Published on: April 1, 2016
Rising home prices and shrinking inventory levels are creating “gridlock” in the housing market, crimping sales and threatening to create a vicious cycle that will perpetuate the problems. The problem begins at the low end of the market, where first-time buyers are having trouble finding available homes for sale at prices they can afford. Existing owners, unable to find buyers for their homes, are unable to trade up – hence the housing equivalent of gridlock on the roadways. Trulia reports that the inventory of starter and trade-up homes has declined by more than 40 percent since 2012; the upward pressure on prices resulting from limited supply is forcing buyers to spend between 2 percent and 6 percent more of their income to snag homes, if they can find them
“If inventory continues to shrink throughout the spring house hunting season, buyers will likely be faced with more bidding wars and offers above the seller’s asking price,” Ralph McLaughlin, Trulia’s chief economist, explains in a press statement. Although higher prices may encourage owners to sell t homes, he notes, “they may have difficulty finding another home to buy.”
Other housing reports produced better news: Pending sales for February reached their highest level in seven months, offsetting to some extent concerns about the 7.1 percent dip in existing home sales for the month.
Lawrence Yun, chief economist for the National Association of Realtors (NAR), said the pending sales data were “encouraging,” indicating that attractive mortgage rates are pulling buyers into the market. A “modest” uptick in inventory also helped, he said. “But the key for sustained momentum…is a continuous stream of new listings quickly replacing what’s being scooped up by a growing pool of buyers. Without adequate supply,” he cautioned, ‘sales will likely plateau.”
On a less encouraging note, corporate profits in the fourth quarter plummeted by 11.5 percent compared with the same quarter of 2014. The 3.1 percent annual decline was the largest in seven years and a source of concern for some economists, who think the negative trend indicates that recession risks are rising. But others say the earnings weakness is concentrated in the battered petroleum and coal industries and is not widespread.
“Greater profits are a growth engine for the economy, but we are looking past this data today as it seems to be related to the big decline in oil,” Chris Rupkey, chief financial economist with Bank of Tokyo Mitsubishi, told Bloomberg News.
Citing continuing concerns about turbulence in the global economy, the Federal Open Market Committee (the Fed’s rate-setting arm) left interest rates unchanged at its March meeting and scaled back its estimate of a cumulative 1 percent increase this year. Policy makers now say they expect to raise rates no more than 50 basis points between now and the end of the year.
In a press conference after the FOMC meeting, Fed Chairman Janet Yellen emphasized that while the Fed remains confident about the U.S. economy, “prudence” required caution in the face of global uncertainty., “what you see here is a virtually unchanged path of economic projections and a slightly more accommodative path” for monetary policy, she said.
In a subsequent speech to the Economic club of New York, Yellen sounded an even more cautious note: “Developments abroad imply that meeting our objectives for employment and inflation will likely require a somewhat lower path for the federal funds rate than was anticipated in December,” she told that group.
DEDUCTIONS FOR CONDO DUES?
Legislation proposed recently in the House of Representatives would make home owner association fees and assessments deductible for some condo owners. Sponsored by California Representatives Anna Eshoo and Mike Thompson (both Democrats), the HOME Act would allow owners with annual incomes of $115,000 or less to deduct up to $5,000 in fees and assessments, which are not deductible expenses under existing federal tax laws. “[The measure] recognizes that millions of middle class homeowners are struggling to keep up with rising household expenses like child care, college tuition, health care, mortgage and community assessments,” Eshoo said. “The Home Act can go a long way by providing relief from this tax burden on millions of middle class families.”
The Community Associations Institute (CAI) says the measure targets the unfair “double taxation” of many condo owners, who pay local property taxes, but receive many basic services, such as trash collection, snow removal and street cleaning, from their community associations, funded by the association fees owners also pay.
There is as yet no companion bill pending in the Senate, indicating that the measure faces a tough road to approval. But CAI officials are hopeful. An association press release notes: “CAI expects [lawmakers] in states with a large number of community associations, [including] Florida, California, and Massachusetts, to support the legislation and continue a dialogue that leads to inclusion of the tax deduction in comprehensive tax reform legislation.”
Mel Watt, the director of the Federal Housing Finance Agency (FHFA), will decide in the next month whether to allow Fannie Mae and Freddie Mac to reduce the principal balance on the mortgages of underwater borrowers, or take that idea “off the table entirely.”
Watt’s predecessor, Ed Demarco, adamantly resisted pressure from lawmakers and consumer advocates to offer principal relief to struggling homeowners, arguing that it would create an unacceptable risk for taxpayers, who would foot the bill for losses incurred by Fannie and Freddie, which are still operating under federal conservatorship. Demarco and other critics also warned that borrowers able to make their mortgage payments might default intentionally to take advantage of the debt relief.
The Wall Street Journal reported that the FHFA had already approved a limited principal reduction plan, but agency officials rebutted that report, saying the issue was still “under consideration.” Speaking to Women in Housing and Finance after the Journal article appeared, Watt said the agency was “drawing close to the end” of a difficult process.
“It would not be an overstatement to say this has been the most challenging evaluation the agency has undertaken during my time as a director,” he added. The challenge, he said, lies in balancing the needs of a “decreasing number “ of borrowers who are both underwater and seriously delinquent, with the impact on loan servicers and the GSEs of implementing a complex and costly principal reduction program, in a way that creates “a win-win” result for all.
Some industry executives think that is an impossible task. “It is hard to envision a scenario where principal reduction would result in a win-win for the marketplace overall,” Carrie Hunt, executive vice president of government affairs for the National Association of Federal Credit Unions, told DS News. Implementing that program, he said, would set “a dangerous precedent.”
BACK IN THE MARKET
Conventional wisdom holds that “you can’t go home again,” but a significant number of ‘boomerang buyers,” who lost their homes to foreclosure during the real estate collapse, have managed to do just that. A study by the Urban Institute found that of the 7.1 million consumers who experienced a foreclosure on a first mortgage between 2003 and 2015, 4.3 million are homeowners and 2.5 million have a current mortgage. “That so many who lost their homes to default just eight or nine years ago is a remarkable achievement and proves that even though a foreclosure is considered a very negative event by a FICO score, it won’t ruin one’s credit forever. If all other credit obligations are in good standing, FICO scores can begin to rebound in as little as two years,” the report noted.
The study also yielded some interesting conclusions about the impact of the housing bust, finding, for example, that it hit middle-aged homeowners hardest. About 25 percent of the former homeowners who lost their homes to foreclosure were middle-aged, between the ages of 36 and 55, and they continue to struggle with the financial after-effects of that experience. They have lower credit scores and a larger proportion of negative public records. More than one-third currently have debt in collection.
But for former owners who have repaired their finances, the desire for home ownership remains strong. Nearly 80 percent of those responding to a recent survey said it were interested in buying again, more than 40 percent said their incomes are now higher than when they lost their homes and more than 60 percent said their debt obligations are lower.
IN CASE YOU MISSED THIS
More than half of the new homes started in 2014 were built within community or homeowner associations. The largest proportion (76.5 percent) of new condominium construction was in the Mountain Division; the smallest (21.8 percent) in New England.
Home prices are rising faster than rents in most areas of the country.
The Federal Aviation Administration reports that drone sales topped 2.5 million this year and will likely grow to more than 7 million in the next four years.
A 4-4 Supreme Court split left in place an Eighth Circuit decision holding that spouses who guarantee loans aren’t “applicants” and can’t sue creditors for violations of the Equal Credit Opportunity Act (ECOA).
All the talk about lenders loosening mortgage credit standards is just that ─ talk ― according to analysts at Real Estate Economy Watch, who say these reassurances amount to “a big lie.”
BEATING THE DRUM FOR DRUMMER BOY
Seven years ago, a Massachusetts appeals court sliced a corner off of the condominium priority lien; last week, the Massachusetts Supreme Judicial Court (SJC) put it back. Reversing the Appellate Division, the SJC ruled that the Massachusetts Condominium Act allows condo associations to establish multiple contemporaneous priority liens by filing successive legal actions to collect unpaid monthly common fees.
That decision, in Drummer Boy Homes v. Britton, represents a huge victory for condo associations, which have long used “rolling liens” to capture delinquent payments that continue to accrue after an initial six-month lien has been established.
The protracted litigation, part of a broader national effort to undermine the priority lien, has been covered extensively, but to recap the details briefly: The Drummer Boy battle began when the Brittons, owners of a unit in this Lexington, MA condominium community, began withholding their monthly common area fees to protest fines levied on them for violations of parking rules with which they disagreed. The condo association filed three successive six-month liens to recover the delinquent payments that accumulated during the prolonged dispute and sued to enforce the liens.
The District Court ruled that the association could collect only the six months of delinquent payments and legal fees covered by the first lien, because, in the court’s view, the Massachusetts condominium statute didn’t permit successive priority liens. When the Appellate Division of the District Court and the Appeals Court both upheld that decision, the association sought further review in the SJC, winning a favorable ruling there, as the state’s highest court concluded that both the legislature’s intent in passing the law and the plain meaning of the statute supported the association’s position ― that the statue permits rolling liens.
“A Public Emergency”
When lawmakers approved the priority lien, the court noted, they were responding to “a serious public emergency” resulting from an economic downturn, when the inability of some owners to pay their share of common area expenses deprived condo associations of the revenue they needed to provide essential services to their communities. The priority lien was designed, the court said, to ensure that condominium associations could collect delinquent payments.
While the statutory language clearly establishes an association’s authority to impose a priority lien covering the six months of unpaid assessments preceding the lien, the court said, the law is “silent” on the key question in this case: Whether associations can establish multiple, sequential liens covering delinquencies that occur after the initial lien is filed. But given the legislative intent – to address “a serious public emergency” — the court said, “it is reasonable to think that the Legislature would view such payment delinquencies as an ongoing problem necessitating more than the heretofore limited remedy of one lien for six months’ worth of common expenses.”
A 1998 amendment to the statute strengthens that argument, the court said. The amendment details the steps lenders can take to preserve their lien priority ─ by paying off the owner’s delinquent payments and assuming responsibilities for future delinquencies. Two paragraphs in that amendment, the court noted, refer to the enforcement of “priority liens” established by an association.
What the Statute Says
Construing the statute to permit only a single six-month priority lien would render the mechanism the statute establishes for protecting a lender’s priority position “inconsequential,” the court reasoned, noting: “There would be little reason for a first mortgagee to assume responsibility for the payment of a unit owner’s future common expenses if the condominium association were limited to one six-month period of lien priority.” If that were the case, the court noted, “future common expenses would always be subordinate to the first mortgage.” The mechanism the statute establishes for protecting a lender’s priority position “reflects an awareness by the Legislature that the statute permits an organization of unit owners to establish and enforce multiple contemporaneous priority liens…,” the court said.
This interpretation of the statute is supported by the statutory language, the court said, and is “consistent with the Legislature’s long-standing interest in improving the governance of condominiums and strengthening the ability of organizations of unit owners to collect common expenses, thereby avoiding a reemergence of the serious public emergency that developed in the early 1990s.”
Imposing multiple priority liens on a property could extinguish most of a lender’s security interest, as the defendants in this case contended, the court agreed, but that is not an inevitable result. “It is well within the control of a first mortgagee to avert the establishment of such liens in the first instance,” the court noted, “by paying statutorily prescribed amounts to the organization of unit owners in conformity with [the procedures outlined in the statute.]”
MEEB Partners Thomas Moriarty and Jennifer Barnett handled the SJC appeal, supported by amicus briefs from: the Community Associations Institute (submitted by Goodman, Shapiro & Lombardi and Perkins & Anctil) and the Real Estate Bar Association for Massachusetts (submitted by Robinson & Cole and Prince, Lobel). Additionally, Avidia Bank, Brookline Bank, Mutual of Omaha Bank, North Shore Bank and Rockland Trust Company joined in submitting an amicus brief (drafted by Burns & Levinson) supporting Drummer Boy and the rolling lien. The Federal Housing Finance Agency, Fannie Mae and Freddie Mac and Bank of America submitted amicus briefs supporting the defendants, who represented themselves in the appeal.
“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind.” — Mel Watt, director of the Federal Housing Finance Agency.