LEGAL/LEGISLATIVE UPDATE – AUGUST 14, 2017

Published on: August 14, 2017

LABOR MARKET REPORT SIZZLES

To a summer that has been sizzling in many parts of the country, the Department of Labor’s July employment report delivered some additional heat. Employers added 209,000 workers to their payrolls, beating the consensus estimate and indicating that the nine-year-old economic recovery still has legs under it. Revisions added 2,000 jobs to the May and June totals, the unemployment rate dipped a little and average hourly earnings – a source of ongoing concern for economists – increased by a respectable 2.5 percent year over year.

“This is a Goldilocks report for the markets,” Michael Gapen, chief United States economist at Barclays, told the New York Times. “It really bodes well for macroeconomic growth.”

The strong employment report suggests that the Federal Reserve is likely to follow through on its plan to increase rates at least once more this year. But an inflation rate that remains stubbornly below the Fed’s 2 percent target may give policymakers pause.

Personal consumption expenditures, the inflation guide Fed analysts follow most closely, remained flat in June compared with May, which was also unchanged from April. The June reading was up 1.4 percent compared with the same month last year, but that modest increase followed four consecutive year— over year declines since February. Consumer spending and personal income didn’t move in June either – the first time in seven months spending hasn’t increased.

Given the persistent inflation lag, Andrew Hunter at Capital Economics sees “little appetite” at the Fed for another rate hike in September, notwithstanding the steady job gains. But Fed Chair Janet Yellen suggested otherwise in Congressional testimony delivered after the July Federal Open Market Committee after policy makers decided not to add a third rate increase to the two announced this year.

It is “premature,” she insisted, to conclude that inflation won’t hit the Fed’s target. “We’re not seeing very substantial upward pressure on wages [yet],” she conceded. “But we may begin to see pressure on wages and prices as slack in the economy diminishes.”

STILL RISING

Home prices have begun to increase more slowly this year, but the appreciation trend still points sharply upward. The S&P/Case-Shiller index jumped by nearly six percent year-over –year between March and May compared with the same three-month period last year.

Home owners have clearly benefited from that upward trend. Those who sold their homes in the second quarter booked an average gain of $51,000 – 26 percent over the original purchase price and the largest margin since the second quarter of 2007, just before the market crashed, according to statistics compiled by ATTOM Data Solutions.

But when these home sellers become home buyers, they run into the inventory shortage and rising prices that produced their record gains. Industry executives blame the paucity of home listings for the unexpected decline in existing home sales in June. The annual sales pace of 5.52 million units for the month was almost 2 percent below the May level and the second-lowest rate for this year.

“There’s no inventory, and that’s what’s really kicking the market in the teeth,” Nela Richardson, chief economist at Redfin, told the Wall street Journal.

First-time buyers continue to struggle against these market headwinds. They were responsible for just 32 percent of all purchase transactions in June, down only slightly from the previous month, but well below their historical average of 40 percent.

“The demand for buying a home is as strong as it has been since before the Great Recession,” Lawrence Yun, chief economist for the National Association of Realtors (NAR), told Housing Wire. “But the severe housing shortages [affecting] many markets are keeping a large segment of would-be buyers on the sidelines.”

HIGH HOPES

Like other states that have legalized the recreational use of marijuana (eight in all now, plus the District of Columbia), Massachusetts and Maine are eyeing the substantial tax revenue retail sale of the drug is expected to produce. Massachusetts lawmakers have compromised on a 20 percent tax on retail sales – settling halfway between the 30 percent rate some state officials preferred and the 10 percent (or lower) rate retailers had urged. The Maine legislature is still debating where to set the marijuana tax rate there.

At the federal level, Attorney General Jeff Sessions would like to slam the door completely on legal marijuana, for both medical and recreational use. Among other steps, he has asked Congress to revoke a provision in the Department of Justice budget that prohibits the use of federal funds to prevent states from implementing medical marijuana statutes, but Congressional leaders have thus far ignored the request.

Sessions also did not get the support he had expected from a task force he created to recommend strategies for reducing crime. Instead of calling for strict enforcement of federal law, which still classifies marijuana as an illegal drug, the task force issued a fairly mild suggestion that government officials continue to study the issue.

John Hudak, a senior fellow at the Brookings Institution, thinks the task force was intentionally vague: “If they come out with a more progressive, liberal policy, the attorney general is just going to reject it,” he told the Insurance Journal. “They need to convince the attorney general that the recommendations are the best they can do without embarrassing the entire department by implementing a policy that fails,” he said.

HOMES TO RENT

Underscoring the growth of the single-family rental market, two of the largest players in that arena are merging. Invitation Homes and Starwood Waypoint Homes (itself the product of a recent merger) are combining to create what will be the largest operator of single-family rental properties. The new entity will have a portfolio of more than 80,000 rental homes nationwide. The press release announcing the merger says it will “bring together the best practices, technology, and personnel from both firms to create the premier single-family rental company” in the country.

The move will also exacerbate the concerns of housing industry executives who fear the burgeoning investor demand for rental homes is crowding individual homebuyers out of the market.

The National Association of Realtors (NAR) complained loudly last year when Fannie Mae began purchasing loans financing large-scale purchases of single-family properties by institutional investors. “Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgages options, Fannie Mae is actively financing large institutions to compete with them.” the industry group objected at the time.
The California Association of Realtors echoed that complaint a few weeks ago when Freddie Mac announced a similar initiative, even though Freddie insisted that its target is “mid-sized landlords,” not institutional investors, who are renting single-family homes.

CAR President Geoff McIntosh, “While CAR is waiting on details, we are concerned with Freddie Mac moving forward to partner with institutional investors to use what is essentially a government guarantee to compete with homebuyers,” CAR President Geoff McIntosh said in a press statement. “While Freddie has hinted a potential deal may include affordable housing,” he noted, “the deal announced earlier this year by Fannie Mae did not, and there are no requirements that any future deals by the GSEs must promote affordable housing.”

GET OUT OF OUR WAY!

Boomers who aren’t moving at the same rate as their parents and grandparents did are blocking the path to home ownership for first time buyers. Today’s ‘older’ generation is living longer and more inclined to “age in place” than to move to a retirement community. And builders, or a variety of reasons, aren’t constructing homes as rapidly as they once did. The result is “gridlock” in the housing market that leaves everyone stuck in place, like a game of musical chairs in which the music stops and no one moves.

“Millennials are finding themselves out in the cold because building has slowed, and longer-living baby boomers are staying put, setting up a simmering conflict between the two biggest generations in U.S. history,” Bloomberg News reported recently.

Boomer homeowners, 55 and older, own 53 percent of all owner-occupied homes today, up from 43 percent a decade ago and the largest share since 1900 when the government began collecting these statistics, according to a Trulia report cited by Bloomberg. Millennials in the 18-34 age group, by contrast, account for only 11 percent of owner-occupied home – about half the ownership rate recorded for boomers at the same age.

The article recounts the frustrating experience of young, would-be homebuyers going door-to-door in search of someone interested in selling their home. “Anybody on the block considering selling?” one of them asks, adding, “I’m not a developer, I’m not interested in renting to students. I’m just a kid trying to buy a house, fix it up and live in it.”

IN CASE YOU MISSED THIS

The number of families living in substandard or subsidized housing and/or paying more than half their income for rent is increasing, according to a report by the Department of Housing and Urban Development. HUD Secretary Ben Carson said the report underscores the need for government to adopt “a more business-like approach “to the production of affordable housing.

Economists have increased the odds that Congress will not avoid an impasse that either shuts down the government, causes the Treasury to default on its obligations, or both. “The annual games of Debt Ceiling Roulette and Federal Budget Chicken pose greater risks than ever this year,” Amy Crews Cutts, chief economist of the credit ratings agency Equifax, said.

Protections mandated by the Service Members Civil Relief Act (SCRA) that prevent mortgage lenders from foreclosing on military personnel on active duty, do not apply to loan obligations they incur while in the military, a federal district court has ruled.

Courts are siding more frequently with plaintiffs in discrimination suits targeting web sites that are inaccessible to people with physical disabilities.

LEGAL BRIEFS

HIDDEN FROM VIEW

“Out of sight, out of mind” can be a common sense guide for associations in developing rules restricting what owners can do. If other owners can’t see, hear or smell a behavior, then boards probably don’t have any compelling reason to regulate it. But a Maryland appeals court decided that theory didn’t apply to architectural standards mandating design consistency in a condominium community. (Spoon v. Deering Woods Condominium.)

The owner (Spoon) replaced her flat-panel door with a six-panel design. The board notified her that she had failed to obtain board approval of the change, as the association’s deed and bylaws required, and gave her 15 days to do so. When she didn’t respond, the board ordered her to remove the door and install a flat-panel model consistent with the association’s architectural standards.

In the ensuing litigation, the association won the first round at the trial court level. On appeal, Spoon argued that the design restrictions applied only to features that were visible to others; since her door could not be seen, she contended, the association had no reason and no authority to regulate its appearance. She also contended that the deed and bylaws contained contradictory language, and that the ambiguity should be resolved in her favor; and that the board had waived its right to enforce the design standards because it had not enforced them consistently.

The conflicting language Spoon alleged targeted a provision in the deed requiring board approval for alterations resulting in “a change in the exterior appearance of the building,” and wording in the bylaws requiring board approval of alterations that “change the exterior of the unit in any manner whatsoever….[including the removal or alteration] “of any . . . exterior door of any Unit.”

The appeals court disposed of this argument quickly, finding the provisions to be neither contradictory nor ambiguous but “complimentary….We fail to see how a change in a unit that causes a change in the exterior appearance of the building conflicts with a change in the exterior of a unit,” the court said. “We also fail to see any ambiguity in the subject language of the Deed and the Bylaws. The concepts expressed are clear and understandable to a reasonable person.” Replacing the door, the court said, changed the exterior appearance of both the building and the unit, within the meaning of both the deed and the bylaws.

The court also refused to accept Spoon’s reasoning in support of her central argument — that her door was invisible and thus outside the board’s authority to regulate. Spoon pointed out that because the door was inside a stairwell, and because the glass outside the stairwell was tinted, her door could not be seen “unless you walk directly up to it.” According to Spoon, that configuration made the door an interior features and altering it did not affect the building’s exterior.

Both the trial court found and the appeals court found that argument “absurd.” By the same logic, they noted, because the rear of the building can’t be seen from the locations from which Spoon said her door was invisible, the outside wall would also be an interior feature, even though “it is clearly part of the exterior of the building.”

Spoon got no further with her contention that the board had “abandoned” its design requirements for the doors, because it had enforced them inconsistently. As evidence, she cited differences in doorknockers (30 of which differed from the other 210), variations in door colors, and varying types of screens and storm doors.

Dismissing those arguments in order, the court pointed out that:

  • The 30 knockers represented only 12. 5 percent of the total, and most of them were, if not identical, “extremely similar in appearance.”
  • Spoon presented no evidence indicating that the color variations she cited were attributable to “anything other than normal wear and tear, weather or other maintenance issues as opposed to the voluntary decision of an owner to make the color of his or her door different from the standard door.”
  • Owners are not required to install storm doors, and fewer than half had done so. Unlike the exterior doors, which follow a universal design (with panels or without), the court noted, storm doors come in a wide variety of models that were not subject to the association’s control. As a result, the court concluded, “We see no clear error in the trial court’s finding that the presence of varying storm door designs did not constitute waiver by abandonment” of the association’s architectural requirements.

WORTH QUOTING

“The changes to the 21st Century Flood Reform Act will help give certainty to homeowners who have brought their property to code and have done their part to protect it against flood risk….It’s a fair and reasonable approach that recognizes the need for accessible, affordable flood insurance, while taking us one step closer towards reauthorization.” ― William Brown, president of the National Association of Realtors, commenting on legislation proposed to reform the federal flood insurance program


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