial crisis, may be coming to an end, the Federal Housing Finance Agency, which has served as conservator for the companies, is proposing revised capital standards for them.
The proposed changes “ensure proposal “ensure each [GSE’s] safety and soundness and its ability to fulfill its statutory mission across the economic cycle, in particular during periods of financial stress. The re-proposal is also a critical step toward responsibly ending the conservatorships,” Mark Calabria, director of the FHFA, said. The COVID pandemic has underscored the essential role Fannie and Freddie play in supporting the housing market “during good times and bad,” he added. “We must chart a course for the [GSEs] toward a sound capital footing so they can help all Americans in times of stress. More capital means a stronger foundation on which to weather crises. The time to act is now.”
IN CASE YOU MISSED THIS
Slightly less than one-third of homeowners and renters missed their mortgage and rent payments in June, about equal with the May rate but up from 24 percent in April.
A French insurance company has decided not to challenge a court ruling that it is obligated to pay the business interruption claims of more than 1,700 restaurants. The insurer, AXA, had argued that the wording of its policy did not require the coverage – an argument that is also being advanced by insurers facing similar claims in the United States.
The Massachusetts Division of Insurance is cautioning insurers against strictly interpreting requirements that businesses maintain occupancy of insured properties to avoid cancellation of their policies. Noting that many companies were forced to close during pandemic-triggered lockdowns, the department urged insurers to be flexible in tallying vacancy periods.
The mood of prospective homebuyers improved in May, pushing a Fannie Mae index up by nearly 5 points from an historical low in April. But the index remains 25.5 percent below the year-ago level.
More tenants are using credit cards to pay their rents, which could mean they are taking advantage of the convenience of electronic payment; but it may also indicate that they are having trouble paying their bills. “While we applaud the use of electronic payments, which bring convenience to renters and landlords alike,” Brian Zrimsek, a principal at MRI Software, said in a press statement, “the use of credit cards could signal increased risks if residents are paying with cards because of restricted cash flows as opposed to a desire to accumulate reward points.”
“USE IT OR LOSE IT!”
Physical trainers will often recite that mantra as they encourage clients to push through an intense workout. The exhortation applies equally to condominium association boards charged with enforcing their community’s regulations and covenants. If they don’t enforce the policies consistently, they may lose the ability to enforce them at all. This decision by a Texas appeals court (Densmore v. McCarley) illustrates the point.
The deed restrictions at issue in this dispute:
- Prohibited “noxious or offensive [activities] that could become an annoyance or a nuisance” to the community.
- Barred use of the property “for a commercial feed lot for livestock or fowl or dog or cat kennel.”
- Allowed businesses “of a limited nature” but required that they be operated in space contained “within the residence or attached by breezeway” to it.
- Specifically prohibited “excessive or offensive noise, fumes or odors, excessive traffic….in order to protect neighboring property values and [the enjoyment of rural living].”
The defendant, Debby McCarley, purchased a lot in this single-family subdivision, on which she built a residence and several structures for the dog-breeding business she planned to open. The subdivision did not have an HOA, but the covenants allowed individual owners to enforce them.
Exercising that right, the plaintiff, Densmore, notified McCarley that her business, and the structures she had built for it, violated the covenants. McCarley installed sound-proofing in the buildings to address concerns about noise, but Densmore wasn’t satisfied and filed a suit, joined by several other residents, seeking an injunction barring the operation of McCarley’s business.
McCarley argued that because subdivision owners had failed to enforce numerous deed restrictions in the past, they had “waived and abandoned” them, rendering them un-enforceable now. The trial court agreed and Densmore appealed, arguing that McCarley had failed to support her waiver claim and that the trial court had “abused its discretion” by rejecting the injunction the plaintiffs sought.
In its analysis, the appeals court noted that in order to overturn the trial court, it would have to conclude that “the credible evidence supporting the finding is too weak, or so against the great weight and preponderance of the contrary credible evidence, that the finding should be set aside and a new trial ordered.”
Weight of the Evidence
The key question for the court was whether McCarley had provided sufficient evidence that the deed restrictions had been abandoned. To meet that test, the court said, she would have to demonstrate (citing a prior decision) “evidence of violations so pervasive that they have destroyed the fundamental character of the neighborhood.’ In other words,” the court said, McCarley had to demonstrate that the plaintiffs “acquiesced in extensive and material violations of the restrictions,” amounting to “international conduct inconsistent with claiming the right to enforce [them.]”
The question of whether restrictions have been waived is “a question of fact,” the court said, requiring consideration of three issues:
- “The number, nature, and severity” of past violations that have not been enforced;
- Previous enforcement actions (or the absence of them); and
- Whether it is still possible to realize “to a substantial degree” the benefits the restrictions were intended to provide.
On the first point (past violations), the Appeals Court found that McCarley had provided ample evidence of past violations that had not drawn enforcement actions. Of the 43 lots in the subdivision, the court noted, 33 (more than 76 percent) have violated the restrictions in some way, including lots owned by Densmore and the other plaintiffs.
The court also noted testimony indicating that while Densmore was aware of many of those past violations, the enforcement action against McCarley was the first she had ever initiated. Further weakening the argument against abandonment, another plaintiff, who had livestock on his property, testified that he assumed the restriction forbidding livestock had been waived because it hadn’t been enforced in the past.
Past violations were sufficiently numerous and serious, the court found, to justify the trial court’s ruling that they “had vitiated the benefits” the restrictions were intended to provide, and to discount the plaintiffs’ argument that the inability to enforce the deed restrictions would destroy the character of the neighborhood.
While some of the evidence was conflicting, the appeals court agreed, the trial court appropriately resolved those conflicts in favor of the homeowner against whom the restrictions were being enforced, “which it was entitled to do and which we may not second-guess….The evidence showed that the restrictions had been repeatedly and pervasively violated over a thirty-five-year period and that Appellants had acquiesced in these violations,” the court said, while McCarley provided “more than a scintilla” of evidence to support her claim that the restrictions had been waived by abandonment. “”We cannot conclude that the evidence supporting the trial court’s [decision] is so weak that it must be set aside,” the court concluded.
“[Insurance companies] know they’re going to be the scapegoats [in COVID coverage disputes]. They know they’re going to be villains here, and so the question is not how we eliminate [that risk], but how we reduce it.” ─ Richard Levick, principal in LEVICK, a public affairs, crisis and reputation risk management firm.