Published on: February 2, 2016
CYBER RISKS GROWING
Cyber-attacks are getting more sophisticated, more dangerous and more expensive for businesses of all kinds. Nearly 70 percent of the corporate business risk managers responding to a recent survey said they had experienced at least one computer hacking incident last year and close to 20 percent said they had suffered more than 15 attacks. The most widely reported attacks have involved large entities – Target, several national banks and (recently) the Office of Management and Budget, for example. But a Verizon analysis found that more than 60 percent of the data breaches reported in 2013 involved small businesses (such as condo associations), which are actually more vulnerable than giant corporations, security experts say, because they are less sophisticated and have less robust computer protections in place. Lloyd’s, the British insurance company, estimates that cyberattacks currently cost businesses as much as $400 billion per year. That total could reach $500 billion or more over the next decade, analysts warn, unless cyber security strategies keep pace with the ever-increasing skills of cyber criminals.
FLOOD INSURANCE REFORM
Congress held hearings recently on measures to reform the National Flood Insurance Program overseen by FEMA. Funding is a major concern – Congressional authorization for the program’s borrowing authority will expire in September of next year. Critics say the program as currently structured costs the government too much and provides inadequate assistance for homeowners. Recent catastrophic weather events, such as Hurricanes Katrina and Sandy, have produced outsized claims and exposed flaws in the program, including errors in the maps defining where flood insurance is required. Industry experts testifying at the hearings focused on the need to reduce taxpayer exposure by expanding the participation of private insurers. The “Flood Insurance Market Parity and Modernization Act,” one of several measures Congress is considering, takes a step in that direction by clarifying that privately underwritten flood insurance satisfies the mandatory purchase requirement for property owners in designated flood risk areas.
The Community Associations Institute (CAI) is lobbying for another measure clarifying that condo associations qualify for FEMA disaster assistance to cover damage to common areas. Because the legislation creating FEMA does not specifically reference community associations, agency officials have generally insisted that while condominium owners themselves are eligible for aid to repair their units, condo associations are not entitled to that assistance for the common areas they control. Although Congress has failed to pass this legislation in the past, CAI officials say they are optimistic about its prospects this year.
APARTMENT VACANCIES UP A LITTLE
The national apartment vacancy rate increased a bit in the fourth quarter of last year as new construction responded to increasing rental demand. The increase – to 4.3 percent from 4.2 percent in the same period of 2014 – wasn’t large. But it was the second consecutive quarterly increase in the vacancy rate, and that caught the attention of industry analysts, who note that this is the first time we’ve seen back-to-back quarterly increases since 2009 – an indicator, some say, that over-building could become a problem in some markets. The major concern seems to be at the high end of the market, which is where most of the new construction activity has been concentrated.
“It’s taking a lot longer for [these luxury] projects to lease up,” Ryan Severino, a senior economist at Reis, Inc., told Bloomberg News. “Vacancies are rising predominantly because a lot of shiny, sexy new Class A projects are having a harder time leasing up relative to a few years ago,” noted. Developers completed close to 1 million new ‘Class A’ units between 2007 and 2011, compared with 44,000 in the Class B and Class C categories.
Most industry analysts remain optimistic about the long-term forecast for the rental market, however. They expect housing costs and credit constraints – especially student debt loads — to keep homeownership rates low and rental housing demand high. “While recent estimates suggest that homeownership rates may be firming in some areas, there is no evidence so far of a significant rebound,” Harvard University’s Joint Center for Housing Studies notes in a recent report. Even if homeownership rates remain stable, the Joint Center predicts that new household formations will increase the number of renter households by more than 4.4 million over the next decade as older households, who tend to own their homes, are replaced by younger and minority households, more likely to rent them.
SLOWER GROWTH STAYS FED’S HAND
Economic growth slowed sharply in the final quarter of last year, re-igniting concerns about the outlook and persuading the Federal Reserve to hold off, at least for now, on its plan to follow the December rate hike with several more this year. The nation’s Gross Domestic Product (GDP), the primary indicator of growth, fell to 0.7 percent in the final three months of 2015, down sharply from 2 percent in the third quarter. While noting that household spending and business investment both improved despite the GDP decline, the Federal Open Market Committee (FOMC) also acknowledged that “net exports have been soft and inventory investment has slowed.”
Continued volatility in the financial markets also contributed to the Fed’s decision, the statement released after the committee’s January meeting indicated. “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation and for the balance of risks to the outlook,” the statement said.
Unseasonably warm weather in much of the country boosted existing home sales last year to the highest level since 2006. A 14.7 percent jump in December sales pushed the sales total for the year to 5.26 million units, up from 4.94 million in 2014. Delays in November closings, widely attributed to the new mortgage disclosure rules that took effect in October, were largely responsible for the December surge, industry executives agree.
The data are “confirming it was delays, not cancellations” that produced the November slump, Lawrence Yun, chief economist for the National Association of Realtors (NAR), told Bloomberg News. “All those [delays] rolled over into December.”
Inventories, which have been tight all year, declined again in December to a 3.9 month’s supply, the lowest level in more than a decade, suggesting to Yun that “a housing shortage appears to be in the cards.”
Limited inventories and an uncertain economic outlook have led the NAR to scale back its housing forecast for the year, from the 3 percent increase the association predicted a few months ago, to between 1 percent and 2 percent.
A shortage of homes for sale will keep upward pressure on home prices, reflecting “the cumulative effect of homebuilders under-producing for multiple years,” Yun said “Once the spring buying season begins, we’ll begin to feel that again,” he predicts.
IN CASE YOU MISSED THIS
Home owners continue to think their homes are worth more than their appraised value, but the gap is narrowing.
The Federal Housing Administration (FHA) is reducing insurance costs for loans on multifamily projects that support affordable housing and energy efficiency.
New federal regulations aimed at curbing money-laundering will require major title insurance companies to disclose the names of individuals who pay entirely in cash for properties valued at more than $1 million in Miami and more than $3 million in Manhattan.
A few small, specialty lenders are beginning to reject credit scores as an indicator of a borrower’s ability to repay a loan.
The presence of a professional football stadium in a neighborhood boosts home values sometimes – but not always.
EQUAL PROTECTION – BUT NOT FOR ALL
Homeowner associations can’t enforce regulations that discriminate against residents based on their sex, marital status, age, race, religion or disability, but they can discriminate against college students, who are not one of the “protected classes” covered by federal and state anti-discrimination laws. A recent decision by a South Carolina Appeals Court affirmed that general understanding of the boundaries of those laws.
The plaintiffs in the case (The Spur at Williams Brice Owners Association, Inc. v. Lalla), Sunil and Sharon Lalla, purchased a unit in this condominium community, which they planned initially to use on weekends, anticipating that their daughter might occupy it, with rent-paying roommates, if she decided to attend a nearby college.
When the economy tanked in 2007, the Lallas tried to sell the unit. Unable to find buyers in a down market, they began renting the unit to college students. Upon learning of the rentals, the board sent a notice to all owners, including the Lallas, reminding them of a provision in the master deed barring rentals to college students. The Lallas refused to terminate their leases and the association sued.
A trial court sided with association, ruling that the rental restriction was valid and could be enforced. The Appeals Court agreed, rejecting the Lallas’ arguments that the restriction was discriminatory and unreasonable.
The court used a two-part analysis to determine whether the restriction was discriminatory. The first question: Did the restriction violate the Equal Protection Clause of either the state or federal Constitution?
To comply with the Equal Protection standards, the court noted, a restriction can’t be based on an “inherently suspect” classification, defined by other court decisions as a classification whose members “have faced a long history of discrimination” or represent a “discrete and insular minority who would otherwise be unheard by the political process;” or is based on “an immutable trait acquired at birth.” The Appeals Court agreed with the Trial Court’s conclusion that college students do not meet any of those tests.
Because college students aren’t an “inherently suspect” classification, the restriction against them must meet a different test: It must be reasonable and reasonably related to the purpose for which it was created.
The stated purpose of the association’s rule was to protect the investment of condominium owners and ensure their safety and comfort by preventing undesirable behaviors associated with college students. The court found that purpose to be reasonable and the rental restriction to be rationally related to it, “because it bars from the pool of possible renters a population that the Association alleges has a tendency to engage in certain behaviors dangerous to themselves and disruptive to those around them. The fact that some potential renters barred by the college student prohibition might not be disruptive or disorderly does not render the classification itself arbitrary or constitutionally violative,” the court said.
The court also rejected the Lallas’ argument that the enforcement of the rental restriction was unreasonable in light of the changed economic circumstances that made it impossible for them to sell their unit and essential for them to rent it. Although acknowledging that state law permits covenant waivers when economic conditions change, the Appeals Court noted that South Carolina courts have generally been reluctant to grant waivers on that basis, requiring evidence of (in the words of a prior decision) “so radical a change that the original purpose of the restrictive covenant can no longer be realized.”
That wasn’t the case here, the court said, noting that the decline in the value of the unit and the difficulty selling it “had no effect on the Association’s need to minimize the risk that [the condominium community] might develop [the] dormitory-like atmosphere” the ban on student rentals was designed to prevent. The Lallas’ were aware of the rental restriction when they purchased the unit, the court said, and the change in economic circumstances did not eliminate their obligation to comply with it.
“It’s a tough issue, the most complex issue I’ve worked on in my time in the United State Senate.” ─ Sen. Bob Corker, R-TN, describing efforts to reform Fannie Mae and Freddie Mac and predicting that nothing will happen in that area any time soon.