LEGAL/LEGISLATIVE UPDATE – APRIL 2, 2018

Published on: April 2, 2018

UNEXPECTED RELIEF

Given the widespread expectations for draconian cuts in financing for federal housing programs, the stop-gap $1.3 trillion funding bill Congress approved in March contained an unanticipated but welcome surprise: a $4.7 billion increase in funding for the Department of Housing and Urban Development (HUD), instead of the $6 billion reduction President Trump had sought.

The $52.7 billion budget approved for the agency included significant increases to programs Mr. Trump had proposed cutting or killing, including community development block grants and the HOME program for affordable housing.

An analysis by the National Low-Income Housing Coalition notes: “The spending bill renews all Housing Choice Vouchers and provides new vouchers to veterans and people with disabilities, allocates nearly $1 billion in additional funding to repair and operate public housing, and boosts funding for the HOME Investment Partnerships program (HOME) to the highest level in seven years.”

A bulletin from the Citizens Housing and Planning Agency (CHAPA) reflects the relief felt by housing advocacy groups nationwide. “The short story is that the budget includes increases not only well above what President Trump proposed in his original budget, but also increases above 2017 budget levels, CHAPA notes, adding, “today is a good day to be in housing!”

SLOW TO GROW (UP)

Home ownership, it is generally accepted, is a cornerstone of individual wealth. If that conventional wisdom is true, then millennials are going to build wealth a lot more slowly than previous generations, because it is taking them a lot longer to enter the housing market.

Based on population size, millennials, who represent the largest living generation, ought to be dominating the housing market and fueling an explosion in home purchases. But they are forming separate households – the prelude to homebuying – at an agonizingly slow rate – 3.6 percent more slowly in 2016 than in 2000, according to the U.S. Census Bureau. Freddie Mac analysts estimate that had young adults matched the historical “headship” rate, they would have formed 1.6 million more households and bought a lot more houses.

The Freddie Mac analysis attributes the lag primarily to housing costs, which have been rising rapidly and incomes, which have not been rising fast enough for millennials to keep pace. Real median home prices increased by nearly 30 percent between 200 and 2016, compared with a 1 percent increase in the incomes of young adults.

Saddled with student loans and hampered by low incomes, more young adults are living with their parents for longer periods. Census Bureau statistics put that number at 15 percent in 2016 compared with 10 percent in 2000. But these young people will strike out on their own eventually, Len Kiefer, Freddie’s deputy chief economist, and an author of the headship analysis, suggests.

“We expect that as life progresses and today’s young adults age, they will add around 20 million households to the U.S. economy,” which should increase demand over the next decade – but it may not. “Housing costs are a major factor holding back young adult household formations,” Kiefer notes, accounting for about 28 percent of the decline in household formation rates. “If housing costs continue to rise,” he predicts, “we could see about 600,000 fewer households over the next decade.”

RISING TIDES SINKING COASTS

Rising sea levels – a byproduct of climate change – will take a huge bite out of the New England coastline. And massive storms, like the sequential Nor’easters that struck in March, will become stronger and more frequent, an article posted on weather.com, warns.

The weakening of the Gulf Stream will reduce its moderating impact on sea levels, the article explains, by reducing the contrast between sea levels on both coasts, and this in turn “would act to push up sea levels along the Northeast U.S. coast, on top of the global rise produced by warmer seas and melting ice,” the article, by Bob Henson of Weather Underground, explains. As a result, Henson says, “the renowned ferocity of nor’easters will thus play out atop a progressively rising sea surface, making coastal impacts progressively worse unless adaptation efforts can keep pace.”

Even without an increase in major storms, the threat to the New England coastline will be dire, he contends. “All it takes is the wrong storm at the wrong time to push destructive waters into the coast, and the sea level supporting those surges and waves will only get higher with time.” Adding five feet of water to Boston Harbor, which, Henson notes, is only slightly more than the Jan. 4th storm (Grayson) produced, would flood more than 6 percent of the city. “That extra inch and a half of water could be on Boston’s doorstep in little more than a decade,” Henson warns, “just waiting for the next nor’easter.”

AIMING HIGH AND FALLING SHORT

Corporate “wellness” programs get high marks for their two primary goals – lowering health care costs improving the health of their employees. But they get poor grades for the results achieved in both. Researchers at the University of Illinois compared 3,300 university employees enrolled in a wellness program with a control group of employees who had no access to it.

Similar to many corporate programs, this one had both medical and fitness components and offered varying incentives for participating in them. Analysts wanted to assess how the program affected health outcomes and health care costs and gauge the impact of incentives on participation rates. Their conclusions: Wellness programs and incentives for them have little or no impact on employees’ health or their behavior.

On the incentive question, offering employees $100 for participating in the wellness screening boosted their participation rate to only 59 percent, compared to 50 percent without the screening. Doubling the incentives didn’t change that outcome much. The comparison of health costs wasn’t any more favorable: health-related expenditures were almost identical for employees enrolled in the program and those who weren’t. Medical insurance claims were also somewhat lower for employees who weren’t enrolled in the program.

Those findings may be a bit unsettling for employers, who spent an estimated $6.8 billion on wellness programs in 2017, up from $1 billion in 2011. Other analysts who have studied the issue say it can take at least three years for wellness programs to demonstrate results, and this study tracked employees for only one year. The study’s authors say they intend to follow participants for three more years, “and it is possible effects will emerge in the long run,” one of the authors told Insurance News. But he’s not optimistic. Based on the results gleaned to date, he said, “We don’t see anything trending toward savings.”

ENTHUSIASM GAP

Americans still have a generally favorable view of the housing market, but their enthusiasm is wavering. Sixty-eight percent of the respondents to the National Association of Realtors’ first quarter HOME survey agreed that this is a good time to buy a home, down from 72 percent in the fourth quarter of 2017.

That decline came despite an increasingly optimistic view of the economy generally and of their personal financial prospects. The survey’s ‘personal financial outlook index,’ reflecting expectations for the next six months, increased from 59.1 in December to 62.0 in March. “Those positive feelings are not translating to positive views that now is a good time to buy a home,” the NAR’s chief economist, Lawrence Yun, observed

Yun blames rising home prices, exacerbated by a critical inventory shortage, and rising mortgage rates, for the disparity. Prices have increased by almost 50 percent since 2011 and have gained nearly 6 percent year-over-year in the first two months of this year, according to the NAR. “Supply conditions would improve measurably and ultimately lead to more sales,” Yun said, “if a growing number of homeowners finally decide that this spring is the time to list their home for sale.”

A survey by Redfin underscores the drag created by the shortage of available homes for sale. The company’s “Housing Demand Index” declined by 14.1 percent in February compared with the previous month, the largest one-month decline ever for the index, and its lowest level in nearly a year.

Although the number of buyers requesting home tours increased by nearly 3 percent in February compared with the same month a year ago, Redfin reports, the number of buyers making offers declined by more than 20 percent

“There are still plenty of people touring home,” Peter Ziemkiewicz, Redfin’s head of analytics, said in a blog on the company’s web site. “There just aren’t enough of homes to satisfy all the buyers who want to make offers.”

IN CASE YOU MISSED THIS

Shrunken housing inventories are creating a challenging market for anyone looking to buy a home, but for first-time buyers, conditions are really “ugly,” bloomberg.com reports.

Interlocking plastic shapes known as ‘LEGOS’ have been entertaining children – and causing intense pain for parents who stepped on them – for decades. Elon Musk, known for building electric cars and spaceships, is planning to sell life-sized “LEGO-like interlocking bricks” that can be used to construct buildings and sculptures.

California voters may consider a ballot initiative in November that would all allow seniors to sell their primary residence without triggering the Proposition 13 property tax reassessment, if they purchase another home in the state worth no more than the one they sell. Supporters say the change would encourage older homeowners to downsize, freeing up larger homes and making them more affordable for younger families, who would not be hit by a huge property tax increase.

The number of new homes constructed per household has sunk to its lowest level in nearly 60 years.

Staff cuts have reduced IRS staffing by a third and slashed the number of taxpayer audits from a peak of 1 in 90 in 2010 to 1 in 160 in 2017.

LEGAL BRIEF

COMMERCIAL OR RESIDENTIAL

As the short-term rental market continues to grow, more condo associations are clashing with owners who want to capitalize on that trend. Not surprisingly, many of those disputes are ending up in court. Also not surprisingly, the courts are reaching different conclusions on a key legal question: Whether short-term rentals represent a prohibited commercial use or an acceptable residential use of a condo owner’s property.

In Santa Monica Beach Property Owners’ Association v. Accord, homeowners in a Florida subdivision argued that renting their properties to vacationers did not constitute commercial use, because the renters were engaged in traditional residential uses of the property – eating, sleeping, and “other ordinary living purposes.” The home owners’ association, which sued to enforce the rental restriction in the community’s covenants, contended that collecting rent, advertising the homes on a vacation rental site, obtaining a license to operate a rental business, and collecting state and local taxes on the rental income, provided evidence of commercial use.

The trial court and the Appeals Court both rejected that argument. Adopting a rationale courts in other jurisdictions have applied, these Florida courts concluded that neither a short-term tenancy nor the collection of rent constitutes commercial use of a residential property. “The critical inquiry is not the duration of the tenancy, but the character of the actual use of the property by those residing thereon,” the trial court noted in its decision, which the Appeals Court cited favorably in affirming it. “The nature of the properties’ use is not transformed from residential to business simply because the properties may be subject to a regulatory scheme that requires licensure, and owners may earn income from the rentals,” the Appeals Court noted.

The wording of the covenants, which failed to specifically bar vacation rentals, also weakened the association’s position in this case. “Even if the restrictive covenants were susceptible to an interpretation that would preclude short-term vacation rentals,” the Appeals Court noted, “the omission of an explicit prohibition on that use in the covenants is fatal to the [association’s] position…because “[t]o impute such a restriction would cut against the principle that such restraints ‘are not favored and are to be strictly construed in favor of the free and unrestricted use of real property.’ Indeed,” the court added, “the need for explicit language in the covenants is particularly important where the use in question is common and predictable, as is the case with short-term rentals of houses near the beach to vacationers.”

A Michigan case, Bauckham Trust v. Pette, also involved a dispute between a home owners’ association and owners who, in this case, were using their properties almost exclusively as vacation rentals. Rejecting the owners’ contention that rentals were common and had long been accepted in the community, a trial court concluded that they violated both the association’s covenants and local zoning codes. The Appeals court agreed. Defining “commercial use narrowly to mean, “able or likely to yield a profit,” both courts concluded that renting the properties for a fee constituted commercial use, violating deed restrictions that permitted only “private residences” for the exclusive use of residents, and specifically prohibited commercial uses.

Although the association had objected only to short-term vacation rentals, the trial court issued an injunction barring all rentals in the subdivision, concluding that rentals of any length violated a local zoning ordinance prohibiting commercial uses in low-density areas. The Appeals Court upheld that part of the decision as well.

Although the injunction went beyond the relief the association had requested, the court agreed, the rationale rejecting short-term rentals “is equally applicable to rentals of any length,” the court said. “The act of renting property to a third-party for any length of time involves a commercial use because the property owner is likely to yield a profit from the activity,” the court reasoned, noting that restrictions barring commercial uses of “proscribe a wide variety of activities, even activities that are residential in nature, such as renting to residential tenants for extended periods of time. As such, the trial court’s decision to bar all rental activity for a fee” was not outside the range of principled outcomes,” the Appeals Court concluded, because the deed restrictions “barred any commercial activity from occurring on defendants’ lots….”

WORTH QUOTING:

“An earlier version of this article incorrectly stated that Benjamin Netanyahu said Moses brought water from Iraq. He said the water was brought from a rock.” ─ From a correction in the March 28 issue of the Wall Street Journal.


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