LEGAL/LEGISLATIVE UPDATE – AUGUST 16, 2018

Published on: August 16, 2018

HOUSING UNCERTAINTY

What has been a quiet hum of concern about the housing market has grown louder, echoing in the comments of industry analysts and in headlines such as these: “Home Buyer Demand Cools Off”; “Housing Market Showing Signs of Cracking”; “Is the High-Flying Housing Market Heading for a Fall?”

Economic reports for June indicate that some key trend lines have begun to shift. Home buyer confidence, housing demand, sales of new and existing homes, pending sales and new home construction all declined, in some cases continuing a downward trend. Taking those markers in order:

  • Redfin’s Housing Demand Index registered its steepest year-over-year decline (9.6 percent) in more than two years.
  • Fannie Mae’s Home Purchase Sentiment Index fell by 1.6 points to 90.7, reversing survey highs reached in April and May. Doug Duncan, Fannie’s chief economist, blamed “tight supply and lackluster income growth.”
  • Existing home sales declined for the third consecutive month in June, while pending sales remained more than 2 percent below the 2017 level.
  • New home sales lagged the May total by 5.3 percent, but still managed to hang on to a year-over-year 2.4 percent edge over 2017’s lackluster performance.
    New home construction, on the other hand, fell more than 12 percent below the 2017 pace, with most of the dip concentrated in the multi-family sector.
  • Permits for new single-family construction were only 4.6 percent above a year-ago pace that analysts agree fell far short of the production level needed to match current and pent-up housing demand.

“It’s too soon to tell whether this is the start of a broader cooling or simply a return to something more like balance in places that had become extreme seller’s markets,” Pete Ziemkiewicz, head of analytics at Redfin, told Bloomberg News.

FED CONFIDENCE

The Federal Reserve left its target federal funds rate unchanged in August but Fed Chair Jerome Powell told lawmakers recently that policy makers still see “gradual” rate hikes as “the best way forward.” Analysts are expecting another quarter-point increase in September, and one more before the end of the year.

While signaling the Fed’s confidence in the economy, the rate increases will also make homebuying more expensive. The rate on a 30-year fixed rate mortgage was averaging 4.57 percent in June, up from 4.03 percent in January. This cuts two ways in the housing market – both negative: It increases affordability pressures on prospective buyers and makes it less likely that prospective sellers with a low rate on their existing mortgage will want to trade it for the higher rate on the mortgage they would need if they sold their existing home and purchased another one.

The bottom line: Fewer new listings in a market starved for them, and more headwinds for buyers, who are already being sidelined by cost constraints.

ENERGY CRUNCH

It wasn’t that long ago that utility companies were exhorting consumers to conserve energy to reduce soaring bills and conserve scarce resources. They may have been too persuasive. Conversion to wind, solar and other alternatives is reducing the demand for electricity the utilities generate through traditional means, pushing energy prices lower and reducing the return on power plants.

“Once confined to a curiosity for a few hours over windy Christmas holidays, sub-zero cost of electricity is becoming a reality for hundreds of hours in many markets, upending the economics of the business in the process,” Bloomberg News reported recently.

Power prices have been falling to zero or lower in some markets during periods when supplies have surpassed demand. This occurs in part because wind and solar are partially feeding the grids in many markets.

“Energy market price signals are critical to telling generators where to build new resources,” Abe Silverman, deputy general counsel at NRG Energy, told Bloomberg. “As negative prices become more prevalent, we’ll have to evolve our energy market price formation strategies to ensure that we will continue to drive efficient investment.”

PET PRIORITIES

Prospective home buyers are, necessarily, willing to compromise on many features, but apparently not when it comes to features related to their pets. The three kids can share a tiny bedroom, but Fido and Fluffy can’t possibly manage without a large back yard and a deck on which to sun themselves. Three-quarters of pet-owning buyers responding to a recent survey by Realtor.com said they would reject an otherwise “ideal” home if it lacked essentials for their animals; 90 percent said the needs of their animals were an important or very important consideration in their search, while only 7 percent said their pets didn’t enter into the equation at all. The top ‘must have’ pet features: A large yard (45 percent), a large house (29 percent); a dog run (26 percent) and close proximity to outdoor spaces (25 percent).

“It’s heartwarming to find that people will put their pets’ needs first, even when it comes to one of the biggest financial decisions they will ever make,” Nate Johnson, chief marketing officer for Realtor.com., said in a press statement. “This survey shows that we really do consider pets part of the family—and that their needs are a critical part of finding the perfect home.”

The survey also contains a heads-up for real estate brokers and sellers: 80 percent of survey respondents were pet owners, who are going to be looking for pet-friendly properties.

NO EXODUS

The economic downturn and its aftermath forced many young adults, unable to find jobs or sufficiently well-paying ones, to live with their parents rather than forming households of their own, sending that statistic to a modern-day high. The economic recovery has not yet reversed the trend. U.S. Census Data indicate that 26.3 percent of 25-34-year-olds were living with their parents or other relatives in 2016 compared with 15.3 percent in 2000.

Critics say young people are simply unwilling to give up the advantages of living at home – free rent, home-cooked meals and an extended adolescence. But analysts say rising home prices and sluggish wage gains are the primary culprits.

The median new home price increased by almost 40 percent during the last 10 years, while median weekly earnings for young adults in the 25-34 cohort grew by only 19 percent. That disparity explains why the number of young adults heading their own households has declined from 46 percent in 2000 to 40 percent in 2016, contends Natalia Siniavskaia, assistant vice president for housing policy research at the National Association of Home Builders (NAHB), who analyzed the Census data for the trade group. The 6 percent difference translates into about 2.4 million homes that weren’t sold during that period, she says.

But Siniavskaia thinks this negative trend might be changing. “As the economic situation continues to improve it should give more stability and confidence to younger adults to buy their homes or leave parental homes,” she told CNBC. If she’s right, the improvement should be reflected in a higher home ownership rate for this group in the 2017 Census data, which haven’t been released yet.

IN CASE YOU MISSED THIS

The open space concept that has dominated housing design for at least two decades may have hit a wall – literally. Surveys of homebuyers have found a growing preference for using walls to separate rooms instead of removing them to create large open spaces.

A new Freddie Mac program provides financing incentives to multifamily developers who agree to cap rent increases for the life of their loan.

The number of older Americans filing for bankruptcy has tripled since 1991. Analysts blame the decline in employer-funded pensions and the increase in health care costs for the disturbing trend.

 

Massachusetts lawmakers have approved a bill that taxes and regulates short-term rentals in the state. Trade groups representing the hotel industry supported the bill, but Gov. Charlie Baker, who wanted some changes in the measure, did not sign it before the legislative session ended.

Just under the wire – again – the Senate voted to extend the National Flood Insurance Program. That means we can probably expect another ‘under-the-wire’ Congressional vote four months from now, when this extension ends.

LEGAL BRIEFS

AMENDMENT TANGLE

Start with declaration amendments changing the definition of limited common elements; add questions about the application of two different condominium statutes and common law; then, just for fun, throw in a question about how to define “air space” in a condominium, and you have the Gordian level legal tangle the Vermont Supreme Court unraveled in this decision. (Watson v. The Village at Northshore Association, Inc.)

The plaintiff (Watson) challenged a series of amendments the association approved between 1986 and 2012, arguing that they violated the Vermont Condominium Act, the Vermont Common Interest Ownership Act, and/ or the association’s declaration. The Trial Court ruled for the association on all 13 of the claims Watson raised.

The Supreme Court focused on two key questions: Whether some of the amendments, which were approved by a super majority of owners, required either unanimous approval or the approval of individual owners affected by them. And whether some of them exceeded the board’s authority.

On the latter point, one of the amendments at issue dealt with the board’s authority to enter owners’ units in an emergency. The original declaration authorized entry “as reasonably necessary to maintain and repair the common elements.” The amendment approved by owners authorized entry “at any time in the event of emergency, or to accomplish emergency repairs;” and after prior notice “to verify and enforce compliance with the association’s declaration and rules…and for any lawful purpose.” The amendment also authorized “specified board members” to enter a unit “during reasonable hours to inspect it and any improvements in connection with an application {for construction] or to ensure compliance with the board’s action.”

The trial court ruled that the amendment was consistent with the authority granted by the Common Interest Ownership Act, granting access required for the association to carry out its duty to “maint[ain],repair and replace[]” common elements,” and so represented a valid exercise of the board’s authority. But the Supreme Court concluded that the amendment exceeded both that statutory boundary and the powers granted in the original declaration.

Because the statute is silent on the question of what additional authority, if any, the board can exercise, the court noted, common law on this point must prevail. And under common law, the court said, any expansion of an easement “must be generally of the type originally contemplated” and “must not materially burden the landowner beyond what was intended.”

The amendment failed on both grounds, the court said. “Determining and enforcing compliance with the Declaration and Rules were powers not given to the Board in the Original Declaration, to say nothing of entry for “any lawful purpose.” Because the amendment expands the Association’s access beyond what is “reasonably necessary” for “[m]aintenance, repair and replacement of the Common Elements,” the court ruled, it is invalid.

Watson also challenged amendments redefining the association’s limited common elements to include attic space and roof structures located immediately above the units. He raised two issues here and the Supreme Court rejected both. The first: The Common Interest Ownership Act requires the approval of owners affected by any reclassification of common elements as limited common elements. Because he did not approve the change, Watson argued, it was invalid.

Although Watson noted correctly that some provisions in the CIOA applied retroactively to communities that existed before the law was enacted ,the court pointed out, the provision at issue here was not among them. As a result, Vermont’s Condominium Ownership Act governs the amendment process for Northshore, and the amendment met that statute’s requirement for approval by two-thirds of the owners.

Watson did not fare any better with his second argument – that the roof structures amendment created a covenant “enforceable as a servitude” that required his consent. The court found that his supporting evidence actually contradicted his argument and supported the general understanding that in a common interest ownership community, “the benefits and burdens of the restrictive covenants…inure to and are imposed on unit owners….[The association is created] to enforce the …covenants and manage land for the common benefit of all …owner,” the court noted, adding, “Watson was aware of the association’s “discretionary power” when he purchased his unit, and so he “accepted the risk that the power may be used in a way that benefits the commonality but harms the individual.”

Addressing what it termed “the crux” of Watson’s complaint, the court considered his contention that the association violated his property rights by allowing owners to expand into the attic and into the air space above their units. Because those expansions altered unit boundaries and percentage ownership interests, Watson argued, they required unanimous owner approval.

The court distinguished between the two types of expansions: Loft expansions, which created ceiling space in what had been an attic; and dormer expansions, which created a new room in air space above the unit.

The attic expansions the board approved would have affected Watson’s ownership interest, the court noted, only if he did not have the same expansion option. “Watson’s percentage interest changes only if other unit owners receive exclusive use and control over a portion of the common elements and only if Watson does not also receive exclusive use and control over an equal portion of the common elements.”

Watson’s unit has attic space, the court noted, “and he could therefore expand into that space if he so desired.”

Dormer expansions were different, the court said, because they involved air space. And unlike attic space, the court said, airspace “is not appurtenant to any one unit, but is instead shared by all of the units in common, like a commonly owned pool area or playground. Accordingly, an allocation of a portion of the airspace to any individual unit results in a reallocation of that airspace from a common element to a part of a unit—regardless of how the Association classified the dormer expansions—and that reallocation requires a unanimous vote by the unit owners.” The dormer expansions, did, in fact alter Watson’s percentage interest in the common elements, the court concluded, they did require unanimous owner approval, and “[they] were therefore unauthorized as a matter of law.”

WORTH QUOTING

“It would have been bone-deep, down-to-the-marrow stupid to let the National Flood Insurance Program expire in the middle of hurricane season, and my colleagues realized that,” ─ Sen. John Kennedy (R-Louisiana), following the Senate vote to extend the program hours before it was set to expire.


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