LEGAL/LEGISLATIVE UPDATE – SEPTEMBER 15, 2016

Published on: September 15, 2016

COOLING OFF

for-rent-148891_1280The overheated rental market is beginning to cool off. The annual increase in apartment rents fell to 3.1 percent in July – the lowest level in two years, according to Axiometrics, which tracks rental trends. Rents actually gave ground in some of the hottest markets, the company found.

“Lower rates of job growth and an abundance of new supply have been causing decreased apartment performance in [major] metros, Jay Denton, senior vice president of analytics for Axiometrics, said in a press statement. While he expects the construction pace to slow in most areas next year, he predicts that “relief from new deliveries will not truly be felt until 2018.”

Relief may actually be a little further out. Fannie Mae reports an “exceptional” volume of new multifamily construction under way – with 556,000 units in the pipeline in June, up from 512,000 in January. That total includes 72,000 condo units compared with 69,000 under construction 6 months ago.

Multifamily production overall was up nearly 5 percent year-over-year on a seasonally adjusted basis in June, according to the Fannie Mae report, compared with a scant 0.5 percent increase in the single-family sector.

good-1122969_1920GOOD SIGNS – BAD OMEN

There’s an old rule-of-thumb for real estate investment: When the dentists and doctors finally get into the market, it’s time for everyone else to get out. A variation on that mostly (though not entirely) humorous observation applies to housing analysts: When they agree the market is healthy, it is almost certainly going to stumble, or fall. If that theory is accurate, it may be time to brace for a setback, because there seems to be an emerging consensus that the housing market is stabilizing. Consider just a few examples from a rather long list:

  • “It has been an excruciatingly long time coming, but the housing sector in the United States is finally getting healthy.” ─ Housing Wire
  • “Positives Pushing Housing Market Near Potential.” ― Headline in DS News.
  • Consumer confidence in the housing market has hit an all-time high. ─ Fannie Mae’s National Housing Survey for July.

These increasingly optimistic assessments of housing market conditions, while widely shared, don’t reflect a unanimous view; nor are they entirely supported by market data.
Although new home sales and construction both increased sharply in July, building permits, an indicator of future activity, declined. Existing home sales likewise seemed to hit something of a wall, declining below the year-ago level for only the second time in the past 21 months, as rising prices and shrinking inventories took huge bites out of resale activity.
“There’s a logjam,” Sam Khater, deputy chief economist at CoreLogic, agreed. “You’ve got first-time buyers who can’t buy, trade-up buyers who can’t move up, and it’s grinding to a halt,” he told reporters.

HOMEOWNERSHIP CONCERNS

As some analysts question the consensus that the housing market is stabilizing (see above), others are finding the continuing decline in homeownership also cause for growing concern. The current rate (62.9 percent) is the lowest it’s been since 1965, and some studies predict that it could sink to 58 percent or even lower, by 2050.

apartments-924786_1920In 2004, when the overall homeownership rate peaked just shy of 70 percent for all age groups, nearly half of 25-34-year-olds owned their homes; today, just 39 percent of them do.

But some analysts see the ownership dip as a positive indicator, resulting not from a decline in the desirability of home ownership but from an increase in the number of young adults who, after being held back by the recession, have finally established renter households.

“The homeownership rate is so low because there are so many more renters – not because we have lost millions of homeowners,” Mark Fleming, chief economist for First American Title Company, notes in a recent commentary.

The renter population is growing, he says, because as millenials, “the biggest demographic group in American history,” complete their education and find jobs, “they are naturally doing what so many generations before them have done – renting a place to live.” They’re just doing it a little later than previous generations.

Will they rent forever? “Doubtful,” Fleming says. These young adults may be delaying their move to ownership, but they haven’t abandoned the expectation that they will buy homes eventually. The ownership rate may continue to decline for a while, Fleming agrees, “but make no mistake – once millennial renters decide to become homeowners it will be a housing boom of a different kind.”

A LESS SACRED COW

income-tax-491626_1920There are growing signs that the most sacred of sacred cows — the mortgage interest deduction – may be fair game for lawmakers trying to reform the tax code. The latest indicator that the deduction is becoming less bullet-proof: David Stevens, CEO of the Mortgage Bankers Association (MBA), said the association, traditionally a staunch defender of the deduction, “is not religiously wed” to it. Stevens made it clear, however, that the MBA isn’t willing to relinquish the deduction without other concessions to lessen the impact on middle-income homebuyers. It is that group, Stevens said, that benefits most from the deduction, and would be most harmed by eliminating it.

“Entry level homebuyers typically don’t itemize,” he told CNBC, “and wealthy borrowers won’t really care” about it, he told CNBC. But middle-income buyers rely on it to offset their homeownership costs.

PLAYING THE ODDS

Market watchers, who had been betting that the Fed would increase interest rates this month, reversed course after a Fed Governor said current conditions may argue for “prudence.” The odds of a near-term increase fell from 28 percent to 22 percent after Fed Governor Lael Brainard made those comments in a speech to business executives.

Economic indicators, though generally positive, have been mixed, and the Fed’s signals about its intentions have been equally so. Although second quarter GDP was more sluggish than originally estimated, consumer spending was revised upward. Based partly on that improvement and a surprising increase in industrial output, Fed economists have revised their third quarter growth estimate from 2.43 percent to almost 3 percent.

Fed officials pondering the pros and cons of a rate hike, will see strong arguments on both sides. “It’s a close call,” the Wall Street Journal noted recently. But with no sign of inflationary pressures and “no clear consensus” on whether to act or not, the paper reports, “senior officials feel little sense of urgency about moving and an inclination toward delay.”

IN CASE YOU MISSED THIS

Tighter mortgage underwriting standards are keeping many minorities out of the housing market. African-American borrowers got only 5 percent of the mortgages originated in 2014, compared with 7 percent a decade ago.

Homeowners are staying put longer, which means they are trading up less frequently. A CoreLogic report blames baby boomers in part, for being more inclined to age-in-place in communities in which they have roots.

An interest rate hike – whenever the Fed gets around to implementing it – probably won’t have much impact on mortgage rates, some analysts believe.

After flat-lining for years, median family incomes increased by 5.2 percent last year – the largest annual increase the Census Bureau has recorded since it began tracking these statistics in 1960.

The Ninth Circuit Court of Appeals has upheld the National Labor Relations Board’s (NLRB’S) position that federal law bars provisions in arbitration agreements requiring employees to waive their right to initiate class actions. The Seventh Circuit reached the same conclusion in another case earlier this year.

LEGAL BRIEFS

WINNERS AND LOSERS

It isn’t always easy to identify the winners and losers in legal battles. This case (Almanor Lakeside Villas Owners Association v. Carson) is an example. Although the trial court judge rejected most of the fines a condo association had sought to impose on an owner, he awarded the association more than $100,000 in attorneys’ fees anyway and a California Appeals Court upheld the decision, concluding that while the association may have lost most of the battles in this conflict, it had ultimately won the war.

The conflict began in 2009, when the board of the Almanor Lakeside Villas Owners Association approved rules enforcing covenant provisions restricting commercial uses of property.

The rules prohibited short-term rentals (for fewer than 30 days) and required commercial owners to give the board the names, addresses and lease terms of all tenants.

keys-1317389_1920The board subsequently amended the rules to exempt commercial lots from the minimum lease term, but retained language requiring owners to send the board a copy of the rental agreement at least seven days before the rental period began. The defendants, James and Kimberly Carson, said the rental restriction did not apply to the two commercial lots they had purchased before the rules were adopted, operated continuously as a hunting, fishing and vacation lodge, and continued to operate in that manner after the rules took effect.

The board revised the rules in 2012 to exempt commercial properties from the restriction on short-term rentals, but fined the Carsons for violating the restriction for the three years before that, for failing to provide the advance notice of rental terms the rules required, and for a variety of other alleged violations. When the Carsons refused to pay the more than $54,000 in accumulated fines, fees and interest, the association sued.

Who Prevailed?

Finding most of the fines Almanor had levied to be unreasonable, the trial court ordered the Carsons to pay only $6,600 of the total. But the court held that Almanor was, nonetheless, the “prevailing party,” because its authority to levy the fines had been upheld. And as the prevailing party, the court said, the association was entitled to collect attorneys’ fees and court costs from the defendants – a conclusion the Carsons appealed.

California courts use a “pragmatic” test to identify the prevailing party, the Appeals Court noted: “Whether a party prevailed on a practical level by achieving its main litigation objectives.” Both parties in this case claimed to meet that test.

The Carsons said the court had affirmed its central arguments: That the fines Almanor imposed were unreasonable, unduly severe and unfairly burdened their legitimate commercial use of the properties they owned. Almanor countered that by allowing some of the fines, the court had affirmed the association’s right to enforce reasonable restrictions on the properties. The Appeals Court sided with Almanor.

“It is true that the Carsons prevailed to the extent of the fines that the court disallowed,” the court acknowledged. “That partial success substantially lowered the Carsons’ liability for damages” and supported their position that the association’s covenants and rules “could not impose an unreasonable burden on their properties.” But in upholding some of the fines the association had imposed, the trial court also affirmed that the association had the authority to impose reasonable restrictions on Carsons’ properties, notwithstanding their zoning for commercial use. And that broader ruling, the Appeals Court said, “echoed Almanor’s stated objective”: To counter the Carsons’ contention that because their properties were commercially zoned, they were not bound by the association’s covenants and rules.

The fact that the trial court rejected most of the fines Almanor had imposed did not make the Carsons the prevailing party, as they had contended, the court said. The [actual] damages award does not negate the broader, practical effect of the court’s ruling, which on the one hand narrowed the universe of restrictions that Almanor could impose on the properties, but on the other hand cemented [its] authority to promulgate and enforce rules pursuant to the CC&Rs so long as not unreasonable….Taken together and viewed in relation to the parties’ objectives as reflected in the pleadings and trial record,” the Appeals Court concluded, “these outcomes were adequate to support the trial court’s ruling” that Almanor was the prevailing party.

IN QUOTES:

“We went so many years without building there are in many places in the country a shortage of housing…I think that overshadows everything else in terms of normalcy.” ─ Richard Green, Lusk Chair in Real Estate, University of Southern California.

 

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