Published on: November 12, 2015
A SURE BET….MAYBE
A December rate hike is looking increasingly like a sure bet. But then, we’ve heard that assessment before, and more than once, only to see what had seemed a foregone conclusion that the Federal Reserve would act derailed. That’s what happened in October, when turbulence in the international financial markets and a surprisingly weak September employment report convinced the Fed policy makers that the economy wasn’t quite ready to absorb higher rates. The October employment report may support a different conclusion.
Employers added 271,000 jobs for the month and the unemployment rate fell to 5 percent― its lowest level since April, approaching the level many economists, including those at the Fed, define as “full employment.” The under-employment rate, reflecting part-time workers who would prefer to work full-tie, fell to 9.8 percent, its lowest rate in more than 7 years.
Equally significant and encouraging, worker income increased by 2.5 percent ,the largest annual gain in more than 6 years, providing a positive answer to analysts who have cited flat wage growth as a major source of concern about the economy’s underlying strength.
When Fed Chairman Janet Yellen announced that the Fed was going to stand pat in October, she said a December rate hike was “a live possibility.” The recent employment report clearly supports that assessment.
But some still think a rate hike is premature. Among them is Rep. Brad Sherman (D-CA), who told Yellen at a Congressional hearing that “God’s plan is not for things to rise in Autumn….Nor is it God’s plan for thinks to rise in winter, through the snow….God’s plan is that things rise in the spring, so if you want to be good with the Almighty, you might want to delay until May,” he suggested.
Consumer uncertainty about the economic outlook doesn’t seem to be affecting their view of the housing market. Housing confidence, measured by a Fannie Mae index, rose to a record high in September, as rising home prices buoyed seller confidence. Nearly half of the respondents to this survey predicted higher home prices next year, while only 9 percent said they will likely be lower.
A survey by the National Association of Realtors (NAR) found a similar trend. Nearly three quarters of the respondents said they expect to sell their homes for more than they paid, up from 55 percent in 2013. Less than one quarter said they can’t move because they won’t be able to sell their existing homes for enough to finance the purchase of another one.
Sellers have good reason to feel upbeat. The NAR reports that homeowners who sold this year realized a gain of more than $40,000 ― 23 percent higher than last year.
This is something of a double-edged sword, however. The rising home prices that are making sellers happy are making it more difficult for first-time buyers to gain a toehold in the market, explaining why their share of the market has been declining for the past three years and, at around 32 percent, continues to trend below the long-term average of close to 40 percent. Rising rents, stalled income gains and scant inventories of available homes are also contributing to the problem, the NAR’s chief economist, Lawrence Yun, observes.
“It’s just a lack of affordable homes, especially in the starter range,” Yun told Bloomberg News. “At a time when housing wealth is growing, we have fewer people participating in this recovery, and that worsens wealth inequality in the U.S.,” he added.
BIG DUMB BANKS
Regulators worry about banks that are too big to fail; Chase CEO Jamie Dimon thinks some banks are just too dumb to survive. “Banks should be allowed to fail,” he told corporate executives attending the Fortune Global Forum. “For the American public,” he added, “[bailouts] should be called ‘bankruptcy for big, dumb banks.'”
Dimon is one of several top industry executives who have blasted the government bail-outs that rescued flailing financial institutions during the last downturn.
Dick Kovacevich, the former CEO of Wells Fargo, has called the Troubled Asset Relief Program (TARP), which pumped billions of dollars’ into several large banks, “an unmitigated disaster” because it established the precedent, institutionalized in the Dodd-Frank financial reform legislation, that some banks are so crucial to the financial infrastructure they must be kept alive at any cost.
Chase was among the banks receiving TARP assistance, but it did so, Dimon says, at the government’s request and has since repaid the loan.
Kovacevich, Dimon, and others are arguing that the government shouldn’t help banks get out of holes they have dug for themselves through poor management and high-risk strategies. The notion that keeping poorly-managed banks afloat is good for the economy is misguided, they insist; the long-term effects of keeping them afloat are much worse.
With that concern in mind, the Federal Reserve Board has proposed new rules that would require the nation’s largest banks (including Chase) to increase their ability to absorb losses by raising a combined total of $120 billion in new capital. A Fed statement said the requirement would “bolster financial stability by improving the ability of banks covered by the rule to withstand financial stress and failure without imposing losses on taxpayers.”
SHAKING THINGS UP
The changing preferences and priorities of businesses and their employees will drive the office market over the next decade, and real estate professionals will have to anticipate and adapt to these changes in order to succeed. That was the consensus view expressed by a panel of technology and real estate executives convened recently by the Urban Land Institute (ULI).
Flexibility in design, land use and leasing terms will be essential, the panelists said, to accommodate a challenging economic environment and a more collaborative mindset encouraging businesses to cooperate with each other and encouraging office building owners to collaborate with their tenants.
“The industry needs to alter its business model in order to serve tenants whose needs are different than they were in the past,” Patrick Phillips, global chief executive officer at ULI, who led the discussion, suggested. For example, he noted, businesses will increasingly need flexible leases in order to respond to changing market conditions. And office developers would do well to view their corporate tenants as partners, he suggested, noting, “We need to align real estate providers’ interests with those of their tenants.”
Randall Rowe, global chairman of ULI and chairman of Green Court Partners (a real estate investment firm), noted the impact of driverless vehicles, which, he predicted, “will change the way we think about designing cities.” Other panelists cited the growth of e-commerce and the evolution of the “sharing” society as major sources of transformative change for the real estate industry.
On the retail side, Hamid Moghadam, chairman of Prologis, noted that more brick and mortar companies are shifting to on-line operations, and as they do, “the space needs of those companies are going to change.”
A greater willingness to share resources will also affect the way companies view their space needs. “We’re conditioned to think about our infrastructure and office space in a certain way,” David Mandell, founder and CEO of PivotDesk noted, but as more companies recognize the advantages – in cost and flexibility – of sharing their facilities, he predicts, more will move in that direction.
Moghadam agrees. He thinks companies will increasingly recognize their space as an asset valuable to them and to other companies. It won’t be long, he predicts, before “some smart guy in Silicon Valley will figure out how to get the [optimum] utilization” from the physical assets that companies own.
A SHARED CONCERN
If misery loves company, condominium associations struggling with an avalanche of demands for “service” animals in their communities may find some solace in a recent New York Times article reporting that college dormitories are grappling with the same problem.
More students are being diagnosed with depression and anxiety, the article notes, and they are requesting that service animals live with them in campus housing (where animals are usually prohibited) to help them cope with those conditions. Discrimination suits initiated and won by students whose requests were denied have persuaded many college officials that, like condo associations, they often have no choice but to waive their no pet rules.
Most students have requested dogs and cats but lizards, tarantulas, ferrets, rats, and a 95-pound pig have also been on the list of requested comfort animals. The pig was particularly problematic. It seems the pig had anxiety, too, and was too frightened to use the stairs or the freight elevator to go outside for walks. So, the Times reports, it stayed in the dorm room and used a litter box instead, which worked for the pig, but not so well for its other human roommates.
“Schools with no-pet housing policies are scrambling to address a surfeit of new problems,” the article notes, among them: “How can administrators discern a troubled adolescent’s legitimate request from that of a homesick student who would really, really like a kitten? If a student with a psychological disability has the right to live with an animal, how should schools protect other students whose allergies or phobias may be triggered by that animal?”
Condo boards that have struggled with the same questions may find one school’s approach to managing pets in its dorms somewhat helpful. This school imposes on the animals some of the same rules that apply to students: “We don’t let our students walk across campus and lick people unless it’s welcome,” a school official told the Times, “so we don’t let the dogs do it. We also don’t let students howl all night,” he added, “and they can’t go to the bathroom wherever they want.”
IN CASE YOU MISSED THIS
It is now less expensive to buy a home than to rent one in most housing markets, and renters are taking note. More than half the renters responding to a recent survey said rising rents have led them to consider buying a home.
Student loans aren’t primarily responsible for keeping millenials out of the housing market, Trulia economists have concluded. In fact, they say education-related debt has had no impact on the home buying capacity of this generation.
The Federal Housing Agency (FHA) has eased some of its requirements for certifying the underwriting of loans, but lenders say the agency hasn’t done enough to reduce the risk that they will have to buy back failed loans found to have relatively minor errors.
The demand for cyber insurance is growing. Some insurance industry executives are predicting that regulators may make the insurance mandatory for banks, telecommunications companies, medical services providers and other entities that collect and store large amounts of sensitive customer information.
The Consumer Financial Protection Bureau has made clear its view that mandatory arbitration agreements are often contrary to the interests of consumers. But a Colorado Appeals Court felt differently about the issue, finding that an arbitration requirement in a condominium declaration neither violated the rights of owners nor contravened the purpose of the Colorado Common Interest Ownership Act.
A key question in this case (Vallagio at Inverness Residential Condominium Association, Inc. v. Metropolitan Homes) was whether the association was required to obtain the developer’s approval before eliminating the arbitration requirement, which owners sought to do as a precursor to filing a construction defect suit against the developer.
One provision of the declaration specified that all amendments required both an affirmative vote of 67 percent of the owners and the approval of the developer. But under this provision, the developer’s right to approve amendments expired when the last unit had been sold.
A second provision, dealing specifically with the arbitration requirement for construction defect claims, said amendments to this provision required the developer’s written consent, even if the developer no longer owned any units in the community. When the association filed its construction defects suit, the developer moved to compel arbitration. The association argued that the required number of owners had voted to eliminate that requirement.
The trial court sided with the association, finding the two clauses dealing with amendments to the declaration to be contradictory, and resolving that conflict in favor of the association and against the developer, who had drafted the language. The trial court also agreed that requiring the developer’s approval to remove the arbitration provision violated the owner-protection purposes of Colorado’s condominium statute. The Appeals Court rejected both arguments.
On the first point, the court focused on the very specific wording of the arbitration provision: “The terms and provisions of this Section inure to the benefit of Declarant, are enforceable by Declarant, and shall not ever be amended without the written consent of Declarant and without regard to whether Declarant owns any portion of the Real Estate at the time of such amendment.”
Where contract terms are inconsistent, the court noted, specific provisions trump more general ones. The court also found that the expiration of the developer’s right to approve amendments, included in the general provision, did not apply to the arbitration clause.
The association fared no better with its contention that requiring developer approval to amend the arbitration requirement violated several provisions of the Colorado Common Interest Ownership Act. Addressing those provisions individually, the court ruled:
- The CCIOA prohibits restrictions on the association’s power to deal with the declarant that exceed restrictions on its power to deal with others, but that provision doesn’t apply here, the court said, because it is the owners and not the association itself that has the power to amend the declaration. And the requirement for developer consent doesn’t affect the 67 percent voter approval requirement. Moreover, the court noted, nothing in the CCIOA precludes a declarant from imposing additional requirements for amending the declaration.
- The arbitration provision does not allow the declarant to control the votes of unit owners, in violation of the CCIOA, as the association contended. The requirement that the declarant approve amendments does not alter the 67 percent requirement for owners, the court noted, “nor does it allow [the declarant] to unilaterally amend that section without the unit owners’ consent. It merely imposes an additional requirement that [the declarant] also consent.
- The developer approval requirement doesn’t contravene CCIOA’s purpose (protecting owners from overreaching by declarants), the court said, because it applies only to the arbitration requirement for construction defect claims, and the CCIOA “endorses the use of alternative dispute resolution and specifically allows declarations to mandate binding arbitration….Given that statutory language and the public policy in Colorado favoring arbitration,” the court said, “we cannot say that the declarant consent requirement in this case ‘evade[s] the limitations or prohibitions” of the CCIOA.
“The medical profession has determined that two 4-ounce glasses of wine for a male adult is a healthy amount, not two bottles. We’re just talking about trying to renormalize an economy that’s effectively gotten used to zero rates.” ― Joe LaVorgna, chief U.S. economist at Deutsche Bank, arguing for the incremental rate increases the Fed is planning.