LEGAL/LEGISLATIVE UPDATE – March 6, 2017

Published on: March 6, 2017

RESILIENT BUYERS

Shrinking inventories and rising interest rates continue to worry housing industry executives, but they haven’t deterred home buyers — at least, not so far, this year. Existing home sales increased by 3.3 percent in January compared with the December total. The annualized rate of 5.69 million units was the highest in a decade. Sales of condominiums and cooperatives jumped by more than 8 percent nationally. New home sales also rose by 3.7 percent – a little short of expectations, but still reflecting strong underlying demand, analysts agreed.

Lawrence Yun

Lawrence Yun, chief economist for the National Association of Realtors (NAR), credited “resilient” consumers and a strong labor market, helping to offset the headwinds created by higher mortgage rates and a skimpy supply of homes available for sale. The 3.6 months inventory was unchanged from December. “Market challenges remain,” Yun said in a press statement, ‘but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

First time buyers remained relatively active, accounting for 33 percent of January sales, compared with 32 percent in December. But rising prices and an acute shortage of entry-level homes are creating serious challenges for this segment of the market, David Berson, chief economist for Nationwide, told Housing Wire. “We have concerns that continued supply constraints in the housing market will allow outsized house price gains again in 2017, especially hurting potential first-time homebuyers,” he cautioned.

LANDLORD VS. AIRBNB

One of the nation’s largest owners of rental properties is suing Airbnb Inc., accusing the company that created the owner-to-renter short-term vacation rental market of encouraging tenants to violate their leases by renting out their units. Apartment Investment & Management Company (AIMCO) has initiated civil suits in California and Florida, seeking unspecified damages as compensation for lost revenue and for property damage caused by transient tenants.

“It is not acceptable to us that Airbnb actively promotes and profits from deliberate breaches of our leases, and does so in utter disregard of the disrespectful and unsafe situations created for our full-time residents and their families,” Terry Considine, chief executive of AIMCO, said in a press statement. Airbnb has vowed to fight what it termed an “attack on the middle class by powerful interests.”

This is reportedly the first time an apartment owner has sued the company, but the suit reflects the strong opposition Airbnb has faced from landlords and community associations, concerned about the impact of short-term rentals on their buildings and their residents. In an effort to deflect that resistance, the company introduced a “partnership” program last year, offering to share a portion of the rental revenue with landlords who allowed Airbnb guests to rent tenants’ apartments. It is not clear how many apartment owners have accepted that offer, but it is clear that AIMCO isn’t one of them.

POWER OF NEGATIVE THINKING

Analysts who have been puzzled by the sluggishness of the recovery from the last downturn may find an answer in new research, suggesting that the power of negative thinking may be at least partly responsible. “Put simply, the anticipation of a less bright future is leading to temporarily weaker demand,” economists Olivier Blanchard, Guido Lorenzoni and Paul L’Huillier conclude. Their theses, simply stated: Thought creates – forecasts predicting slow or no growth in productivity discourage some workers from entering the labor market, creating a domino effect: unemployment rises, consumers, anticipating lower income and possibly unemployment, reduce spending, which reduces demand/ As demand falls, corporate profits also decline, leading companies to cut back their investment. Their critical point is, this dynamic is temporary, not the systemic problem some analysts believe it to be. “If we are right, it may well be that, as this adjustment comes to an end, the adverse effect will disappear, demand will pick up and interest rates will increase substantially,” they predict. “To the extent that investors in financial markets have not fully taken this effect into account, [current forecasts] may understate the increase in interest rates to come.”

PET CONCERNS

Pets rule! No one who has and loves pets would question that assertion, but the National Association of Realtors has documented the extent to which pet ownership is increasingly influencing the choice of homebuyers. More than 80 percent of the respondent to an NAR study said they considered their pets in making housing decisions, 80 percent said they would not relinquish a pet because of a housing choice, and 12 percent said they had moved in order to accommodate their pets. Not surprisingly, given these responses, 99 percent said they considered their pets to be member of their family.

The NAR estimated last year that more than 60 percent of U.S. households either had pets or planned to acquire them. Given that forecast, NAR President William Brown suggested, “It is important to understand the unique needs and wants of animal owner when it comes to homeownership.”

That advice may resonate particularly with condo associations that wrestle frequently with whether to welcome pets, restrict them, or ban them entirely.

AGING IN PLACE

Aging baby boomers increasingly are expressing a preference for ‘aging in place’ in the homes they own. But few of those residences are equipped to accommodate their needs as they become frailer, less mobile, and possibly disabled. A Freddie Mac survey found that two thirds of older homeowners and 44 percent of older renters want to stay where they are, in residences that have impediments they may not be able to negotiate, such as stairs, or lack some, if not all, of the various accommodations they will need, among them: Single-floor living, wider doorways and hallways, lower light switches, lever-style handles on doors and faucets, and brighter lighting. Freddie Mac estimates that 2 million homes occupied by older residents will need at least some retrofitting by 2030. The costs may be prohibitive for many owners and some residences may not be candidates for retrofitting at all, Sean Beckett, Freddie’s vice president, points out. “For some [older homeowners], aging in place until the bitter end may not be a possibility. As Betty Davis said, ‘Old age is not for sissies.’”

IN CASE YOU MISSED THIS

Individuals are replacing institutional investors as the primary purchasers of single-family homes to rent. “Smaller investors—particularly those who have already paid off their mortgages on the homes they live in—see rental properties as an attractive way to save for retirement,” a Bloomberg article explains.

Everything is coming up roses ─ in the Trump Administration’s economic forecasts.

Economists see a Fed rate hike this month as increasingly likely and inching closer to a foregone conclusion.

Home prices continue to outpace salaries in most areas of the country, flashing a warning signal for the housing market outlook.

The Trump Administration has indicated plans to strictly enforce federal laws classifying marijuana as an illegal drug, setting up a potential clash with the increasing number of states (Massachusetts and Maine, among them) that are legalizing its recreational use.

LEGAL BRIEFS

HARD TO DUCK DEVELOPER’S RESERVE REQUIREMENT.

During the period when they control the board of a condominium, developers have the same obligation as elected trustees to pay operating expenses and otherwise manage the association’s finances. But developers also have a strong incentive to minimize their expenses in order to maximize their profits, which the developer in this Florida case (Sarah and Ralph Mackenzie v. Centex Homes) attempted to do by failing to fund the association’s reserves.

Two owners sued, claiming that state law required the developer to make capital contributions to the reserves. When the lower court issued summary judgment in favor of the developer, the owners appealed.

There was no dispute over the facts: The developer, Centex, made an initial reserve contribution of $32,300, but made no contributions after that, relying on a state law that exempted developers from their obligation to pay “operating expenses and assessments” if they financed the association’s operating deficit (the difference between expenses and the amount collected from owners), which the developer did.

The developer argued that “operating expenses and assessments” should be interpreted broadly to cover all monies owed to the HOA, including the reserves. The lower court affirmed the developer’s interpretation of the reserve requirement, but the Appeals Court found the wording ambiguous. “It is unclear as to whether the developer is excused from all other contributions, including contributions to the reserves, or if the developer is merely excused from paying the regular assessments on the properties.”

The condominium declaration wasn’t particularly helpful. “If anything,” the court said, it was “more ambiguous on this point,” because it specifically excluded reserves from the definition of operating expenses “without specifying whether Centex is liable for those expenses in addition to the operating deficit.”

The Appeals Court also found that the developer’s interpretation of the statutory exemption from reserve payments conflicted with another statute, which specified that if an HOA decided not to fund its reserves (as the statute permitted), the decision must be approved by a vote of owners and disclosed “conspicuously” in the association’s financial reports. That requirement, the court said, reflected “an intent to keep homeowners aware of the state of reserve finances, and to avoid allowing developers and boards to surprise homeowners with unexpected special assessments.”

The court resolved the conflict and the ambiguities by rejecting the developer’s reading of the statute, concluding that it excused developers from contributing to regular assessments for operating expenses but did not eliminate their obligation to contribute to reserves.

Centex had argued that the statute simply required inserting a line item for reserves in the budget, but did not require actually funding that account. “The difficulty with [that] position is clear,” the court said, “Under Centex’s interpretation, a board could completely defund the reserve accounts without notifying homeowners, provided it continued to include a tally of what the reserve accounts ought to contain. This interpretation is incorrect,” the court said, “because the plain language of the [statute] requires the HOA to notify homeowners if it fails to fund the reserve accounts established in the budget.” Based on that analysis, the court concluded, the statute “should not be read to excuse a developer’s otherwise valid obligation to fund reserves while it controls the HOA.”

WORTH QUOTING

“No longer a political “third rail,” experts from across the ideological spectrum are increasingly calling [the mortgage interest deduction] what it really is: A wasteful use of federal resources that encourages households to take on higher levels of debt, disrupts the housing market by increasing costs for everyone, and mostly benefits those who do not need federal assistance to live in a stable home.” — Diane Yente, president and CEO of the National Low Income Housing Coalition and Mark Calabria, director of financial regulation studies at the Cato Institute, in a co-authored op-ed article.


Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.