Published on: September 26, 2019
Citing concerns about the impact of the trade war with China and the increasing risk of a global economic downturn, the Federal Reserve slashed interest rates for the second time this year, reducing the benchmark overnight lending rate by 25 basis points, to a range of 1.75 percent to 2 percent. In a press conference following the announcement by the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, Fed Chairman Jerome Powell indicated that while future rate cuts are possible, they are not baked into this decision. “We took this step to keep the economy strong,” he told reporters. But he also noted that the labor market remains strong, inflation is nearing the Fed’s target, and the economic challenges the Fed sees “can be managed “with moderate adjustments to the federal funds rate. We ae going to be highly data-dependent,” he added. “We are not on a pre-set course. We are going to be making decisions meeting by meeting.” If the economy weakens, “a more extensive series of rate cuts could be appropriate,” Powell acknowledged. “But we don’t see that. We don’t expect that.”
The quarter-point rate reduction disappointed some analysts, who had been predicting a steeper cut, and infuriated President Trump, who has been pressing the Fed to lower rates more aggressively to offset the impact of the trade war with China. “No guts, no sense, no vision” Trump said of the Fed and Powell in a series of angry tweets following the FOMC decision. Post-meeting comments also revealed a rare split on the committee, with two members opposing any reduction and one favoring a steeper reduction.
Housing industry analysts don’t expect the Fed’s move to have much impact, if any, on mortgage rates. The expectation of a rate cut was already reflected in long-term rates, Ruben Gonzalez, chief economist of Keller Williams, told DS News. “Unless we see an increase in uncertainty around Fed policy decisions,” he added, “we don’t expect to see a lot of movement in mortgage rates as a result of Fed policy announcements.”
AGAINST THE RULES
Condominium owners don’t always obey their association rules. That’s hardly news to the boards and managers who enforce them. But many of the owners violate HOA rules intentionally, not because they are unaware of the rules, but because they don’t like them. Nearly one-third of the condo owners responding to a survey by Porch, an online marketplace for home improvement services, said fines and other penalties don’t deter them from violating association rules and more than half said they have not paid fines assessed against them. The most common violations: Putting out the trash too early—or too late; owning pets barred by the association rules; renting their units to tenants; displaying holiday decorations deemed “improper” or untimely; parking vehicles improperly; and speeding in the community. Disdain for association rules and fines notwithstanding, most owners responding to this survey said they like living in a condominium community. More than half of single-family owners and 49 percent of townhome owners said they liked their HOAs. The major reasons for choosing a condominium, cited by more than 40 percent of the respondents: The expectation that their home values will be protected – an assurance that stems in part from the enforcement of rules many of these owners don’t like.
HOME SALES SURGE
Spurred by lower interest rates, existing home sales increased for the second consecutive month in August, notching the strongest pace in more than a year. Sales reached an annual rate of 4.9 million in unit in August, nearly 3 percent higher than the same month a year ago. New home sales were even stronger. The annualized rate of 666,000 units was 18 percent higher than the same month a year ago.
But the inventory of available homes continues to shrink, falling to a 4.1 month supply, down from 4.2 months in July. “Sales are up, but inventory numbers remain low and are…pushing up home prices,” said Lawrence Yun chief economist of the National Association of Realtors, who has been urging home builders to ramp up new construction in the face of increasing demand.
The lower mortgage rates that have been drawing more buyers into the market appear to be encouraging builders, as well. Single family starts increased by 4.4 percent in August to 919,000 units – the best performance for this sector since January. Single-family and multi-family starts combined were 6.6 percent above the year-ago level. Single-family permits, an indicator of future starts, increased by 4.5 percent to a seasonally adjusted annual rate of 868,000 units.
“Finally, some clearly good news in home building, with August building permits and housing starts topping the numbers in July by 12.3% and 7.7% respectively,” Robert Frick, chief economist of Navy Federal Credit Union, told Housing Wire. “These are the best numbers in more than a decade and show a great jobs situation combined with good raises, high consumer optimism and low mortgage rates for the foreseeable future have spurred the home building industry.”
Other housing analysts shared his enthusiasm, but also voiced some continuing concerns, primarily about inventories. Although inventory levels have been improving, only 200 of every 10,000 currently occupied homes are for sale. That is “well below the historical average” of about 250, Odeta Kushi, deputy chief economist for First American, notes in a recent research report. The steep August increase in new construction was also encouraging, she says, but “it still falls short of the 1.2 million units needed to meet the increased demand stemming from household formation.”
Surveys indicate that millennials are becoming discouraged about their prospects for becoming homeowners, and a recent study indicates that their pessimism is justified. Rising rents and lagging incomes are creating bigger obstacles for this group than the Baby Boomers and Gen Xers who came before them have faced, the study, by HireAHelper, concludes. Among other critical differences: The average home price today equals 6.4 years of income for millennials, compared with 5.6 years for both boomers and Gen Xers. Other obstacles, including student debt, tighter underwriting standards for mortgages and a dearth of homes priced for first-time buyers, are also responsible for making home ownership “far less accessible to millennials than it was to previous generations in their early years of adulthood,” the report concludes.
Prospective buyers who are struggling to gain a foothold in the housing market aren’t the only ones concerned about the affordability problem. More than 80 percent of the adults responding to a recent survey by the National Association of Home Builders agreed that the lack of affordable housing represents a “national crisis,” and 64 percent said they would support expanding government programs to increase the supply of affordable rental housing.
TARGETING RENT CONTROL
A little-noticed provision in the Trump Administration’s proposal for revamping Fannie Mae and Freddie Mac would prevent the two Government Sponsored Enterprises (GSEs) from buying multifamily mortgages in markets subject to rent control. The plan, developed by the Treasury Department, outlines a blueprint for privatizing the two companies and ending the government conservatorship that began more than a decade ago. The Treasury Department says targeting rent control in this way is appropriate, because the policy “[interferes] with the functioning of local housing markets, tending to decrease the supply and quality of the available housing.” Housing industry executives who oppose rent control nonetheless expressed concern about the administration proposal, which they said would have the effect of further reducing the already scarce supply of rental housing. In a move that would also have a supply-reducing impact, the Federal Housing Finance Agency, which oversees Fannie and Freddie, has proposed capping at $100 million each the total of multifamily mortgages the enterprises can purchase. The agency has also proposed eliminating an existing policy that exempts from the caps “green” loans to finance energy and water-efficiency improvements in multifamily properties.
IN CASE YOU MISSED THIS
Vulnerable coastal communities could suffer devastating floods annually, absent meaningful actions to curb the effects of climate change, a new United Nations report warns.
Foreclosure starts have fallen to their lowest level in more than 18 years, while prepayment rates, spurred by lower interest rates, have climbed to a three-year high.
Home flipping is getting more popular but less profitable. Investors flipped nearly 60,000 homes in the second quarter of this year—12.4 percent more than in the previous quarter; but the gross profit on those transactions, $62,700, was 2 percent lower than it was a year ago.
Insurance costs are rising nationwide, led by property, umbrella and directors and officers premiums, which are posting double-digit gains for the first time in about five years.
Zillow predicts that housing starts will remain below historic averages for at least the next two years and possibly longer.
Housing costs are preventing many prospective buyers from purchasing homes but relocation costs are preventing them from moving to areas where housing prices are more affordable.
A ‘STORIED’ ARGUMENT
When the home owners association said a two-story dwelling violated a covenant allowing only single-story structures in this Texas subdivision, the developer (BCH Development) amended his plan to specify a “habitable attic” rather than a “2nd Floor Plan.” The HOA (Lakeview Heights) argued that the attic was still a second story and litigation ensued. (BCH Development, LLC v. Lakeview Heights Addition Property Owners Association).
The trial court granted summary judgment to the association and issued a permanent injunction prohibiting BCH from building a residence that had more than “one above-ground level or floor of living space,” or that had a “habitable attic.”
On appeal, BCH raised two primary arguments:
- The wording of the covenant was “ambiguous” and could be interpreted to allow a habitable attic.
- It was impossible to have the association’s Architectural Control Committee (ACC) approve the development plan, as the covenants required, because all three members had died and no replacements had been named.
Because the association had not reviewed the plan within 30 days, also as required by the covenants, BCH contended, the plan should be deemed to have been automatically approved.
On the first point (ambiguity), the appeals court found the plain meaning of the covenant language to be clear. The relevant provision stated: “No building shall be erected, altered, placed or permitted to remain on any lot other than one single family dwelling not to exceed one story in height….”
BCH argued that the phrase ”one story in height” could be interpreted to restrict the height of the exterior of homes, not to regulate the use of the space within the addition. Under this theory, BCH argued, if the disputed area were unfinished but the building design and height unchanged, the structure would contain only a single story and would not violate the covenant.
The Appeals Court found that interpretation inconsistent with the “commonly accepted” definition of the terms “story,” (the habitable space between two floors) and “height – the measure upward from the ground.” Using those definitions, the court said, the covenant limits homes to one story and not, as the developer’s interpretation would suggest, to a “specific numeric height.”
BCH had also argued that the local building code in effect when the subdivision was built and international building codes adopted since distinguish between “story” and an “attic story,’ which is defined as “any story situated wholly or partly in the roof” intended for storage, business “or habitation.” The court was unpersuaded by that theory too.
If the developers of the community had intended to permit “attic stories,” the court noted, they could have done so by excluding them from the single-story restrictions. Moreover, the court noted, an attic story, “by its own definition is a separate floor of living space,” so a dwelling containing an attic story “would be more than one story.”
The court also noted the distinction the Texas Supreme Court has made between words or phrases that are ambiguous (because they may have more than one meaning), and words or phrases with clear meanings that become “vague” when applied to different fact situations. “We think the meaning of the term ‘dwelling not to exceed one story in height’ is unquestionable,” the court said. “It is a home in which there is living space on only one level upward from the ground.” The ambiguity alleged by the developer “does not stem from confusion about the meaning of the words at issue,” the court reasoned. ”[It] arises from application of its unquestionable meaning to various factual scenarios.”
The court also rejected BCH’s other central argument: That its development plan was approved automatically because the Architectural Control Committee that was supposed to review it had no members, and there were no alternative means of obtaining that review. The developer cited other state court decisions holding that a requirement is waived if circumstances make compliance impossible.
But the doctrine of “impossibility of performance” doesn’t apply in this case, the appeals court said, because the covenant at issue doesn’t require approval of buildings with more than one story; the covenant bans those structures. The association didn’t object to the dwelling because the ACC didn’t approve it, the court noted; it rejected the plan because it violated the single-story restriction.
BCH did prevail on one argument: Because another two-story building had been constructed in the community, the BCH contended, the association had waived the right to enforce the one-story restriction against others. To establish grounds for a waiver, the court noted, a plaintiff must demonstrate that the violations at issue “are so great as to lead [an average man] to reasonably conclude that the restriction has been abandoned.” That is a fact based judgment, the court said, requiring consideration of, among another factors “the number, nature and severity” of the existing violations, prior enforcement actions, and “whether it is still possible to realize to a substantial degree the benefits intended through the covenant.”
This analysis should be undertaken by a factfinder, the court said, “and cannot be made as a matter of law.” Concluding that the trial court had erred by including the waiver argument in the summary judgment finding for the association, the appeals court remanded this issue to the lower court for a hearing on the facts.
“It is critical to preserve the Federal Reserve’s ability to make decisions based on the best interests of the nation, not the interests of a small group of politicians.” ─ From a Wall Street Journal op-ed signed by all four living former Federal Reserve chairs: Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen.