LEGAL/LEGISLATIVE UPDATE – JULY 8, 2018

Published on: July 8, 2018

CLIMATE CHANGING THE HOUSING MARKET

Climate change is reshaping the housing market. A recent study by Attom Data Solutions finds that consumers are beginning to factor concerns about flooding, wildfires and other climate-related disasters into their decisions about where to live, and those assumptions are beginning to affect home values in some areas. According to the study, home values in areas with high exposure to floods and hurricanes declined on average between 2007 and 2017.

The changes weren’t uniform. Values in Key Biscayne, Florida, where flooding risks are high, increased by almost 20 percent, and Aromas, California, classified as high-risk for wild fires, increased by more than 40 percent, indicating that buyers are concluding that natural amenities outweigh the disaster risks. But the key point, Attom suggests, is that buyer are considering climate change in their homebuying decisions.

“Natural disaster risk is certainly not the only factor consumers are considering when buying a home,” Daren Blomquist, Attom’s senior vice president for communications, told Bloomberg News. But the statistics provide “some evidence real estate consumers are responding to natural disaster risk, albeit somewhat erratically.”
Echoing that concern, the National Centers for Environmental Information predicts that coastal flooding alone will represent a trillion-dollar threat by the end of this century, when 2.4 million homes and more than 100,000 commercial properties will be at risk.

“What’s striking as we look along our coasts is that the significant risks of sea level rise to properties identified in our study often aren’t reflected in current home values in coastal real estate markets,” Rachel Cleetus, policy director for the UCS Climate and Energy Program, and co-author of a UCS report, told DS News. That has implications not only for homeowners but for coastal communities, which “will face declining property values as risk perceptions catch up with reality. In contrast with previous housing market crashes, values of properties chronically inundated due to sea level rise are unlikely to recover and will only continue to go further underwater, literally and figuratively,” Cleetus warns.

The impact on the tax base in some communities could be “staggering,” Kristy Dahl, a senior climate scientist at UCS, notes in the same DS News article. With reductions of as much as 70 percent possible in rural communities, she suggests, “tax base erosion could create particular challenges for communities already struggling with high poverty rates.”

IT’S ALL RELATIVE

Home prices measured by almost any index have been increasing steadily, stirring concerns about housing affordability and dimming forecasts for existing- and new home sales. But those staggering price increases look much tamer in relative terms, according to a study by Harvard’s Joint Center for Housing Studies, which found that historically low mortgage interest rates have largely offset the torrid appreciation pace. According to this study, the adjusted monthly payment on a median-priced single-family home was actually less in 2017 than in 1987, when prices were much lower but interest rates soared to 16 percent.

Of course, buyers don’t purchase homes in relative terms; they buy them in real time, based on economic circumstances today. And in real terms, Trulia reports in a separate study, average income, adjusted for inflation, increased by 27 percent between 1980 and 2016, while home prices increased by more than 60 percent. Lower mortgage rates, the report notes, “won’t really help the family that is trying to scrape together the down payment” required to purchase a home today.

DRUG TESTING

As the labor market tightens and more states legalize both recreational and medical use of marijuana, many companies are excluding marijuana from the drug tests they require for prospective employees.

Airlines aren’t ignoring marijuana in drug tests for pilots, but hotels, retailers and other labor-intensive businesses are reportedly in the vanguard of this trend, most evident in states that have legalized recreational marijuana use and in states where unemployment rates are lowest.

Although Attorney General Jeff Sessions’ hardline opposition to marijuana has seemingly defined the Trump Administration’s position, other administration officials have adopted a softer stance. Speaking at a recent Congressional hearing, Labor Secretary Alexander Acosta encouraged employers to consider taking “a step back” on drug testing.

“We have all these Americans that are looking to work,” Acosta said. “Are we aligning our … drug testing policies with what’s right for the workforce?”

The Society for Human Resource Management estimates that around 60 percent of companies conduct regular drug tests. Although there are no statistics on the number of employers now excluding marijuana or considering doing so, Insurance Journal reports: “Interviews with hiring executives, employment lawyers and agencies that help employers fill jobs indicate that dropping marijuana testing is among the steps more companies are taking to expand their pool of applicants to fill a near-record level of openings.”

While many companies may be moving in this direction, few are willing to acknowledge it publicly, Insurance Journal reports, leading a New Hampshire attorney quoted in the article to predict, “This is going to become the new don’t ask, don’t tell.”

RENTS RISING FASTER THAN INCOMES

Economic crosscurrents seem to be both supporting the rental housing market and undercutting it. Competing theories go like this: A strong economy and rising incomes are unleashing the homebuying power of millennials, sidelined until now by the recession and its economic fallout. Rising rents, meanwhile, have shifted the balance in favor of owning vs. renting. The alternative view: Soaring home prices are outpacing income growth, while the inventory drought, especially at the lower end of the market, is making it harder for prospective buyers to find homes they like at a price they can afford.

Census data indicate a shift toward ownership. The ownership rate increased for the fifth consecutive quarter, reaching its highest level (64.2 percent) since 2014,continuing an upward trend that began last year when the ownership rate increased for the first time in 13 years. While the population of homeowners increased by 1.3 million households, the renter population declined by 286,000 – the fourth consecutive quarter to log a year-over year decline in renter households.

“Landlords should start to take caution,” Ralph McLaughlin, chief economist at Veritas Urbis Economics, told the Wall Street Journal. “There’s going to be downward pressure on rents and founder of in the near future,” he predicts.

Some markets are already beginning to feel that pressure. Although rents increased nationally by 2.3 percent in the second quarter compared with the same period last year, that as the smallest annual increase reported in nearly eight years. And the Wall Street Journal reports that landlords in some previously hot markets, Austin, Portland, Seattle and Washington, D.C. among them, are reducing rents and offering incentives to keep their buildings full in the face of competition from new units that are beginning to come on line.

Analysts are expecting developers to add 300,000 new (mainly higher end) rental units to the national market over the next year. That represents the largest inflow in three decades, and it’s coming when rising rents have begun to push more owners into the ownership pool, reducing rental demand.

But back to those cross currents. Matthew Pointon, a property economist at Capital Economics, thinks current trends actually favor the rental market. The scarcity of homes for sale “has put a stop to what had been a gradual rise in the homeownership rate,” he explains in a recent note to clients. “It is also supporting rental demand,” he adds, noting: “Despite a large rise in the number of rental apartments hitting the market over the past couple of years, the multifamily rental vacancy rate has held steady at just over 8% for the past six-months. Although developers are producing “a large number of apartments,” he acknowledges, “the lack of homes to buy is supporting rental demand. In turn, that argues against a sharp slowdown in rental growth this year.”

“JOB OPENINGS EXCEED APPLICANTS”

Few would have predicted that headline three years ago, when the unemployment rate was the major concern. But for the first time since economists began tracking the trend two decades ago, the number of available jobs advertised this spring exceeded the number of unemployed workers seeking them.

The Labor Department reported a record total of 6.7 million job openings in April, against 6.3 million unemployed Americans that month, as the unemployment rate fell to 3.8 percent – the lowest level since 1969.

The tight labor market is forcing employers to rethink not only their drug testing policies (see item above) but also what have been fundamental requirements for many positions.

“Is it a health and safety issue? If not, you have to ask if those demands are really related to the outcome on the job,” Terri Greeno, who heads an employment agency in Crystal Lake, IL, told the Wall Street Journal. “When the unemployment rate is this low, you’re really competing for workers who already have jobs.”

In addition to the obvious strategy (increasing wages), many employers are reducing education requirements, hiring workers with criminal records, and becoming more flexible about the hours employees work and what they wear.

“If you tell someone they can’t have Friday off for prom, they’ll quit,” the owner of a fast food franchise told the Wall Street Journal. “They know they can find another job on Monday.”

IN CASE YOU MISSED THIS

With hurricane season fast approaching, homeowners can expect their flood insurance premiums to increase by an average of 8 percent this year, from $866 to $935.

The United States boasts more social mobility than large European countries, but higher levels of income and wealth inequality, according to a Paris-based research organization.

The Congressional Budget Office is a lot less optimistic than the White House about how much the federal government is going to earn and spend over the next decade.

Americans working full-time earning the minimum wage can’t afford to rent a “modest” two-bedroom apartment anywhere in the country, the National Low Income Housing Coalition reports.

Home prices, widely blamed for depressing home sales, also appear to be reducing the birth rate, some economists believe.

LEGAL BRIEFS

SPECIAL ASSESSMENT LOGIC

Special assessments aren’t popular – to say the least. Owner opposition to large-scale expenditures is often visceral, but not always logical. This Illinois Appellate Court decision (Dedic v. Board of North Shore) provides an example.
The board of this 90-unit condominium voted to levy a $1.01million assessment what it deemed to be essential repairs of the balconies on all units. One owner (Selma Dedic) objected and petitioned the board to submit the decision to a vote of owners.

The association’s governing documents specify that if a special assessment exceeds 115 percent of the previous year’s regular and special assessments, 20 percent of owners can demand a referendum and a majority vote can reject the plan – with one exception. Assessments to address an “emergency” or issues “mandated by law” aren’t subject to owner approval.

Citing that exception, the board refused to schedule a special meeting, the board refused to hold the referendum, explaining in a letter from the association’s attorney that an engineer had determined that “a number of the balconies are unsafe for use by the homeowner. This constitutes “an immediate life and safety hazard,” the attorney said, necessitating an “emergency repair,” and making the petition for a referendum “ineffective and not appropriate.”
Dedic went to court, seeking an injunction barring the assessment until owners had voted on it and preventing the board from entering into a contract for the deck repairs pending the outcome of that vote.

A trial court refused to grant the injunction, finding that both the emergency and ‘mandated by law’ exceptions applied, justifying the board’s refusal to hold the referendum. The Appeals Court concurred, finding “no reason to disturb the trail court’s decision.”

The association based its conclusion that emergency repairs were required on an Engineer’s report, which cited “serious deterioration” in 33 balconies examined closely (Dedic’s not among them) , and found a variety of deficiencies, including corrosion, damage to handrail bases and displaced railings – visible in others inspected from ground level. The report also noted that 56 of the balconies did not meet the code requirement that they sustain a “concentrated 200-pound load.” Concluding that the balconies posed “a safety threat,” the report recommended that the association undertake repair work “immediately.”

Because all of the balconies were the same age “of similar construction” and subject to the same deteriorating forces, the report noted, addressing them in a single project would be “the most cost-effective and fastest” remediation strategy.

After filing her suit challenging the assessment, Dedic obtained an opinion from another engineer, who found less cause for immediate concern. Based on what he acknowledged was a “limited site visit,” this engineer concluded that none of the units he observed ‘are in imminent condition of collapse or should be considered to require emergency repairs.” This engineer also acknowledged at trial that he had not assessed the code compliance issue cited by the first engineer, and so “could not testify to a reasonable degree of structural engineering certainty” whether thy decks complied with applicable codes – one of the details the trial court cited in rejecting Dedic’s request for an injunction. .

In her appeal, Dedic cited three arguments supporting her contention that the condition of the decks did not constitute the “emergency” the board claimed. The court found none of them persuasive. Her arguments:

  • The board did not notify owners of the most seriously deficient decks of the danger they posed, which, Dedic argued, a true emergency would have required. But the association’s manager did contact these owners personally, the court pointed out, Moreover, the court said, “Dedic does not explain how the delay and formality of a written warning would be any more indicative of an “emergency” than these prompt conversations.
  • The board’s assertion of an emergency is “inconsistent,” Dedic argued, with its “glaring failure” to begin remediation work during the two years following its receipt of the engineering report. Finding that argument a bit disingenuous, the court said the delay was attributable partly to the board’s “due diligence” in evaluating the report, assessing financing options and selecting a contractor, and partly the result of the suit Dedic filed seeking an injunction blocking the assessment and the repair work.
  • The court also took issue with the assertion by Dedic’s engineer that the condition of the decks did not constitute an emergency because there was no imminent danger that the slabs would collapse. An emergency, as defined by the condominium declaration and the state condominium statute, the court noted “includes not only an immediate danger to the structural integrity of the common elements of the condominium complex, but also an immediate danger to the life, health, safety, or property of the unit owners.”
  • Contrary to the first engineer’s conclusion that the repairs were “mandated by law,” Dedic argued that the decks would have to meet code requirements not in place when the condominium was constructed only if the association undertook substantial renovations. The association argued, and the court agreed, that the issue was not “that the railings don’t necessarily meet the [current code requirements],” but that deterioration had reduced the load-bearing capacity of the structure, creating a safety hazard the assessment was levied to address.

“There is ample evidence in the record to support the trial judge’s findings and ruling, and we do not find any of Dedic’s appellate arguments persuasive,” the court concluded.

WORTH QUOTING

“It’s just a free-floating anxiety about what the hell is going to happen.” ─ Ian Sheperdson, chief economist at Pantheon Macroeconomics, describingthe increasing concern about a looming trade war.


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