LEGAL/LEGISLATIVE ALERT FOR MARCH, 2020

Published on: February 27, 2020

OWNERSHIP LAGGING

What’s up with the home ownership rate? More precisely, why isn’t it up? After sinking in the aftermath of the “Great Recession,” the rate rebounded from the low point of 62.9 percent four years ago, to 65.1 percent in the fourth quarter of last year, according to a Census Department report. But it’s been stuck near that level since the fourth quarter of 2018, despite favorable interest rates and solid employment growth.

Part of the answer may be found in a recent survey by ING International, which found that more than 80 percent of Americans who are currently renting a residence don’t view saving money for a down payment as a priority. Raising a family, repaying student debt and travel are either more important than homeownership or seem more achievable, at least in the near term. But twenty-five percent of the respondents said they don’t think they will ever be able to buy a home.

Affordability is an obvious concern for many, and with good reason. Although wages have been increasing, home prices have been increasing more rapidly. The median sales price has more than doubled since 2000 while median wages have remained flat for most of the past two decades. Recent wage gains, averaging around 3 percent, continue to lag annual appreciation rates, hovering around 4 percent this year.

INVENTORY RELIEF

Permits for new single-family homes hit a 12-year high in January, spurring hope that the chronic inventory shortage that has impeded sales and pushed prices higher may ease. Permits increased to an annual rate of 987,000 – up 6.4 percent compared with December of 2019 ─ and the highest level since June of 2007, the Commerce Department reported. New home construction fell by 3.6 percent in January ─ a negative number but still a better performance than predicted by many analysts, who expected a sharper reversal following a 3.2 percent increase in November and a 17 percent jump in December. The January construction rate was also more than 21 percent above the year-ago pace.

Lawrence Yun

Lawrence Yun, chief economist for the National Association of Realtors, is encouraged by the recent construction numbers. The January dip notwithstanding, “the trendline is clearly on an upward path,” he said in a press statement. The increase in permits “is a positive indicator for even greater production in the months ahead,” he added.

That new construction can’t come to market soon enough. Inventory levels have fallen steadily for the past six months. There were fewer active listings in January than at any time in the past seven years, according to a Redfin report, with none of the 85 largest metros the company tracks reporting year-over-year increases in listings.

“More construction will mean more housing inventory for consumers in the later months of this year,” Yun told Housing Wire. “But the spring months could still be quite tough for buyers,” he noted, “because it takes time to convert housing starts into actual housing completions.”

RENTING VS. OWNING

Conventional economic wisdom has long held that owning a home is usually less expensive than renting one. But rising home prices have created the perception at least that renting is a more affordable option. (See ownership lag, above.) More than 80 percent of the renters responding to a Freddie Mac survey expressed that view – an all-time high for this monthly survey. It’s not as if renters think they are getting a bargain, however. More than 40 percent said they are paying more than a third of their income for rent, compared with only 24 percent of homeowners who say their housing payments are taking that large a bite out of their paychecks.

Rising rents may lead some renters to rethink their affordability assumptions. Almost 70 percent of the survey respondents said they are concerned that their rents will increase within the next year. About the same number said they worry about being able to meet larger expenses because their rent burden is so high, but they believe, nonetheless, that homeownership costs would be higher.

An analysis by ATTOM found that owning a home is, in fact, more expensive than renting one in about half of the 855 counties the research firm surveyed, suggesting that renters and homeowners are both struggling with affordability challenges. Home prices are growing faster than wages in two-thirds of the counties, according to ATTOM; rents are growing faster than wages in 57 percent.

“Either buying or renting is a financial stretch or out of reach for individual wage earners throughout most of the country in the current climate,” Todd Teta chief product officer for Attom, noted in the report.

FLOOD CONTROL

As climate change brings more storms and more storm-related insurance claims, Congress is looking for ways to keep the National Flood Insurance Program (NFIP) afloat. Industry analysts say there is an obvious solution: Prohibit construction in flood-prone areas.

A recent study by R Street, a Washington, DC think tank, found that new development has been increasing faster inside 100-year flood plains than outside of them. But local development policies continue to encourage development in those areas, the report notes, and the NFIP continues to insure properties located there. In addition to ending coverage for new construction in high-risk flood zones, the study suggests, the NFIP should increase its premium rates to reflect changing flood risk assessments, and should stop “grandfathering” existing properties – allowing them to retain their existing insurance rates even when flood assessment risks rise.

Barring new development in high-risk areas is essential, R.J.Lehmann, author of the R Street study, told Insurance Journal, because it addresses flood insurance costs without overburdening existing property owners.  “There is no argument to be made that you are pricing people out of their homes if those homes do not exist,” he said. “Where we can discourage flood-prone land from being developed without laying any new burden on current residents, we simply must take that opportunity.”

If the policies he proposes are adopted, Lehmann said, the NFIP would remain “an important source of risk management and financial protection” for policyholders, including those in 100-year flood zones. The agency should also focus on providing information to homeowners to make sure those facing heightened flooding risk,” which exists anywhere it rains,” recognize the “potential protection gap they face” in standard homeowner insurance policies, which do not provide flood protection.

UPWARD TREND

After several years of relative stability, property and liability insurance costs are rising. Reacting to mounting losses from large catastrophes and low interest rates that are depressing investment returns, insurers boosted their rates last year and many are warning that additional increase are likely.

Hurricanes, wildfires and other disasters cost the insurance industry worldwide more than $200 billion in 2017 and 2018, according to industry statistics; pretax operating income, meanwhile, declined by nearly 8 percent between 2014 and 2018. Looking to narrow that gap, insurers have increased rates on virtually all insurance lines (excluding state-regulated workers compensation). The cost of property-casualty insurance sold to businesses increased by almost 7 percent through the first three quarters of last year, putting the industry on track for the largest annual increase since 2003, according to recent Insurance Journal report. The Journal also reported a recent earnings call with reporters, in which Chubb Ltd. CEO Evan Greenberg cited increases ranging from 3 percent to 33 percent across its global product lines, with premiums for U.S. companies rising by an average of 8 percent. “There is nothing I see that tells me this momentum is going to slow,” Greenberg told reporters. “If anything, it has picked up.”

IN CASE YOU MISSED THIS

Government regulators are going to subject drones to the same design review standards applied to other aircraft – a precursor to permitting drone deliveries over major population centers.

Wells Fargo has agreed to pay $3 billion to resolve SEC complaints that the institution misled investors by touting the success of a “cross-selling” strategy that involved opening millions of accounts that were not authorized by consumers. “This settlement holds Wells Fargo responsible for its fraud and furthers the SEC’s goal of returning funds to harmed investors,” an SEC statement said.

Age-restricted homes are somewhat smaller and more expensive than single-family homes not subject to age restrictions, according to ab analysis by the National Association of Home Builders. The NAHB study also found that age-restricted homes are more likely to be cash purchases.

The U.S. fiscal deficit exceeded $1 trillion in 2019 – the first time it has passed that marker since 2012. The national debt now stands at $23.2 trillion.

The U.S. debt may be increasing but the population is not. Falling birth rates and declining immigration have pushed population growth to its slowest pace in nearly a century, according to census data reported by the Wall Street Journal.

LEGAL BRIEF

A GARAGE BY ANY OTHER NAME

“A rose by any other name,” as Shakespeare observed, would still be a rose. But what about a garage? A Florida appeals court addressed that question in a dispute over the interpretation of a restrictive covenant in a unit owner’s deed. (Beach Towing Services, Inc. v. Sunset Land Associates, LLC).

The plaintiff (Sunset) purchased three lots in this Miami Beach community, all subject to a deed restriction prohibiting property from being used “as a parking lot, storage yard facility, or for a garage or tow truck company.” Sunset wanted to build a parking garage as part of a planned development for the lots. Beach Towing and several other neighbors contended that the covenant prohibited that structure. Sunset argued that the covenant language prohibited the use of the property for the operation of a garage-related business, but did not bar construction of a parking garage. The trial court granted summary judgment in favor of Sunset and Beach Towing appealed the decision.

The Appellate court’s analysis focused on the definition of the word “garage,” on the rules of grammar and on the covenant’s sentence structure. The decision actually reads more like a grammar lesson than a legal opinion.
Beginning with the definition, the court noted that both the dictionary and the Miami building code define the term “garage” as both a structure (the definition advanced by Beach Towing) and “a business a business where vehicles are mechanically repaired, rebuilt, or constructed for compensation.” In any dispute over how a covenant should be interpreted, the court noted, the language must be he read within the broader context of the covenant and considering the intent of the parties.

“It is well settled that a single contractual term must not be read in isolation,” the court said. “Rather, the goal is to arrive at a reasonable interpretation of the entire agreement, and to construe contractual terms ‘in such a manner as to give them a meaning consistent with the apparent object of the parties in entering into the contract.’”

The court’s assessment of “intent” turned on the sentence structure – specifically, the use of the terms “as” and “or.” The covenant creates two categories of restrictions, the court said. The first states that land can’t be used “as a parking lot, storage yard facility.” The second states that land can’t be used “for a garage or tow truck company.”

Quoting from previous court decisions, the court noted, “As a general proposition, the use of different language in different contractual provisions strongly implies that a different meaning was intended.” The “separate” use of ‘as’ and ‘for’ in the covenant, the court said, “indicates a distinction between “parking lot, storage facility” and “garage or tow truck company.”

Additionally, the court noted, a modifier typically applies to all words in a series. Here, the modifier “company” would apply to both garage and tow truck. Analyzed in this way, the court said, the covenant language prohibits the construction of a parking lot or a storage lot facility, and prohibits the use of the land for a tow company or a garage company “where vehicles are mechanically repaired, rebuilt or constructed for compensation.” But it would not prohibit the use of the land for a garage structure.

“Based on the plain language of the Covenant,” the court said, “the term ‘garage’ is properly read as ‘garage company’ and refers to a business activity, not a physical structure….the clear and unambiguous language of the Covenant does not prohibit plaintiff from building or operating any kind of a parking garage on the property,” the court ruled.

The covenant language did create some ambiguity about specifically what garage or garage-company activities might be prohibited, the court acknowledged. But that ambiguity, the court said, must be resolved in the way that is most favorable to the property owner and is least restrictive to the property’s use.

That analysis produces the same conclusion dictated by the analysis of the convent’s sentence structure, the court said: “The covenant must be construed to prohibit only the use of the Property for a company where vehicles are mechanically repaired, rebuilt or constructed for compensation. The Covenant cannot be read to prohibit a parking garage on the Property. Any other construction would run counter to the well settled rules that a restrictive covenant must be strictly construed against the party seeking to enforce it, and in favor of the free and unrestricted use of the Property.

The defendants’ argument that the covenant prohibited a garage structure failed for one additional reason, the court said: “[It] would impermissibly result in the forfeiture of Plaintiff’s substantial development rights, in violation of these long-standing principles of real property law.”

WORTH QUOTING

“As policy, this is folly. As politics, it is flat-out malpractice.” ─ Stanley Kurtz, a senior fellow at the Ethics and Public Policy Center, criticizing proposed revisions in HUD’s Affirmatively Furthering Fair Housing rule.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.