Published on: October 7, 2017
BAFFLED BUT UNDETERRED
Although Fed Chair Janet Yellen admits that policy makers are baffled by persistently low inflation, they are undeterred by the failure to meet the 2 percent target they have set as the indicator that higher interest rates are in order, and still on track to boost interest rates once more this year. They remain convinced that the declining unemployment rate – now near a 16-year low – will begin to stoke inflation pressures, although it hasn’t done so yet.
As the economy has strengthened steadily, albeit slowly, the Fed has levied four, quarter-point rate hikes since late 2015, pushing its target range from zero to between 1 percent and 1.25 percent. But Fed officials have been struggling for most of this year with competing concerns that failure to raise rates soon enough could trigger an economy bashing inflationary spiral, while hiking rates too much too soon could tip the economy back into a recession.
Talking to reporters following the Federal Open Market Committee’s (FOMC’s) September meeting (at which the committee left rates unchanged), Yellen attributed the below-trend inflation rate to temporary factors that, Fed officials believe, will soon give way to more normal patterns.
Reiterating that point in a subsequent speech to business economists, Yellen said “significant uncertainties” about the inflation trend “[strengthen] the case for a gradual pace of adjustments….It would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” she added.
Although most members of the policy-setting FOMC apparently share that view, some disagree. “The Fed should be under no pressure to raise rates. We have time to let inflation climb back to target,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told reporters. “When I look at the economy, I don’t see any signs the economy is close to overheating,” he added. “I see no need to tap the brakes” and attempt to moderate the economy with higher short-term rates.
Charles Evans, president of the Chicago Fed, and Fed Governor Lael Brainard have expressed similar concerns. Speaking recently at the Economic Club of New York, Brainard said, “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,”
The economic growth rate topped three percent in the second quarter, more than doubling the first quarter’s anemic pace. Increases in consumer spending, nonresidential investment, exports and federal government spending fueled the increase, reported by the U.S. Bureau of Economic Analysis; declines in residential investment and state and local spending partly tempered the gains. A rise in imports also sapped some of the second quarter strength. The key question now is how much the combined impacts of Hurricanes Harvey, Irma and Maria will dent the economy, and on that point, analysts are divided. Some expect the economy to take a major hit in the third quarter, but others think the momentum reflected in the second quarter will continue. Paul Ashworth, chief economist for Capital Economics, lines up with the optimists. Although the hurricanes “did cause some temporary disruption,” he predicts that third quarter growth will still fall in a healthy 2.5 percent to 3 percent range.
Hurricanes may not have much impact on economic growth (see above), but they will almost certainly boost property insurance premiums. More than 40 percent of the senior insurance executives responding to a KPMG survey said they expect the market to “harden” at least temporarily, in the wake of those storms, bringing higher premiums and more difficulty finding coverage for homeowners. Reduced capital flows (as claims payments soar) and limited reinsurance coverage are the primary challenges facing insurance underwriters in the near-term, survey respondents agreed. Morgan Stanley analysts are less concerned, suggesting in a recent report that “the industry should be able to absorb the combined losses from Harvey and Irma,” currently estimated at between $30 billion and $65 billion. If losses exceed those estimates, reaching $100 billion or more, the report acknowledges, reinsurers may be forced to raise capital, resulting in a ripple effect that would raise premium costs downstream. But at least for now, Morgan Stanley analysts remain “cautiously optimistic” that current estimates of hurricane losses “could still result in operating profits for most of our reinsurers [this year].”
A 1990’s analysis of relationships between men and women concluded famously, “Men are from Mars; women are from Venus.” Potential home buyers and sellers also seem to be occupying different planets. Fannie Mae’s Home Purchase Sentiment Index in August increased by 1.2 points over the previous month, nearly reaching the record high set in June. But the gap between how buyers and sellers view the market widened. The number of sellers who think this is a good time to sell jumped by 21 percentage points year-over-year to 36 percent, while the number of buyers who see conditions as favorable to them fell to 1 16 percent, 5 points below the July level and a year-over-year decline of 16 percentage points. Analysts say rising prices and skimpy inventories are primarily to blame for buyers’ souring mood.
“In the early stages of the economic expansion, home selling sentiment trailed home buying sentiment by a significant margin. The reverse is true today,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a press statement. “Such a sizable gap between selling and buying sentiment, if it persists, could weigh on the housing market through the rest of the year,” he warned.
BUILD THEM STRONGER AND THEY WILL STAND
Homes built to stricter construction standards tend to withstand storm damage better than homes built to less stringent codes. That conclusion, based on preliminary assessments of the damage Hurricane Irma caused in Florida, shouldn’t surprise anyone. But it does provide a notable counterpoint to complaints from the home building industry that overly restrictive regulations are increasing housing costs and creating affordability obstacles for buyers.
The Florida code, updated in 2002 after Hurricane Andrew, is now one of the strongest in the country. It requires, among other safety features, stronger fasteners to keep roofs in place, the use of nails instead of staples to secure shingles, and impact-resistant windows in some high-risk areas of the state. Housing industry executives estimate that those requirements increase housing costs by close to 45 percent in Florida, compared with an average of 25 percent added by regulations nationwide.
But the stricter standards have also reduced insured damage claims. A research paper, not yet published, that analyzed insured losses in Florida between 2001 and 2010, found that the stricter requirements reduced windstorm losses by 72 percent, resulting in $6 in savings for every $1 of additional construction costs.
One homeowner, who retrofitted her Naples, Fla. home in 2005 to meet the new requirements, told the Wall Street Journal, that she is glad she did. Noting that Hurricane Irma left her home relatively unscathed, she said, “I invite anyone who doubts these codes to sit in a pre-code structure in a Category 3 storm or higher,” she said.
IN CASE YOU MISSED THIS
Going against the national trend, Kentucky legislators have banned the use of medical marijuana in that state. A circuit court judge recently upheld the law.
Rising home prices increased homeowners’ equity nationally by 10.6 percent in the second quarter, adding a combined total of $766 billion to that tally since the second quarter of last year.
Incomes are rising, the job market is strengthening, and consumer confidence is high. So why are credit card delinquency rates rising?
We know home prices are beyond the reach of many first-time buyers. But it turns out homes are also over-valued in many markets.
Europe’s human rights court has restricted the authority of companies to monitor employees’ email communications. The decision by the Grand Chamber of the European Court of Justice rolled back an earlier decision, which more closely tracked United States policies giving employers broad authority to monitor workplace communications.
THE WRONG VIEW
Disputes between condominium associations and owners often result from the ambiguous wording of declarations or rules. But it was the board’s reinterpretation of an unambiguous restriction that produced this adverse outcome for a California association. (Lingenbrink v. Del Rayo Estates Homeowners Association.)
The conflict between an owner, George Lingenbrink, and the association’s board centered on a provision in the declaration designed to protect owners’ views. When Lingenbrink purchased his lot in the 21-lot subdivision, the parcel across the street was vacant, leaving his panoramic ocean views unobstructed. Two years later, Douglas Pardee purchased the lot, constructed a home and planted trees around it.
Not surprisingly, those little trees grew taller and after seven years, they had begun to obstruct Lingenbrink’s view. When Lingenbrink complained to the board in 2001, Pardee trimmed the trees and he continued to trim them annually. That seemed to take care of the issue for several years. But in 2009, Lingenbrink complained again that the trees were too high and the board agreed initially that they needed to be trimmed “significantly.” Pardee objected and requested a meeting with the board, after which, the board reconsidered and told Lingenbrink that, having balanced the competing concerns of the two owners, it had determined that Lingenbrink’ s view wasn’t “unreasonably restricted” after all.
Lingenbrink apparently simmered quietly for the next three years as the trees continued to grow, before asking the board in 2012 to enforce the declaration provision protecting his view. When the board refused, Lingenbrink sued. The trial court agreed that his view was obstructed and found that the obstruction reduced his property value by between $100,000 and $800,000. The court also found the declaration wording to be unambiguous and ordered the board to enforce it. The board appealed the decision.
The board’s primary argument was that it had the authority to enforce the rule and the court should defer to its judgment in determining how best to do so. Under that reasoning, the board argued, it could determine not just whether Lingenbrink’s view was obstructed, but whether the obstruction was “unreasonable.”
The Appeals Court agreed with the lower court that while the board could interpret the declaration, it could not “reinterpret” it. The relevant provision states:
“No trees, hedges or other plant materials shall be so located or allowed to reach a size or height which will interfere with the view from any Lot and, in the event such trees, hedges or other plant materials do reach a height which interferes with the view from another Lot, then the Owner thereof shall cause such tree(s), hedge(s) or other plant material[s] to be trimmed or removed as necessary.”
The clear purpose of the provision, the court said, is to “protect the views by requiring the offending trees to be trimmed.” The provision says only that the views must be unimpeded, the court noted; it says nothing to indicate that enforcement is required only if a view is “unreasonably” restricted.
Had the association intended to qualify the restriction, the court noted, “it could easily have drafted the governing documents to provide that the interference with the neighbor’s view be unreasonable” before trimming or removal would be required. But given the “express language” of the declaration, the court said, it is clear that the intention was to ensure that an owner’s landscaping “not interfere – without qualification – with any neighbor’s view.”
“We decline the Association’s invitation to read into [this provision] a requirement that, before vegetation must be ‘trimmed or removed,’ the vegetation must not ‘unreasonably’ interfere with the view from any lot….The language …is not susceptible to such an interpretation,” the court said, “and the authority on which the Association relies… does not suggest otherwise.”
The Appeals Court also rejected the association’s contention that the state condominium statute gives condo associations broad discretion in enforcing rules and restrictions, which the association exercised in this case, and to which the courts should defer. Judicial deference is required in some cases, the court agreed, but it does not apply “to an association board’s improper construction of the governing documents…The trial court properly declined to defer to the Association’s interpretation of the Declaration — as do we on appeal,” the court said, because the interpretation of governing documents involves matters of law, subject to judicial review; it does not involve an association’s “‘exercise [of] discretion within the scope of its authority . . . to select among means for discharging an obligation.’”
The court was similarly unimpressed by the association’s argument that the board’s decision reflected a reasonable effort to weigh the competing interests of the two owners. The declaration “does not authorize the Board to balance one homeowner’s concerns against the other homeowner’s concerns,” the court said. “To the contrary, as a general rule, the enforceability of a use restriction is determined “not by reference to facts that are specific to [one particular] homeowner, but by reference to the common interest development as a whole.”
“I don’t know why we have to apologize for nominal wage growth. At the end of the day it’s real wage growth that allows us to buy our bread.” ― Carl Tannenbaum, chief economist at Northern Trust.