LEGAL/LEGISLATIVE UPDATE – May 2, 2017

Published on: May 2, 2017

IN SYNC

New and existing home sales have been following a zig-zag pattern (one up and one down) of late, but they fell into lock-step; in March, getting the spring home buying season off to a roaring start. Existing home sales hit a 10-year high in March, reaching an annualized pace of 5.71 million units, percent above the year-ago level. The March surge reversed a February slump that some analysts had viewed as an ominous sign that rising interest rates, rising home prices and shrinking inventories were sucking the air out of the housing recovery.

New home sales increased more than 15 percent, year-over-year, beating the February total by nearly six percent and surprising analysts, who had predicted that sales would decline by nearly 1 percent.

In another positive sign, first-time buyers, who have been under-represented in the housing recovery, represented 32 percent of existing home buyers, maintaining the strength they exhibited in February. In a not so positive sign (for affordability), the S&P CoreLogic Case-Shiller home price index increased by almost 6 percent year-over-year, the largest increase in nearly three years.

“Sales are doing much better than I anticipated, particularly in light of affordability challenges,” Lawrence Yun, chief economist for the National Association of Realtors, said in a press statement.
But the market would be doing a lot better if inventories were closer to normal, Nela Richardson, chief economist for Redfin, suggested. Given other positives – population growth and employment strength, “We should be seeing record sales that we haven’t seen since 2005,” she told the Wall Street Journal. “But since there’s no inventory, we’re going to underperform potential.” NAR’s Yun agrees. Limited supply, he says, “continues to be the pest that’s pushing up price growth and pressuring the budgets of prospective buyers.”

BUBBLE FEARS

Home prices are rising twice as fast as incomes, a mismatch that analysts warn, isn’t sustainable.
The 5.8 percent year-over-year Case-Shiller index posted in February was its fourth consecutive record, and another blow to housing affordability, as incomes increased by only 3 percent during that 12-month period. Meanwhile, the shortage of available hoes for sale and fear that rates and prices will continue to rise are spurring bidding wars in some markets, leading some buyers to pay more than the asking price and to chip in more cash when the lender’s appraisal doesn’t support the deal. “It can’t be sustained,” David Berson, chief economist at Nationwide Insurance, told the Wall Street Journal. “It can’t go on forever.”

While noting increasing concern about the development of another housing bubble, the Journal article also reports that economists see little evidence of “an imminent housing bust that would lead to steep national declines in home prices.” The more likely outcome, the article suggests, is that overheated markets will face “a long period of flat or slightly declining home prices….but not an outright crash.”

DEBT RELIEF

Housing industry analysts have identified outsized student loan debt as a major factor, if not the only one, explaining why so few millennials ae buying homes. Fannie Mae has decided to attack that problem with new underwriting requirements designed to reduce the negative impact of student loans.
The new policies, announced recently, will allow mortgage lenders to:

  • Exclude from the debt-to-income calculation student loans that are being repaid by someone other than the borrower; and
  • Accept student loan payments made under structured repayment plans. Under current policies, lenders must count the full payment amount, not the discounted sum many borrowers pay, linked to their current income.

The Fannie Mae program also offers relief to current homeowners, allowing them to refinance their mortgages and use the proceeds to pay off their higher-rate student loans.

More than 40 million individuals now have outstanding student loans – triple the number a decade ago. Student loan debt now totals $3.5 trillion, with 2015 college grads alone carrying an average of $35,000 in debt. “That’s just a shocking number,” Jonathan Lawless, vice president of customer solutions for Fannie Mae, told Inman News. “We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage,” he added, “and we want to be a part of the solution.”

DIMINISHING INTEREST

For a long time, the investor appetite for single family rental properties seemed infinite; now, investors are pretty much ignoring these homes, easing concerns that they were reducing purchase opportunities for first-time buyers.

Investor purchases represented 17 percent of existing home sales in February, down from a high of more than 25 percent eight years ago, according to the National Association of Realtors.

Analysts attribute the downward trend to a surging stock market that is offering attractive investment options, and a decline in foreclosures, which had created a large pool of well-priced single-family properties for investors interested in converting them to rentals. According to industry statistics, as many as 6 million foreclosed properties were converted to rentals during the real estate downturn, producing a total of more than 14 million single-family rentals – the largest number ever recorded.

Many of those properties may be returned to the ownership pool, as smaller “Mom and Pop” investors cash in on high home prices, analysts say. Recent surveys have, in fact, found significant inventory gains in markets that had outsized foreclosure rates – Phoenix, Las Vegas, Fresno, CA and Nashville, TN, among them.

Those reports prompted Real Estate Economy Watch to ask: “Are significant numbers of … properties that turned into rentals returning to the fold? Are inventory levels rising simultaneously with year-over-year prices a sign that single family rentals are hitting the market in large numbers? These are questions worthy of more systematic research,” the on-line commentary suggested, “because the answers could change the face of the real estate economy.”

BAD TIMES

These are not the best of times for the retail sector; they may be approaching the worst, as reports of retail giants struggling or failing continue to mount. In the past month: Payless ShoeSource filed for bankruptcy protection, Macy’s announced another wave of layoffs and store closings, and Ralph Lauren announced that it was closing its flagship store on Fifth Avenue in Manhattan. Retailing woes are creating millions of square feet of vacant space in the nation’s over-built and increasingly under-shopped malls, triggering no small amount of angst on the part of investors who own the properties and lenders who have mortgages on them. Vacancy rates increased in in 30 of 77 community shopping centers last year, according to data compiled by Reis, Inc. The same survey found declines in 19 of the shopping centers tracked in 2014. The mall vacancy rate was unchanged in the first quarter of this year compared to the last quarter of 2016, but analysts caution against reading too much good news in that data.

Standard & Poor’s, which has lowered ratings on 20 retailers so far this year, predicts “increased levels of stress” for the sector this year. Green Street Advisors predict that 15 percent of the country’s existing malls will disappear by the end of this decade.

IN CASE YOU MISSED THIS

Some industry executives have cheered the Trump Administration’s decision to slap a 20 percent tariff on Canadian softwood, but home builders aren’t among them. The National Association of Home Builders estimates that the charge will add $1,236 to the average cost of a new home, reduce new construction totals and eliminate more than 8,000 construction jobs.

Prospective buyers and sellers of have different views of the housing market. The number of buyers who think it’s “a good time to buy” declined by 10 percentage points in Fannie Mae’s March Home Purchase Sentiment Index, while the number of sellers rating this a “good time to sell” increased by almost the same amount.

It was bound to happen: The overheated multifamily market is beginning to cool. Absorption rates are slowing and tenant concessions are becoming more common.

A Trulia report finds that condominiums are now appreciating faster than detached, single-family homes in many markets. Trulia says this signals a changing market. Housing industry executives say Trulia’s research is flawed.

Doubling the standard deduction — a key component of the tax reform blueprint proposed by President Trump, would reduce the value of the home mortgage interest deduction. The nation’s Realtors (among others) don’t like the idea.

LEGAL BRIEF

GETTING SLAPPED

Free speech concerns, which are always complicated, were further complicated by an anti-SLAPP assertion in this dispute between residents of a California condo associations and the president of its board. (Boswell v.The Retreat Community Association)

To say that the parties – the Boswells (residents who were purchasing a unit under an installment contract) and Schmidt (the board president) didn’t get along would be an understatement. They clashed virtually from the time the Boswells moved into the community. First, Schmidt cited the Boswells for multiple violations of the association’s covenants and architectural rules; then both parties began criticizing each other publicly, in emails, flyers and conversations with other residents. Boswell aired his grievances on a Facebook page he created for that purpose; Schmidt sat outside the Boswell’s home with a camera and a video recorder.

Eventually, and not surprisingly, the dispute ended up in court. The Association initiated the court battle by seeking a declaration affirming that the association would not have any liability for a fraudulent real estate transaction of which the Boswells were accused in an unrelated action. The Boswells countersued, accusing the association and Schmidt personally of intentionally inflicting emotional distress, to which the association responded with an anti-SLAPP motion that ultimately became the focus of the litigation.

Anti-SLAPP statutes generally prohibit lawsuits in which complaints arise from the exercise of free speech in connection with a public issue. The California statute provides an exemption allowing courts to reject an anti-SLAPP motion if they determine that the plaintiff has a reasonable probability of prevailing on the claim.

The trial court concluded that the Boswells’ claims were not related to any protected activity and rejected the association’s anti-SLAPP motion for that reason. The association appealed.

The Appeals Court had to consider two questions: Whether the association’s activity was “protected” and whether the Boswell’s had a reasonable prospect of prevailing on their emotional distress claims. The court put those claims in three categories:

  1. The efforts to enforce association rules against the Boswells, which, the court found “did not involve any protected activity.
  2. Surveillance against the Boswells, including taking photos of them and compiling a dossier about their purported rule violations. While agreeing that photography can involve “constitutionally protected speech,” the court found that the photography in this case “does not appear to be related to any public issue.” The dossier also fell short of the ‘public issue’ mark needed to approve an anti-SLAPP motion.
  3. Allegations about the Boswells published in anonymous flyers emails and other forums, suggesting that their presence was detrimental to the community. This third category proved the ‘charm’ for the court, qualifying as a “public issue” or “issue of public interest,” because other homeowners would likely be interested in these allegations., and equally interested in the Boswells’ responses, which included accusing Schmidt of embezzlement and suggesting that he should resign or be recalled.

The Boswells had argued that the charges and countercharges were personal, but the Appeals Court disagreed. Their claims of emotional distress, the court said, arose at least partly from protected activity, supporting the association’s anti-SLAPP motion.

Having established that point, the court turned to the second question in a SLAPP evaluation – whether the plaintiffs had a reasonable prospect of prevailing on their claims. To meet that base line test, the court noted, a plaintiff must demonstrate that the complaint “is both legally sufficient and supported by a sufficient prima facie showing of facts to sustain a favorable judgment ” The bar for this test is relatively low, the court explained, noting: An anti-SLAPP-suit motion is not a vehicle for testing the strength of a plaintiff’s case, or the ability of a plaintiff, so early in the proceedings, to produce evidence supporting each theory of damages asserted in connection with the plaintiff’s claims. It is a vehicle for determining whether a plaintiff, through a showing of minimal merit, has stated and substantiated a legally sufficient claim.”

So was the Boswells’ evidence of emotional distress strong enough to create a reasonable prospect of success in pursing that claim? The court concluded that it was. Intentional emotional distress, the court said, must “be so extreme as to exceed all bounds of that usually tolerated in a civilized community.” The association’s efforts to enforce rules “in a groundless, malicious or harassing manner” alone could meet that definition, the court said, and “the repeated nature of the harassment made it even more extreme.”

Other incidents the Boswells cited, in which Schmidt, representing the association, “denigrated” the Boswells to their neighbors, made accusations about them, and led neighbors to conclude that they were “a danger” to the community, also were “sufficiently extreme and outrageous to constitute intentional infliction of emotional distress,” the court found, “particularly when added to the harassing charges of various rule violations.”

Although it didn’t affect the overall decision – rejecting the association’s anti-SLAPP motion – the court found that the Boswells’ were unlikely to prevail on another claim – that the association had violated its “duty of care” by inflicting emotional distress on them. “They cite no authority for the proposition that a fiduciary duty includes a duty not to cause emotional distress,” the court noted. Most such claims involve more “personal” relationships, between medial professional and their patients, for example. “A homeowners association’s relationship with members does not involve “such a personal undertaking,” the court said.

WORTH QUOTING:

“Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel — to give it some gas, but not so much that we’re pressing down hard on the accelerator.” ― Federal Reserve Chair Janet Yellen, describing the Fed’s current thinking about where its benchmark interest rate should be.


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