Published on: January 16, 2016
BRACED FOR A RATE HIKE
Now that the Federal Reserve has made its long-delayed and much anticipated interest rate move, we can stop speculating about when it will occur and focus on the likely impact higher interest rates will have on the housing market.
Analysts are, predictably, divided. Most agree that the small, .25 percent increase the Fed announced in December won’t be much of a factor. But the successive adjustments the Fed is contemplating (or was contemplating until the stock markets turned turbulent – see related item), could become a serious drag on the market, some analysts believe.
Fannie Mae’s chief economist, Douglas Duncan, who termed the December hike “one small step on an overdue journey,” isn’t among them. Although he expects the Fed to boost its benchmark rate three more times this year, Duncan thinks the increases will be modest, leaving mortgage rates not much above 4 percent at year-end ― comfortably below 5 percent, which is generally viewed as a trip-wire for many prospective buyers.
Lawrence Yun, chief economist for the National Association of Realtors (NAR), is less sanguine. He thinks the Fed’s actions will push mortgage rates to 4.5 percent or higher – uncomfortably close to that 5 percent tripwire. Combined with rising home prices, Yun warns, “affordability issues could [begin to] creep up.”
Lindsey Piegza, chief economist for Stifell Fixed Income, shares his concern. Absent offsetting income gains and increases in housing supply, he told Housing Wire, “a rising rate environment is likely to have a meaningful, downward impact on housing market activity.’
RECALCULATING RATE FORECASTS
Rising interest rates have become somewhat less of a foregone conclusion than they seemed to be just a few weeks ago. The worldwide stock market turbulence triggered by weakness in the Chinese economy has reduced the odds of an April rate hike from 52 percent a couple of weeks ago to 43 percent in the minds of traders responding to a recent survey. Minutes of the Federal Open Market Committee’s December meeting suggest that the rate hike decision was a close call for some members and market uncertainty may reduce their appetite for further action, at least for a while. “We think the Fed will only be able to raise rates twice this year at best,” an analyst with Rabobank International told Bloomberg News.
When she announced the unanimous decision to boost the Fed’s target rate by .25 percent, Fed Chairman Janet Yellen emphasized that it reflected confidence in the economy. “While things may be uneven,” she acknowledged, “we see an economy that is on a path of sustainable improvement.”
Yellen has emphasized that future rate decisions will be based on how the economy is performing, and the strengthening labor market provided a strong argument for pulling the interest rate trigger. Steady employment gains for the past year have reduced the unemployment rate to 5 percent – very close to what the Fed considers to be full employment. And the strong December employment report clearly put at least one check market in the Fed’s interest rate ‘go’ column. But the inflation rate, which is also a key indicator of economic strength, has remained stalled stubbornly below the Fed’s 2 percent target, suggesting to some analysts that the economy many not be as strong as the employment numbers have suggested, nor as able sustain higher interest rates. The surprisingly slow third quarter growth rate combined with the recent stock market setbacks will likely increase those concerns.
CONFIDENCE AND HEARTBURN
Recent reports on rental housing trends should give property owners confidence – or heartburn – or a little of both. In the confidence category, declining homeownership rates (now at their lowest level since 1993, have propelled growth in demand for rental housing. And that trend is likely to continue over the next two decades, according to the Harvard Joint Center for Housing Studies, which predicts 4.4 million new renter households over the next decade – an average of 440,000 per year. “While recent estimates suggest that homeownership rates may be firming in some areas, there is no evidence so far of a significant rebound,” the Joint Center notes in a recent report.
Builders, anticipating and those trends and responding to them, are increasing rental housing production at a dizzying pace. Axiometrics, Inc. predicts that those efforts will produce one million new rental units over the next three years, on top of the 900,000 built during the previous three. There’s mystery about the motivation: Average rents have increased by more than 20 percent over the past five years as rapidly increasing demand has outstripped the available supply.
But now here comes the potential heartburn: Apartment vacancy rates increased in the fourth quarter of last year for the first time since 2009. Vacancy rates are still at a near decade low, but analysts have noted a class difference in the statistics: Strong demand for older properties in suburban markets has kept vacancy rates down, while new construction, concentrated largely in Class A properties in urban markets, is boosting vacancies there. “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,” Ryan Severino, a senior economist at Reis, told Bloomberg News.
Rents continue to rise, though the pace has slowed, and Severino thinks that trend will continue, at least for a while. “But eventually, rising vacancy rates will take the wind out of landlords’ sails and remove some of their ability to keep pushing rent growth at such a febrile pace,” he predicts.
DEATH AND TAXES
Death and taxes have traditionally been viewed as two of life’s certainties. Here’s a third: Twenty percent of debt-burdened consumers think they will still be in debt when they die. A recent survey by CreditCards.com found that debt frustration levels have increased, even though economic conditions have improved. Only 9 percent of those responding to this survey in 2013 felt hopeless about their debt; that percentage increased to 18 percent in 2014 and jumped again last year.
Somewhat incongruously, the number of consumers who say they have no debt at all also increased last year to 22 percent from 14 percent the year before, creating what Matt Schulz, CreditCard.com’s senior analyst, termed “an interesting divide.”
“There are those who feel really feel trapped and hopeless and think they’ll never get out of debt. But we’re also seeing a bunch of people who are foregoing debt and trying to avoid it all costs – an understandable result of the Great Recession,” exacerbated, Schulz said, by a somewhat anemic recovery.
The survey also revealed an age gap, with younger consumers generally feeling more optimistic than older ones about their prospects of dying debt-free. Nearly 25 percent of those between 50 and 64 don’t think they’ll ever eliminate their debts; only 11 percent of millennials share that discouraged view.
Although wealthier consumers are more likely to have debt they are also, not surprisingly, more likely to feel confident about their ability to repay it, Schulz told CBS MoneyWatch. “Poorer folks may not be as likely to be in debt, but they are more likely to feel trapped by what debt they have,” he noted.
Among the other survey results:
- Nearly half of those currently in debt don’t expect to become debt free until they are 61 or older.
- Republicans are almost twice as likely as Democrats to expect to die in debt ─ 25 percent vs. 14 percent.
- Whites are more pessimistic than minorities – nearly 25 percent of white consumers expect to remain in debt forever compared with 16 percent of minorities.
FAIR HOUSING SETTLEMENT
Kent State University has paid $145,000 to settle a Fair Housing discrimination suit filed by the Department of Housing and Urban Development (HUD), resulting from the school’s refusal to allow students with psychological disabilities to keep emotional support animals in university-owned housing.
In addition to paying damages totaling $100,000 to the two students whose request for a Fair Housing accommodation was denied, the settlement agreement requires the University to:
- Pay $30,000 to a fair housing organization that advocated on behalf of the students and an additional $15,000 penalty to HUD; and
- Revise its housing policy to allow students with disabilities to keep support animals that provide essential therapeutic benefits, as long as the animals “would not fundamentally alter” the nature of the housing.
“This settlement shows the department’s continued and strong commitment to ensuring that students in university housing are afforded the protections of the Fair Housing Act,” Vanita Gupta, head of the Justice Department’s Civil Rights Division, said in announcing the agreement “Those protections include accommodations for students with disabilities who need assistance animals in order to have an equal opportunity to enjoy the benefits of university housing,” she added.
“Providers of on-campus housing have the same obligation to comply with the Fair Housing Act as other housing providers,” said Gustavo Velasquez, HUD’s assistant secretary for fair housing and equal opportunity, added. “Today’s settlement reinforces the ongoing commitment of HUD and the Justice Department to ensuring that individuals with disabilities are granted the accommodations they need to perform daily life functions.”
IN CASE YOU MISSED THIS
Builders started construction on new homes at an annualized pace of 768,000 units in November – the highest level in five years. The 7.6 percent in increase over October‘s total starts reversed what had been a distressing 12 percent October swoon attributable primarily to the volatile multi-family sector.
As rising rates and higher home prices squeeze affordability, some builders are taking another look at the lower end of the market, where profit margins are lower but demand may be increasing.
A study by the Harvard School of Public Health concluded that flavored e-cigarettes contain harmful chemicals, calling into question assertions that they are a healthy alternative to tobacco.
The qualified mortgage hasn’t been the unqualified disaster that some mortgage industry critics had predicted.
It is generally accepted (except by those who deny climate change) that the earth is not flat. But the yield curve is heading in that direction and that may be good news for the mortgage market.
COMMON AREAS AND EXCLUSIVE USES
The common areas of a condominium community, by definition, are owned in common by all of its members. And when some owners assert or seek the right to use these areas exclusively, other owners, predictably, object. Two recent decisions offer different perspectives on the authority of association boards to approve or deny these requests.
The first decision (Pfllugh v. 2-4-8-8-10-12 Steiner Street, et al) arose in California when the governing board of this 10-unit community approved a request from two owners to designate portions of the common area for their exclusive use as parking areas. In 2009, the owners of these units had agreed to pay $1,500 each annually under a licensing agreement to use these areas for parking. Two years later, 7 of the 10 owners approved an amendment to the condominium declaration officially designating the parking spaces as exclusive use areas. Four owners sued, arguing that the exclusive use designation represented a “qualitative change” in the common interest ownership rights of owners, which required unanimous approval. The trial court rejected their argument and the owners appealed.
The trial court made two key findings: The exclusive use designation did not affect the ownership interests of owners; and the original development plan contemplated parking in the disputed areas, which had been used consistently for that purpose. The recreational use the plaintiffs proposed as more appropriate for the common area would not have been consistent with this original design, the court said. The Appeals Court affirmed both findings.
On the first point, the Appeals Court agreed with the lower court that the plaintiffs “read too much” into a declaration provision specifying that “the common interest appurtenant to each unit is declared to be permanent in character,” alterable only by the unanimous consent of owners.
The plain language of that phrase, the court said, refers to the common interest ownership of owners, not to the common areas of the community. The plaintiffs agreed that there was no change in the ownership interest, and that stipulation, the court said, defeated their argument that unanimous approval was required for the exclusive use designation.
On the second point, the plaintiffs had argued that the failure to designate the disputed areas for parking in the original CC&Rs provided “overwhelmingly persuasive if not conclusive evidence” that the developer did not intend that use. But the court found more persuasive the evidence indicating that the two units were the only ones with front doors opening directly into the common area, and that occupants had long used the disputed areas for parking. “Substantial evidence supports the trial court’s finding that parking for Units 10 and 12 was part of the original plan of development,” the court concluded, and “any other permanent uses of that space” would be inconsistent with that plan, he court concluded.
In another dispute over an exclusive use designation, a Michigan Appeals Court found that an association board had improperly allowed an owner to construct a deck in a private park that was a designated common area. The trial court in Boyle v. Huron Dunes Association agreed with the neighbor protesting the construction that it violated restrictions in the deeds and the plat plan, and the Appeals Court affirmed that decision.
The deeds specify that the private park “shall be reserved for the lawful and proper use of all owners….” The association’s covenants note additionally that the governing board, as a successor to the developer, had the authority to approve ”proper uses” for the park, but the language also states that those allowable uses include only “educational, recreational or community service activities.”
The Appeals Court held that the deck didn’t qualify as a “lawful and proper use” so the board couldn’t approve it. The court also rejected the board’s argument that the plaintiff hadn’t demonstrated that the deck would impede the common area easement rights of other owners. According to the court, construction of the structure itself would create that impediment.
“While things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement.” ― Federal Reserve Chairman Janet Yellen, announcing the December increase in the Fed’s target rate.