Published on: May 29, 2019
Housing industry analysts continue to insist that the spring housing market will strengthen, but as spring gives way to summer, home sales continue to disappoint. Existing home sales fell again in April, slipping slightly below the March total and falling 4.4 percent below the same month a year ago ─ the 14th consecutive year-over-year decline. Economists were predicting that lower mortgage rates and a strong labor market would produce significantly better results. Lawrence Yun, chief economist for the National Association of Realtors (NAR) hasn’t abandoned that hope. “We are seeing historically low mortgage rates combined with a pent-up demand to buy, so buyers will look to take advantage of these conditions,” he told the Wall Street Journal. “Also, job creation is improving, causing wage growth to align with home price growth, which helps affordability and will help spur more home sales.”
New home sales did improve in April, posting a solid 7 percent increase over April of 2018, but still falling short of the robust numbers posted regularly before the last downturn. Although housing starts increased from the March level, they fell 2.5 percent below the year-ago pace. Even more concerning for analysts, single-family permits, an indicator of future building activity, slipped to an annual pace of 782,000 units ─ almost 10 percent below April of 2018.
Although the housing report was “encouraging overall,” Robert Dietz, chief economist of the National Association of Home Builders, said, the decline in permitting activity was cause for concern, indicating that housing affordability and construction costs continue to impede construction activity. “Builders continue to focus on managing home construction costs as they try to meet growing housing demand,” he told Mortgage Orb.
But like the NAR’s Yun, Dietz thinks demographics, low interest rates and a strong economy will offset the negative headwinds, ensuring a “slow, steady climb” for home sales this year.
Look at how slowly millennials have been buying homes compared with previous generations at the same age and you’ll understand why so many industry analysts are convinced that another baby-boomer style housing boom is coming. All that pent-up demand, they believe, is bound to produce a home-buying surge. But what if this homebuying lag is not a temporary delay but a permanent condition?
The Wall Street Journal poses that uncomfortable question in an article suggesting that high levels of student debt and lasting scars created by the last recession may keep many would-be millennial buyers permanently on the housing sidelines.
“Their economic fundamentals are fundamentally different,” Christopher Kurz, an economist at the Federal Reserve, who has studied the financial experience of millennials, has concluded. Among other differences, he has found:
- Members of Gen-X who were working full time and heading households earned about 18 percent more than millennials at the same age; boomers earned 27 percent more.
- Millennials on average had outstanding student loan balances of $10,600 – about double the student loan debt of Gen-Xers in 2004.
- The net worth of millennial households in 2016 was 40 percent less than that of Gen X households in 2001 and 20 percent below boomers.
Those gaps explain in part why only one-third of millennials owned homes in 2016, compared with half of Gen Xers and a little less than half of the boomers at the same age. The gaps also explain why so many millennials who identify home ownership as a goal, also think the goal is beyond their reach.
The Journal article notes the frustration of 30-something millennials who are struggling to achieve what they view as the benchmarks of adult success – marriage, children and homeownership. “Their slow start has been well-documented in the first years after the recession,” the article notes. “New data show that millennials may never catch up with the generations of Americans that preceded them.”
FHA CONDO LOANS
The condominium industry has been urging the Federal Housing Administration (FHA) for years to loosen some of the restrictions on federally insured (FHA) condominium mortgages. The agency now appears poised to do just that. Speaking at a recent real estate conference, FHA Commissioner Brian Montgomery said FHA officials are finalizing proposed rules designed to make it easier for condominium communities to obtain FHA certification – a prerequisite for buyers seeking FHA financing to purchase a condo unit or for condo owners seeking to refinance an existing mortgage with an FHA loan. The changes Montgomery noted include increasing the maximum amount of commercial space allowed in a community, requiring re-certification every five years instead of every two years, and possibly re-instating the “spot loan” approval process for units in buildings that lack FHA certification.
“We anticipate that the updated regulations will be more flexible, less prescriptive and more reflective of the current market than existing provisions,” Montgomery said at the conference. The updated lending policies, he noted, will better-support condominiums, which, Montgomery described as “a mainstay of affordable housing” for seniors and for first-time buyers.
In a related action, Fannie Mae and Freddie Mac recently revised the underwriting requirements for the condominium loans they will purchase from lenders. The key changes increased from 25 percent to 35 percent the cap on commercial space and eliminated a rule barring loans to communities with pending litigation, as long as the litigation doesn’t pose a potential threat to the community’s financial stability.
PUSHBACK ON NONCOMPETES
Noncompetition agreements have become standard in employment contracts in many business sectors, including the condominium industry. But more states are beginning to push back on restrictions that, critics say, unfairly impede the ability of employees to seek other opportunities in their fields. Washington State recently approved a law barring noncompetes for workers earning less than $100,000 a year; closer to home, the New Hampshire state Senate earlier this year also approved a measure banning noncompetes for ‘low-wage’ workers. And Massachusetts lawmakers last year approved sweeping changes in an existing law, including provisions limiting the duration and geographic scope of noncompete agreements and requiring employers to provide some compensation to employees subject to them. Some studies have found that noncompete agreements have a negative impact not only on employees but also on the economies of states in which the agreements are enforced. “It looks like states that choose to enforce noncompetes see declines in mobility, entrepreneurship and wages,” Evan Starr, an economist at the University of Maryland, told the Wall Street Journal.
Marijuana is a growth industry and U.S. banks want to take advantage of the financing opportunities cannabis-based businesses will create. An essential first step, they say, is eliminating or at least neutralizing federal laws that still define marijuana as an illegal drug, even though many states have legalized both its medical and recreational use. Fear of prosecution prohibits most banks from lending money to marijuana enterprises or offering them checking accounts and other banking services. This is making marijuana largely a cash business, impeding the industry’s development and increasing the risks to marijuana enterprises and their customers, critics contend. Some reports have found that half of the existing cannabis businesses have been robbed.
“Cash-based systems are inefficient, expensive and opaque, making illicit activity more difficult to track and posing a significant risk to public safety by increasing the likelihood of violent crime,” a resolution adopted recently by the National Association of State Treasurers, asserts. The resolution calls for “common-sense federal laws and regulations” governing the operations of cannabis businesses in states that have legalized marijuana use. A bipartisan measure pending in the House would bar federal prosecution of banks and their employees for servicing cannabis companies.
IN CASE YOU MISSED THIS
Inequality in wages, education, health and other key metrics threatens to undermine support for capitalism and the underpinnings of democracy itself, a study by the Institute for Fiscal Studies, a British think tank, has concluded. The study, which focused on the United Kingdom, found that only the United States has a higher level of inequality among major world economies.
Despite continuing efforts to restrict immigration, foreign-born workers represent an increasing proportion of the U.S. work force. The labor force participation rate for these workers hit 65.7 percent last year compared with 62.3 percent for native-born.
Anti-development (‘not-in-my-back-yard’) attitudes represent the largest impediment to the construction of affordable rental housing, according to the National Apartment Association.
Although the U.S. economy remains strong by most measures, low- and middle-income Americans are standing on increasingly shaky financial ground, with nearly 40 percent unable to manage an unexpected $400 expense and only 36 percent confident that they are saving enough for retirement.
What’s the difference between REO and a cookie? According to multiple press reports, it appears that HUD Secretary Ben Carson isn’t sure.
“You can’t make me!” Parents hear that argument frequently from their children; condo associations hear it all-too-frequently from owners challenging the association’s authority to enforce covenants and rules. The rule at issue in this case (Fritz v. Lake Carroll Property Owners Association, Inc.) required owners to maintain their septic systems by having them pumped professionally every four years. An owner challenged the rule; an Illinois Appeals Court upheld it.
The association’s declaration required owners to maintain their lots to prevent “health hazards” or “unsanitary” conditions in this lakeside community. The declaration also established an architectural and environmental committee, responsible for reviewing proposed improvements (including those related to septic systems) and authorized to propose rules and regulations for approval by the governing board. The committee suggested, and the board approved, comprehensive rules requiring that all septic systems be pumped every four years, to prevent pollution of the groundwater.
When the plaintiff (Fritz) refused to schedule the required work, the board imposed a $250 fine and threatened to begin fining him $25 per day for every day he failed to comply. Fritz sued, contending that the association had no authority to regulate privately-owned septic systems. The trial court sided with the association and Fritz appealed that decision.
In his appeal, Fritz advanced two primary arguments:
- The requirement to pump his septic system represented a restraint on the use of his land, which the board could not impose through a regulation.
- The rule the board approved was not valid, in any event, because the board failed to record it, as the declaration required.
Addressing the first argument, the court noted that the septic pumping rule did not constitute a restraint on Fritz’s use of his land; it simply implemented the declaration’s stated purpose of protecting the lake from “significant health risks associated with improperly maintained and functioning septic systems.”
The court also rejected Fritz’s contention that the “ambiguous” wording of the covenants did not explicitly authorize the board to enforce rules regulating septic systems. The declaration did authorize the board to clean up “unsightly, unsanitary, or hazardous conditions” on an owner’s property by arranging for the necessary maintenance and billing owners for the cost. And that remedy, Fritz argued, was the only one available to the board.
That argument might be more persuasive, the court said, “if the covenants were the Association’s only governing document…but the bylaws [referenced in the covenants] also provide…guidance.” The covenants clearly authorize the creation of bylaws detailing the board’s authority to enact rules, the court noted, and the association’s bylaws allow the board to adopt rules and regulations both for ‘the general welfare’ and ‘to protect and preserve the ecosystem’ in the lakeside community. As a result, the court concluded, “we cannot say the rule was improperly enacted without the necessary authority.”
The court also rejected Fritz’s secondary argument – that the rule was invalid because it was not properly recorded. He based that argument on language in the state condominium statute defining “community instruments” as “all documents and authorized amendments thereto recorded by a developer or association, including, but not limited to, the declaration, bylaws, operating agreement, plat of survey, and rules and regulations.”
But that wording simply defines rules and regulations as “community instruments,” the court noted. It does not specifically require that they be recorded. The court pointed to other provisions that, it said, Fritz had ignored, in which rules and regulations were listed in addition to and separately from “other community instruments.” And that “plain wording” the court said, makes it clear that “while rules and regulations may be part of recorded community instruments, they may also exist outside of the community instruments.” Because rules may exist separately from recorded community instruments, the court concluded, “the statute does not provide that rules and regulations must be recorded in order to be enforceable.”
“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism,” Ray Dalio, founder of the hedge-fund manager, Bridgewater Associates.