LEGAL/LEGISLATIVE ALERT FOR NOVEMBER, 2019

Published on: October 28, 2019

UNDER-PERFORMING

The housing market continues to under-perform, producing results weaker than strong employment figures and wage gains would seem to support. Skimpy inventories pushed prices up and pushed existing home sales down in September compared with the previous month. But the seasonally adjusted annual rate of 5.38 million units was almost 4 percent above the year-ago level. “An unbalanced situation” created by rising prices and shrinking inventories is holding sales below expectations, Lawrence Yun, chief economist for the National Association of Realtors, told the Wall Street Journal. The median price for homes sold in September was $272,100, almost 6 percent higher than a year ago, marking 91 consecutive months of year-over year price gains.

Lawrence Yun

While the existing home market is lagging, the new home market seems to be strengthening. Sales of new homes in August topped the year-ago pace by 15.5 percent. New construction – the key to improving the persistent inventory problem, was less favorable, falling more than 9 percent in September compared with the August pace. The decline was concentrated in the multi-family sector, where starts (which tend to swing sharply from month to month) plummeted by nearly 30 percent. Single-family starts inched above the year-ago pace by about 3 percent.

Single-family permits, an indicator of future construction activity, increased by 2.8 percent to an annual rate of 919,000 units, the highest level since the beginning of this year. Although home builders are becoming increasingly optimistic (based on confidence surveys), analysts are decidedly less upbeat. “Builders still aren’t producing enough new houses to satisfy demand,” an article in MarketWatch noted, “and they are unlikely to dramatically scale up construction in light of fresh worries about the health of the U.S. economy. That is keeping home prices higher than they otherwise would be and effectively capping overall sales.”

WIDENING GAP

The widening gap between the rates at which housing prices and incomes are growing suggests that an economic recession is likely to begin next year, economists at the Council on Foreign Relations, a Washington think tank, are warning. A similar gap appeared in the years preceding the “Great Recession” that began in 2008, Benn Steil, director of international economics at CFR and Benjamin Della Rocca, a former analyst with the group, note in a recent blog post. “A parallel dynamic,” they say, “is playing out today.” When income growth fails to match rising home prices, prices have to fall, and declining prices, in turn “drive down household spending, by way of the so-called wealth effect,” the economists explain. Weaker spending, in turn, will trigger an economic downturn.

While consumers probably aren’t analyzing economic trends in the same way, they do appear to agree that a downturn is likely. More than two-thirds of the respondents to a recent poll conducted by YouGov said they are curbing spending and taking other steps (including looking for a better-paying or more stable job) to prepare for a weaker economy. More than 40 percent said they were not adequately prepared for a downturn.

PRIVACY LEGISLATION

Concerns about data breaches and consumer privacy have produced considerable debate in Congress and generated some competing legislative solutions, but no action, as yet, on any of them. More than 100 centrist Democrats are backing a House measure introduced by Rep. Susan DelBene (D-WA), that would allow consumers to opt out of the collection and storage of their personal information, would require companies to obtain affirmative consumer permission to use any “sensitive” information (such as financial or health data), and require companies to adopt “plain language” privacy policies. The measure would also give the Federal Trade Commission (FTC) broader authority to enforce privacy protections, and would preempt state privacy laws, such as a California law, scheduled to take effect next year, which is considerably tougher than this proposal.

A Senate bill proposed by Sen. Ron Wyden (D-OR) also goes much further than the House measure. Wyden’s “Mind Your Own Business Act” would impose prison sentence s of up to 20 years on corporate executives if their companies lie about misusing personal consumer information. The law would also allow the FTC to impose fines of up to 4 percent of revenues on companies that violate the law. Unlike the House bill (whose chief sponsor is a former Microsoft executive), Wyden’s legislation would allow consumer advocacy groups to sue companies for privacy violations and would not override state laws stricter than the federal legislation.

CFPB CHALLENGE

The U.S. Supreme Court has agreed to consider a suit challenging the constitutionality of the Consumer Financial Protection Bureau (CFPB). The plaintiff, a California-based law firm, contends that the legislation establishing the bureau gives it too much power by improperly limiting the authority of the president to dismiss its director. A federal appeals court rejected the challenge last year, ruling that its primary– that a president should have more authority to remove the director – “is without force. The Supreme Court is of course free to revisit [precedents holding otherwise],” the court ruled, “but we are not.”

The CFPB, which was created under the Obama Administration, has significantly scaled back its enforcement activities since President Trump took office. The Consumer Federation of America reported recently that those activities have declined by almost 80 percent since 2015; monetary awards resulting from consumer complaints have declined by 96 percent, according to the consumer advocacy group.

AMERICAN DREAM DEFERRED?

The “American Dream” of home ownership is becoming a dream deferred temporarily for many young adults and perhaps permanently for some of them. Nearly one-third of the respondents to a recent survey said they don’t view owning a home as an essential component of the American dream and 20 percent said they don’t expect ever to buy a home. Affordability was the primary obstacle cited by 62 percent of respondents; 20 percent said they prefer the flexibility of renting over owning and 22 percent said they don’t want the financial burden of owning a home. “Over the past several years, we have started to see a shift toward renting becoming an integral component of the American Dream,” observed Anthemos Georgiades, CEO of Zumper, which conducted the survey. A rental platform, Zumper would benefit from a shift that made renting a home more appealing than owning one.

Investors in the ‘built-for-rent’ market are among those benefiting from the surging demand for rental housing. And much of that demand is coming from people who could afford to purchase a single-family home but prefer renting it, Josh Hartmann, CEO of NexMetro Communities, which builds homes for rent, told NPR.

“We’ve been shocked to find that [many of our buyers] had great credit, had money for down payments and had great incomes, but just didn’t want to own a home,” he noted. “They were lifestyle renters – renters by choice.”

The Harvard Joint Center for Housing Studies reports that 5 percent of the single-family homes constructed in 2016 were built for rent, nearly double the historical average of less than 3 percent. In another indication of perceived strength in the single-family rental market, Fannie Mae has agreed to purchase a package of mortgages from Blackstone Group, which operates Invitation Homes – the largest operator of single-family rentals in the country.

IN CASE YOU MISSED THIS

Medical costs related to the opioid epidemic totaled $631 billion for the three-year period between 2015 and 2018, a recent study found.

African-American home buyers could afford only 25 percent of the homes for sale in 2018. In 2012, the “typical” African-American household could afford almost 40 percent of available homes.

The American College of Occupational and Environmental Medicine is warning that legalizing marijuana has “huge” implications for public health and workplace safety that Congress should consider before taking that step.

The income gap between the richest and poorest Americans reached its highest level last year since 1967, when the Census Bureau began tracking it in what is known as a “Gini” index. Economic gains for lower income workers “have not been enough to close the long-running trend of the wealthy seeing far larger income growth than middle- or lower-income earners,” the Washington Post reported.

Flooding is becoming more severe, glaciers are melting more rapidly and fisheries are shrinking faster than scientists studying the effects of climate change have predicted.

LEGAL BRIEF

CARRYING OVER AND CARRYING ON

Nothing lasts forever – with the possible exception of a condominium association’s governing board, if an association fails to elect a new one. A Michigan Appeals Court reached that conclusion in this dispute between a condominium association and an owner who claimed the existing board had no authority to fine him for violating the association’s rules. (Channel View East Condominium Association, Inc. v. Ferguson.)

The question about the board’s authority arose because members of this condominium community (Channel View) had never elected directors to replace those the developer had selected in 2001 while he controlled the association. Under the bylaws, the first meeting of association members, at which they were to elect a member-controlled board, should have been held no later than July of 2003 – 120 days after the developer had conveyed 75 percent of the lots. That meeting was never held.

No one complained about that lapse at the time. In fact, the question didn’t arise until 2017, when the association sued Ferguson. Ferguson had purchased his lot and had begun constructing a home on it in 2003. When construction had not been completed two years later, the board notified Ferguson that he was violating an association rule, requiring completion within one year. The board scheduled a hearing, which Ferguson did not attend. So the board began assessing monthly fines and continued doing so for the next 13 years.

When the house still had not been completed in 2013 (possibly a record for construction delays), the board moved to foreclose to enforce its lien against Ferguson and collect the $138,000 in accumulated fines and interest that he owed. Ferguson argued that the board should have been replaced years before and had no authority to act on the association’s behalf. The trial court agreed and the association appealed.

There was no dispute about whether Ferguson had violated association rules by failing to complete construction of his house; the only question before the court was whether failure to elect a new board had erased the authority of the existing one.

The relevant bylaw provision states that after the initial meeting at which owners replace the developer’s board, the association is to hold annual meetings to elect directors, whose terms are supposed to overlap. The provision adds: “A board of directors elected pursuant to these provisions shall serve until the earlier of the next annual meeting…or such time as it has been replaced, in accordance with the bylaws.”

The Appeals Court agreed that the original board should have been replaced at the first meeting of owners, “ but contrary to the trial court’s ruling,” the court said, “nothing in the condominium documents, including the bylaws, states that the board’s powers would be divested in the event the first meeting did not occur.”

Equally important, the court said, and crucial to its analysis, the existing board had never been replaced. Ferguson had argued that the language of the bylaw, specifying that the directors would serve “until the earlier of the next annual meeting…or such time as [the board] has been replaced in accordance with the bylaws,” meant that the existing board was no longer authorized to serve.

But the developer-appointed board was not elected pursuant to the bylaws, the court reasoned; it was elected pursuant to the articles of incorporation. “Thus, technically, it appears that this provision does not apply.”

Even if the provision does apply, the court said, the provision says the board will continue to serve until “the next annual meeting” or until it has been replaced via other means, consistent with the bylaws. But there has never been an annual meeting, the court noted, nor has the board been replaced by other means. “Because the board was to serve until either of those conditions came to pass, and because neither of those conditions has taken place,” the court said, “the board continued to ‘serve’ in its existing state,[ and its actions] are binding upon the Association as if the board had been elected by its members.”

Legal precedents support this conclusion, the court said, citing in particular an 1878 state Supreme Court decision holding that the directors of a corporation continued to conduct its business “in the absence of a demand for elections.”

That principle applies here, the court said. In this case, as in the earlier one, the association’s board has “kept up” its position, by filing the annual reports and paying the annual fees required by the state, “and no proceeding has been initiated to question [its] validity.”

Equally important, the court noted, the state Nonprofit Corporation Act incorporates the theory underlying the Supreme Court decision, specifying that the failure to hold an annual meeting at the designated time and failure to elect the directors in accordance with a corporation’s bylaws “does not affect otherwise valid corporate acts or work a forfeiture or give cause for dissolution of the corporation.”

The state’s high court affirmed that theory in another case challenging the authority of an elected board, holding in a 1999 decision that the failure to comply with an annual meeting schedule “did not divest the board of its powers.”

Likewise here, the court said, the association’s failure to hold annual meetings in accordance with the bylaws “did not automatically divest its board of directors of power.”

The board cautioned that its ruling “should not be read as somehow giving corporations carte blanche to ignore their bylaws.” Any members of the association, including Ferguson could have sued the association to require it to comply with the meeting requirements. “But no one ever did,” the court noted.

“Accordingly, regardless of the appropriateness of plaintiff’s failing to call for and hold any member/co-owner meetings,” the association’s bylaws, the Nonprofit Act, and caselaw all support the conclusion that the association’s directors “continued to hold over in the absence of any elections,” and retained the authority to act on the association’s behalf. The court reversed the trial court’s decision and remanded the case for further proceedings on the enforcement of the association’s lien.

WORTH QUOTING

“From my perspective as Fed chair, he is responsible more than any other person for the fact that the United States today has an independent central bank—a central bank able to make decisions in the long-term best interest of the economy, without regard to the political pressures of the moment.” ─ Fed Chairman Jerome Powell, referring to Marriner Eccles, the Fed’s chairman from 1934 to 1948.


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