Published on: December 18, 2017
In a move that had been telegraphed clearly, the Federal Reserve boosted its benchmark rate for the third time this year. The one-quarter-of-a-point increase pushed the target range to between 1.25 percent and 1.5 percent. Citing the strengthening economy, and expectations that current positive trends will continue, the rate-setting Federal Open Market Committee indicated that it is anticipating three more rate hikes next year.
The December decision was the last to be overseen by Fed Chairman Janet Yellen, whose term is ending. Jerome Powell, whom President Trump has selected to replace her, will assume the chairmanship in February. Currently a member of the Federal Reserve Board, Powell is generally expected to continue Yellen’s policy of implementing modest rate hikes, as long as economic growth supports them.
“If the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates,” Powell told reporters recently.
Analysts don’t expect the December move to have any impact on the financial markets, because investors have largely factored it into their assumptions.
“[But] consumers with credit card debt and home equity lines of credit will be welcomed into 2018 with higher interest rates,” Greg McBride, chief financial analyst at Bankrate, observed.
Condominium industry executives have long-complained that the Federal Housing Administration’s policies impeded financing for condominium loans. The Obama Administration responded with some modest revisions in the FHA guidelines, but more significant relief appears likely as part of the Trump Administration’s emphasis on deregulation.
FHA officials signaled that change in the agency’s fiscal year 2017 report to Congress, which stated: “FHA anticipates that its updated guidance in the final rule and subsequent policy implementation documents will be more flexible, less prescriptive, and more reflective of the current market than existing condominium project approval provisions.”
In the fall of 2016, the Obama Administration eased some of the condominium lending restrictions imposed during the financial crisis, slashing owner-occupancy requirements from 50 percent to 35 percent. But that flexibility was linked to stricter standards, including evidence of “long-term financial stability” that many community associations were hard-pressed to meet, so the anticipated increase in FHA financing didn’t materialize. According to the National Association of Realtors (NAR), the FHA financed only 3 percent of the condominium sales completed in 2016.
In a June speech, HUD secretary Ben Carson said he supported policies that would enable “more people, including millennials, to use [-insured mortgages] to buy condominiums.”
The policy changes HUD officials are reportedly considering include reinstating the FHA’s ‘spot-loan’ approval process, under which the agency will approve loans on units in condominium communities that are not themselves FHA-certified. Housing industry executives would welcome that change.
In a comment letter submitted two years ago, urging the Obama Administration to revise FHA lending policies, the National Association of Home Builders said the spot-loan program “can play an important role in expanding the availability of condominiums to FHA home buyers.” The program could also boost the owner occupancy rate in a condominium project to the level required for FHA-approval of the entire project,” the trade group said.
GAIN EXCLUSION CONCERN
As Congress appears poised to approve a sweeping tax reform legislation, housing industry executives are intensifying their warnings that some key changes could create a double-whammy for the housing market: Increasing the standard deduction and reducing deductions for mortgage interest, local and state property taxes will undermine incentives for purchasing homes, they say, while limiting the capital gains exclusion for home sales will discourage owners of existing homes from selling them.
Although reducing the deduction for mortgage interest has gotten most of the attention from industry trade groups, and drawn most of their fire, the capital gain change (requiring five years of continuous residency in a home to qualify for the exclusion vs. two under the current tax rules) is particularly worrisome, industry analysts say, because it would exacerbate an already severe inventory shortage. (A House-Senate compromise appears to have left the two-year requirement in place, but we won’t know what the final bill contains until lawmakers vote on it.)
A study by Black Knight found that close to 15 percent of the owners who sold their homes in the past two years fell within the two-to-five-year ownership window and would not qualify for the capital gains exclusion. The impact would depend on the tax bracket at which gains are taxes. In a “worst-case scenario” (taxing the entire gain at the highest rate), the study says, sellers would incur a cumulative “$23 billion tax liability. If sellers decide to hold on to their homes to avoid the tax hit, as many analysts predict, the study concludes “this may further reduce the supply of homes for sale,” Black Knight concludes.
Separately, Holden Lewi
s, a columnist for NerdWallet, analyzed the reasons for the inventory shortage. His top three:
- Owners of rental properties are disinclined to sell them, because renter demand is high and rents are rising faster than home prices in many markets;
- Home owners who have low mortgage rates are reluctant to give them up to purchase another home; as interest rates rise, their reluctance will increase.
- More baby boomers are aging in place, reducing what has been, in prior generations, a large supply of homes for younger buyers. Rising home prices have made the ownership costs for the smaller homes boomers would buy as high or higher than the homes they own, Dennis Cisterna, chief executive officer of Investability Solutions, told Lewis, “so there’s no urgency to sell right now unless you have to.”
HIGH COST OF HACKING
Security experts have been warning about the increasing exposure businesses of all kinds face from hacking risks; a recent study by the Ponemon Institute, reported in an article posted on SecureWorks, quantified those exposures and their potential costs. Heading the top 10 data breach costs: Remediation, which weighs in at around $973,130 for the 46 days, on average, required to resolve a typical cyber-attack. Nearly 40 percent of the external costs result from business disruption, which includes lost employee productivity and snarled operations, among a host of problems a cyber attack can create. Regulatory fines add to the costs – how much depending on the nature of the breach, the regulators involved, and the company’s response. Also on the list:
- Loss of business – difficult to estimate, but 76 percent of the consumers responding to an industry survey said they would stop doing business with a company that suffered multiple data breaches.
- Notification – Hacked companies paid an average of $700,000 per incident to notify customers of a data breach.
- Repair: The American Bankers Association estimates that Target had to pay $172 million to cover the cost of reissuing credit cards to customers whose account information was stolen in a breach of the company’s computer network; identity repair and credit monitoring costs added about $10 per victim to that total. Another study estimates that hacking costs average $221 for every consumer record or file that is stolen or lost.
- Legal Costs: Sky’s the limit here. According to Ponemon, companies have paid as much as $10 million to settle legal claims resulting from data beaches, and that doesn’t include the legal fees the incurred in fighting those claims or negotiating them.
The SecureWorks article summarizing Ponemon’s cost analysis also recommends some measures to reduce hacking costs. The first step: “recognizing the potential risks,” and the second, “proactively planning” to mitigate them.
Throughout the housing market recovery, analysts have periodically warned of a housing price bubble. Providing some support for those fears, a recent CoreLogic analysis of the nation’s 50 largest housing markets found nearly half of them to be overvalued got. The company assesses whether prices are sustainable long term based on disposable income and other market fundamentals. That analysis classified 36 percent of the markets as over-valued, 28 percent as under-valued, and 36 percent “at value.” CoreLogic’s national index of home prices for September increased by 7 percent year over year, and the company is predicting another 4.7 percent increase next year.
“A strengthening economy, healthy consumer balance sheets and low mortgage interest rates are supporting the continued strong demand for residential real estate,” Frank Martell, president and CEO of CoreLogic, said in a press statement. “While demand and home price growth are in a sweet spot, a third of metropolitan markets are overvalued and this will become more of an issue if prices continue to rise next year as we anticipate,” he added.
The Urban Institute has concluded that rising incomes have kept affordability factors positive in most markets, despite rising prices. In fact, a recent report says, “the median household can afford a house that is $70,000 more expensive than the median home price today.”
But rising prices are a concern in at least six metropolitan areas, which UI has put on its “bubble watch” list. San Francisco and San Jose are tied for first, followed by the Miami and Oakland areas (tied for second), with Portland and Seattle tied for third.
IN CASE YOU MISSED THIS
“Uninformed boards,” regulations, financial pressures and aging buildings top the list of community association concerns reported in CAI’s annual “Member Needs Assessment Survey.”
A government-funded study found that while collisions with drones were unlikely to prove catastrophic for commercial airplanes, the resulting damage could be significant.
The Federal Housing Finance Agency has increased the maximum conforming loan limit for the second time in two years, capping the size of loans that can be purchased by Fannie Mae and Freddie Mac at $453,100 for 2018. The limit in “high-cost” areas, set at 150 percent of that baseline, will be $679,650.
To the growing list of unpopular and or unintended consequences of the tax reform bill, you can add this: Reduction in the corporate tax rate will reduce the value of deferred tax obligations for Fannie Mae and Freddie Mac, which could require another cash infusion from the government to keep the GSEs operating.
It’s getting easier for first-time home buyers to obtain a mortgage, but harder for them to find homes they can afford.
LIMITS OF 40B
Chapter 40B is a powerful tool for affordable housing developers in Massachusetts, but it is not as powerful as one developer tried to argue that it was. The statute generally requires communities that don’t meet affordable housing benchmarks to waive local zoning rules and planning policies that restrict the construction of affordable housing. The issue in this case (135 Wells Avenue, LLC v. Housing Appeals Committee) was whether local permitting authorities could waive a municipal deed restriction.
The developer (Wells) sought approval under the 40B process for a comprehensive permit to construct a 334-unit residential project on a 6.3 acre-lot located in a Newton office park. The designated lot was part of a larger parcel in a manufacturing zoning district in which residential uses were not permitted. The Zoning Board of Appeals ruled that it did not have the authority to override the use restriction and the Housing Appeals Committee, to which the developer appealed, agreed.
Siding with the HAC, the Massachusetts Land Court, to which the developer turned first, ruled that a municipal deed restriction is a “valid property interest” that the Zoning Board and the HAC could not override. The SJC agreed to review that decision on direct appeal.
The developer’s primary argument was that the revisions it sought were the “functional equivalent” of the permits and approvals the Zoning Board was authorized to approve or waive. In a prior decision the Land Court had cited as precedent (Zoning Board of Appeals of Groton v. Housing Appeals Committee), the SJC found a “fundamental difference” between the approval of a permit and the easement a 40B developer sought over municipally owned land, the latter being, in the court’s view, the disposition of a property right. “An order directing the conveyance of an easement…cannot logically or reasonably derive from, or be equated with, a local board’s power to grant ‘permits or approvals,’ the court said. Well argued that Groton wasn’t applicable here, but the court found that it was, in fact, “controlling.” Although similar to zoning provisions, deed restrictions, the court said, constitute “a property interest, a restrictive covenant on land, that cannot be abrogated by any act of the zoning board.”
The court also rejected the developer’s argument that because the process the Board of Aldermen uses to amend restrictive covenants is the same as the process the Zoning Board uses to issue permits, by extension, the zoning board should be able to use its process to modify deed restrictions as well. Unlike the zoning board, the court said, the aldermen “were not sitting as a local permitting authority,” and covenant amendments affecting the city’s property interests did not meet the statutory definition of permissions the Zoning Board could approve: “[Regulations concerning] building construction and design, siting, zoning, health, safety, [or] environment.”
Wells tried two other legal paths, neither of which bore fruit. The first was an effort to distinguish between “affirmative” and “negative” easements. The fact that the appeals board can’t waive positive easements, the developer argued, did not mean it lacked the authority to waive negative ones.
“We are not persuaded,” the court replied. Wells cited “no authority and we are aware of none that would suggest a property right to be protected from certain conditions occurring on another’s land…is somehow less of a right than an easement to pass over a corner of another’s property en route to one’s own.” Indeed, the court noted, it has decided in other cases that “affirmative and negative easements are to be treated equally, as easements.”
The second path also produced a legal dead end: The property restriction was invalid because it no longer supported the purpose for which it was deigned – creating a limited manufacturing district. There were no manufacturing enterprises on the site, the developer noted, nor had there ever been any. Wells cited a state law (184 Section 30) under which a restriction becomes invalid if it no longer provides the intended benefits, and if the character of a neighborhood change so much that “enforcing the restriction according to its terms would be merely quixotic, failing to serve the grantor’s original purpose and impeding present desirable and feasible uses.” That was not the case here, however, the SJC concluded. “While the property does not support any manufacturing uses ….and is not being used for the precise purpose for which the restrictive covenant was created” the court agreed, “the restrictions still provide valuable benefits to the city.” among them, preserving open space, and maintaining buffer zones restricting development around the Charles River. That being the case, the court concluded, ‘the nature of the district has not changed so much as to invalidate the restrictive covenant.”
“You’re talking about potentially causing housing recessions in some of the biggest markets in the country, and those kinds of recessions tend to have spillovers. We’re worried about a national housing recession.” ─ Jerry Howard, National Association of Realtors CEO, warning about the negative impacts of the tax reform legislation.