Published on: June 18, 2017
NO FED SURPRISE
Predictions that the Fed would increase interest rates at its June meeting were virtually unanimous, and the Federal Open Market Committee, the Fed’s policy-making arm, didn’t surprise or disappoint. The 25 basis point increase the committee announced, its third consecutive adjustment, pushed the target range for the Fed Funds rate to between 1 and 1.25 percent. The increase “reflects the progress the economy has made,” Fed Chair Janet Yellen said in a press conference following the FOMC meeting.
But the Fed action also ignored the persistent lag in the inflation rate, which continues to fall short of the Fed’s 2 percent target. Fed officials have said they remain confident that a strengthening labor market will produce salary hikes and a higher inflation rate, reflecting economic strength, but that ‘virtuous cycle’ hasn’t materialized yet, and some economists are questioning when it will.
“The Fed in recent years has been consistent in predicting faster inflation – and in being wrong,” a New York Times article pointed out. As a result, although most economists are predicting that the Fed will raise rates at least once more this year, few expect that it will be in any rush to do so.
“Recent weak economic data – notably, inflation and consumer spending – suggest that the pace of future hikes will remain slow,” Erin Lantz, vice president of mortgages at Zillow, told Housing Wire.
Lawrence Yun, chief economist for the National Association of Realtors, echoed that view, and its underlying concern about the behavior of long-term and short-term interest rates. “The Federal Reserve should be mindful of the lower than expected rate of inflation and the consequent low interest rates on long-dated bonds,” Yun noted in the same Housing Wire article. An inversion in interest rates that puts the short-term fed funds rate above the yield on longer-term bonds “can easily pull the economy into a recession,” he warned. “And we are getting closer to that inversion point.”
HOUSING INVENTORY WORRIES
In the housing market, inventory, or the lack of it, remains the primary focus of industry executives and a continuing source of concern. The National Association of Realtors (NAR) blamed the dearth of available homes for the larger-than-predicted decline in existing home sales in April and for the continued upward pressure on home prices that is creating a larger barrier to entry for first-time buyers.
“A lack of inventory makes it very challenging for first-time buyers to get into the market,” Danielle Hale, NAR’s managing director of housing research, told reporters at a press briefing announcing the sales figures. “Price growth is still outpacing income growth, and rents remain quite high,” she noted, “and low supply is hinting at another home-price gain in 2017.”
Glen Kelman, CEO of Redfin, used near-apocalyptic terms to describe the impact of shrinking inventory levels, which reached a new low point in April. “It’s freaking us out,” he told CNBC. “I think the overall industry for the first time is seeing sales volume really limited by the inventory crunch.”
“JOINT EMPLOYER” REVERSAL
The Department of Labor has rescinded an Obama Administration interpretation of the “joint employer” standard, rolling back an expanded application of the rule that had been hailed by employee advocates and decried by employers.
Under the 2016 reinterpretation of these rules, outlined in DOL guidance, joint employer status depended in part on an employee’s level of “economic dependence” on the companies, and not just on whether the employers had the authority to hire and fire workers and set their wages – the only factors considered under the former standards. Business groups said the rollback of that “burdensome” definition eliminated “enforcement traps” waiting to spring. Labor groups said the change erased guidance that had clarified the obligations of employees and employers alike.
The reversal of the guidance does not affect the DOL’s 2015 ruling (in Browning Ferris Industries of California) that also addressed the standard for defining joint employers. In that ruling, which has been appealed to a federal court, the DOL said joint employers did not have to both possess and exercise direct control over employees to be considered joint employers. Simply having the potential authority to control employment conditions and terms “even if not exercised” was sufficient. The decision also eliminated the requirement under the old standard that joint employers exercise “direct and immediate” control. “Otherwise sufficient control exercised indirectly, such as through an intermediary, may also establish joint employer status,” the DOL ruled
Rising rents are creating affordability pressures for an increasing number of Americans. There is no state in which a worker earning the minimum wage for a 40-hour week can afford a “modest” two-bedroom apartment, according to “Out of Reach,” the National Low Income Housing Coalition’s (NLIHC’S) annual report on housing costs.
The report pegs the hourly “Housing Wage” required for a two-bedroom apartment at $21.21; a one-bedroom unit requires an hourly wage of $17.14. Based on those averages, a worker earning the federal minimum wage ($7.25 per hour) would have to work the equivalent of nearly three full time jobs to afford the two-bedroom home and 2.4 fulltime jobs to cover the rent on a one-bedroom unit.
The gap between what renters earn and what they must pay “means too many families must choose between paying for their shelter and buying diapers, fresh food, child care or medicine,” U.S. Rep. Keith Ellison (D-MN) notes in the preface to the housing report. Minnesota ranks 21st on the list of states with the highest rental costs.
According to the NLIHC, the U.S. currently has a shortfall of 7.4 million rental units available to extremely low-income households. “More than 11 million rental households are spending more than half of their incomes on housing,” the advocacy group notes in a press release, “and hundreds of thousands go homeless on any given night, underscoring the need for greater investment sin affordable housing solutions.”
American mobility is no longer a safe assumption. Homeowners are remaining in place for an average of 8.7 years, according to a 2016 survey; that is double the rate recorded 10 years ago. You’d think an improving economy, rising (albeit slowly) incomes and especially increasing equity ratios would persuade more existing homeowners to trade up, but the New York Times reports that reverse has been true. Rising interest rates – a byproduct of a stronger economy – are creating what the Times terms the “lock-in-effect”: Owners who have taken advantage of historically low mortgage rates to buy or refinance are unwilling to accept the higher payments required to purchase another dwelling.
Average mortgage rates, which were hovering around 3.5 percent six months ago, were above 4 percent in mid-June and are likely to move higher, as the Federal Reserve pursues a rate-tightening policy.
“Once mortgage rates climb to 5 or 5.5 percent, we are going to start to see the lock-in effect really take hold,” Svenja Gudell, chief economist at Zillow told the Times.
Gudell and other housing analysts are expecting lower homeowner mobility rates to persist and possibly worsen over the coming decade. A recent Gallup poll suggests that prediction may be accurate. Nearly 65 percent of the respondents said they don’t expect to sell their homes in the “foreseeable future,” and only 20 percent plan to sell in the next five years.
IN CASE YOU MISSED THIS
HUD Secretary Ben Carson insists that the $6.2 billion cut in the agency’s budget won’t seriously affect its affordable housing initiatives; housing advocacy groups disagree.
The economy is growing, the unemployment rate is falling and incomes are rising. So why are credit card charge-offs increasing?
The U.S. Supreme Court has dealt what may be a death blow to the patent trolls that have been plaguing American businesses, including rental housing providers. The court’s ruling that companies can be sued only where they are incorporated will prevent plaintiffs from venue-shopping to bring actions in courts known to be friendly to patent infringement claims.
“Home alone” is a condition many members of the Baby Boom generation aren’t experiencing. The odds that adult children will be living with their parents have more than doubled in the past 30 years. Just 9 percent of 25-34 year-olds were living at home in 1980 compared with 22 percent in 2015.
Real estate industry executives are watching with growing concern a legislative proposal that would kill the popular “1031” tax break that allows investors to defer the taxes on the sale of real estate and other assets if they invest the proceeds in “like-kind” properties.
HOW TO SKIN A CAT
There are many ways to skin a cat, not all of them equally effective or equally acceptable. The cat in this case (Walworth State Bank v. Abbey Springs Condominium Association) was delinquent condominium fees owed by the owner of two units on which the mortgage lender had foreclosed. And the Wisconsin Supreme Court was not at all enamored of the cat-skinning strategy the association tried to use to collect $13,225 in unpaid fees.
A buyer bid successfully on the units at the sheriff’s sale, but refused to close because the association, named as one of the defendants in the foreclosure action, issued a statement indicating that the new owner would be liable for the delinquent fees. The statement cited the association’s “Membership and Guest Policy,” which barred access to the community’s amenities to owners who were delinquent in their payments.
The bank paid the bill under protest so the sale would go through, and then sued the association. The trial court granted summary judgment for the bank, ordering the association to repay the disputed sum. The association appealed and the Appellate Court reversed the lower court ruling, holding that the association’s “pay-to-play” policy was reasonable and that enforcing it against the new owners, by making them responsible for paying the foreclosed owner’s debt, did not violate any laws.
The Wisconsin Supreme Court disagreed. The bank had relied on a state law specifying that in voluntary grants of ownership rights, new owners can be held jointly and severally liable for unpaid assessments owed by former owners. The inverse must also be true, the bank argued: In an involuntary grant, such as a foreclosure sale, new owners should not be responsible for debts incurred by prior owners. The court refused to follow the bank down that analytical path. While the logic might be reasonable, the court noted, the statute addresses only voluntary grants; it doesn’t mention involuntary grants “and it is not this court’s place to speak where the legislature is silent.”
To resolve what it viewed as a matter of first impression, the court focused instead on the condominium statute and foreclosure law. Unlike Massachusetts and many other states, the Wisconsin condo statute does not establish ‘super lien’ protection for condo associations. As a result, liens for unpaid owners’ fees are secondary to the mortgage lender’s lien. In this case, the foreclosure sale left nothing for junior lien holders after the first mortgage lien was paid, and the foreclosure order, which, the court noted, the association did not appeal, “forever barred” the interests of all defendants, including the association, in the foreclosed properties.
One goal of a foreclosure action, the court noted, is to “extinguish unsatisfied junior lienholders’ rights to the property so that title transfers unencumbered to the new purchaser.” In an effort to “evade” that effect, the court said, the association attempted to sever the lien from the debt, agreeing that the lien had been extinguished by the foreclosure, but arguing that the underlying debt survived and remained connected to the units, not to the former owner.
“Indeed, the underlying debt does survive and nothing in the foreclosure judgment prevents Abbey Springs from suing the former unit owners” to recover it, the court agreed. “What [the association] is foreclosed from doing is perpetually saddling the property and all subsequent owners with debt owned by the former unit owners unless and until that debt is paid.”
A dissenting opinion, signed by two justices, agreed with the Appeals Court that the association was not asserting a right the foreclosure action had eliminated, but simply enforcing a reasonable “pay-to-play” policy that applied equally to all owners, barring access to amenities if they were delinquent in their payments. “If an owner wants to live in a condominium unit at Abbey Springs without using the recreational facilities, the owner need not pay any prior owner’s delinquent assessments,” the dissenters argued.
The majority took a less favorable view of the association’s policy. The bylaws require owner to pay their assessments (which should entitle them to use the amenities), they noted, but the association’s membership policy prohibits access if assessments owed by prior owners remain unpaid. “This is not a pay-to-play policy,” the majority insisted.
They also rejected the dissenters’ warning that under the majority opinion, no use restrictions imposed by condo associations could survive a foreclosure action. Use restrictions that apply to the actions of current owners would easily pass muster, the majority opinion notes. It is the effort to restrict the access of current owners based on the behavior of previous ones that is problematic here.
“A use restriction that prohibits dogs on condominium property…would not depend on prior owners’ actions and would not result in a foreclosed debt forever haunting a particular unit instead of following the prior owners, to whom the debt belongs,” the majority notes, adding: “The dissent disregards the obvious fact that enforceable restrictions generally apply to all property owners equally, and not just to those who have the misfortune of purchasing units from prior owners who left unpaid debts behind.”
“This is a dumb way to toy with the credibility of the U.S. on the global stage….The debt ceiling was never intended to be used as a tool of mass destruction.” ─ Diane Swonk, founder of DS Economics, on the possibility that Congress may fail to approve an increase in the government’s debt ceiling.