Published on: January 6, 2017
When Steve Mnuchin, President-elect Donald Trump’s nominee for Treasury Secretary, said “getting Fannie Mae and Freddie Mac out of government ownership” would be a top priority, industry executives, who have long-advocated privatization for the two companies, cheered, and the stock of the two GSEs soared. But that exuberance may be both premature and irrational. A recent report by Moody’s Investors Service concludes that the costs and complexity make privatizing Fannie and Freddie unlikely in the near term, and not all that likely in the future.
If they are to continue providing a stabilizing force in the mortgage market, the report notes, Fannie and Freddie would need a capital base totaling “hundreds of billions of dollars.” Privatizing the GSEs, which have been operating under federal conservatorship since 2008, “increases the risk of funding disruptions, [because of] the many “questions about how privatization would occur given the amount of debt the GSEs must refinance,” Moody’s analyst Brian Harris writes in the report. And investor confidence in their financial stability would be essential, Harris explains, “given the need to refinance their debts during any transition to becoming a private company.” Any interim disruption in their ability to issue debt, or in their borrowing costs “would negatively affect the US housing [market] and the U.S. economy,” the report cautions.
Harris’ bottom line: A change in the GSEs’ structure is “unlikely” during the next 18 months, and there is “a very low probability that the GSEs will be privatized over the next few years, given their capital needs and complexities of privatization.”
DEMAND VS. SUPPLY
As the housing recovery has remained stuck in an unusually low gear, some industry executives (the National Association of Realtors among them) have prodded builders to increase their construction pace and chided them for focusing too much on higher-priced homes and not nearly enough on the lower end of the market, where first-time buyers are struggling to find entry-level homes they can afford.
Nearly one-third of the recent and prospective home buyers responding to a survey by the National Association of Home Builders (NAHB) said they expected to pay less than $150,000, and 15 percent set an even lower benchmark. But an annual survey by the Census Department found that fewer than 6 percent of the homes started in 2015 (the most recent data available) were priced below $150,000 and a miniscule number (too small to measure) came in below $100,000.
Builders blame the scarcity of buildable lots, the high cost of acquiring land and developing it, a shrinking labor pool (forcing them to pay more for construction workers) and government regulation for pushing new home prices higher.
Government regulation has been a large part of the problem, the NAHB and other industry executives complain. The NAHB estimates that federal, state and local regulations (permitting fees impact fees, safety and environmental regulations) account for almost 24 percent of the price of a new home.
Real estate consultant John Burns makes a similar point in his recent analysis of new home costs in the top 34 housing markets. He found that government attitudes play a large role in determining where builders construct homes and where they don’t. States he classifies as “business-friendly” have scored above-average in the construction of affordable homes, while states deemed “unfriendly and unaffordable” have lagged.
The report cited, among other examples:
- Building and impact fees exceeding $120,000 per home (in San Francisco); development charges totaling $20,000 to $50,000 in some Oregon communities; an increase of 15,000 sq. ft. in minimum lot sizes in one Utah city; and (in California communities) – $6,000 per house in greenhouse gas fees, $1,000-$3,000 for drought resistant landscaping, and $4,000 to $8,000 per house in additional city fees imposed over the last decade.
“All of these costs appear to come with positive consequences for the environment, neighborhoods, or city finances,” the Burns report notes, “but they also make it quite difficult for builders to build entry-level homes and, consequently, for the home construction market to recover to normal volume levels.”
Security experts have been talking for the past five years, and with increasing urgency, about cyber-risks. But business executives don’t appear to be paying much attention. Hackers stole (or companies lost) an estimated 500 million personal records last year, while ransomware and ‘phishing’ incidents increased by 35 percent and 55 percent, respectively, according to a “Cyber Risk Handbook” published by Marsh & McLennan. But few companies have made “the concerted organizational effort to identify the range of cyber scenarios that could affect them, assess the cyber risk of their suppliers and customers, and build fully operational cyber risk prevention and response plans,” the report notes. A recent survey, conducted by Marsh, classified only about one-third of the respondents as adequately prepared to prevent “a worst-case” attack and concluded that 25 percent don’t view cyber vulnerability as a “significant” corporate risk.
Companies are sufficiently concerned about the issue to be purchasing insurance for it, however. Cyber premiums, which totaled nearly $2 billion last year, could reach $20 billion by 2025, Marsh analysts estimate. More than 20 percent of U.S. companies have cyber insurance, making this country currently the largest market for that product.
The shortage of construction workers is forcing some builders to do what many vowed they would never consider: produce some housing components, if not entire houses, in factories. Industry executives have traditionally viewed modular or manufactured homes (not the same as mobile homes) produced in whole or in part in a factory and delivered to a site, as inferior to “stick-built” homes , constructed entirely by hand on the site. Only 2 percent to 3 percent of U.S. homes have modular components, far below the number in other countries, according to a Wall Street Journal article. In Japan, for example, nearly 75 percent of new homes are factory-built.
The dynamic is changing in the United States, as builders struggle with a chronic shortage of labor. Toll Brothers, the first U.S. company to begin using modular components in the 1982, now has four factories providing re-fabricated components to more than half of the homes the company builds each year, the Journal reported.
Assembling manufactured components requires fewer workers than constructing those components on site, industry executives say. “Ultimately this is about cost, it’s about efficiency and it’s about speed,” Dan Bridleman, a senior vice president at KB Home, told the Journal. But that doesn’t mean fewer jobs for American workers, industry executives insist. It actually means more jobs, “because you’re not going to outsource home building work,” and better-paying ones, according to Tedd Benson, chief executive of Bensonwood, a New Hampshire construction firm, who notes that construction teams now include some people who work with computers rather than hammers. “We see it as an upgrading of millions of jobs that are already happening out there,” he told the Journal.
SENIOR DEBT BURDEN
Millennials aren’t the only demographic segment struggling with student loans; many seniors are nearing or entering retirement with this debt burden weighing heavily on them, too. The General Accounting Office (GAO) estimates that approximately 7 million seniors aged 50 or older had a total of $250 billion in outstanding federal student loans last year, and nearly one-third of those loans were in default.
The government has drained nearly $1.1 billion from payments to Social Security beneficiaries to apply to their student loans – stirring the beginning of an outcry from consumer advocates, who note that the garnishments leave some lower-income seniors without sufficient income to meet their expenses.
Lawmakers are beginning to focus on the issue. Sen. Elizabeth Warren (D-MA) has called the government’s collection efforts “predatory,” and Sen. Claire McCaskill, (D-MO), ranking Democrat on the Senate Special Committee on Aging, has warned that the GAO report reflects “the tip of the iceberg of what may be to come if we don’t work harder on this problem.”
IN CASE YOU MISSED THIS
Housing industry executives warn that deporting undocumented immigrants would exacerbate the shortage of construction workers (see item above), an estimated 15 percent of whom are believed to be undocumented.
As a real estate developer, Donald Trump stamped his name in large letters on many of the buildings he developed. Now that he’s president-elect, owners of several of the buildings bearing his name are removing it.
Most of the nation’s housing markets have returned to their pre-recession “normal” for housing activity. Freddie Mac’s Multi-Indicator Market Index stood at 86.4 in October, putting it on the “outer edge” of its historic benchmark activity range.
Airbnb is requiring users of its short-term rental app to sign a “Community Commitment” promising not to discriminate illegally against renters.
Climate change is altering rainfall patterns and shifting flood risks, which are diminishing in drought-plagued areas of the southwest and west, and increasing in the north.
MEMBERSHIP NOT OPTIONAL
Groucho Marx once said famously that he wouldn’t want to join any club that would accept him as a member. If the “club” involved were a homeowners association, an Indiana Appeals Court has ruled, Groucho might not have any choice. (Marvin Hamilton and Linda Hamilton v. Schaefer Lake Lot Owners Association, Inc.)
When Marvin and Linda Hamilton purchased a lot in the Schaefer Lake development in 1973, the covenants did not require owners to join the homeowners association nor did they mention the payment of assessments or common fees. The covenants did specify that after 25 years, a majority of owners could amend the provisions. Amended articles of incorporation, filed in 1977, stated that all current owners could join the association voluntarily by paying a $15 fee, and required all future owners to join the association and pay the $15 fee within 30 days of purchasing a lot in the community.
In 1996, a majority of the owners approved an amendment to the covenants requiring all owners to join the association. The Hamiltons apparently ignored that requirement for years, and in 2013, the association sued them to collect unpaid annual and special assessment. A trial court ordered them to pay more than $6,000 in unpaid fees, attorneys’ fees and court costs and the Hamiltons appealed the judgment against them.
The Appeals Court considered three questions: Whether the Hamiltons were members of the association; whether the assessments were valid; and whether the statute of limitations on the associations claim had expired. Dispatching quickly with the latter two questions (the assessments were approved properly, the court found, and the statute of limitations had not expired), the court focused on the Hamiltons’ contention that they were not association members and so were not required to pay the fees. They argued specifically that:
- The original covenants didn’t require membership;
- They had never joined the association voluntarily and had never paid the $15 fee that would have indicated acceptance of membership; and
- The amendment requiring membership was “outside the scope” of the covenant’s intended purpose and was simply an effort “to force owners” to join the association.
The Appeals Court found those arguments unpersuasive. The covenants clearly authorized owners to amend its provisions, the court noted, and didn’t restrict the changes they could make. “Thus, because the amendment was enacted [as required] by a majority of lot owners,” the court said, “it was within the scope of the Covenants’ intended purpose.”
As for the suggestion that the amendment was designed to coerce membership in the association, the court pointed out that when the Hamiltons purchased a lot in the community, they agreed to be bound by the existing covenant requirements and restrictions and any enacted in the future. It wasn’t the covenant amendment that “forced” them to join the association, the court reasoned; it was their agreement to abide by duly approved changes.
Failure to pay the $15 membership fee specified in the 1997 declaration amendments didn’t alter their membership status, the court said, noting that the fee applied to owners who joined voluntarily at that time and those who purchased units after the declaration was filed The 1996 covenant amendments making membership in the association mandatory did not mention a fee, the court said, “thereby making all lot owners members regardless of any initial fee,” and negating the Hamiltons’ contention that they had never joined.
“Higher interest rates will choke off a little bit of demand but more jobs, more income, more wages should stimulate housing demand. So the big question is, which is going to have a bigger impact?” ― Steve Rick, chief economist for CUNA Mutual Group.