Legal/Legislative Update – September 24, 2015

Published on: September 24, 2015


First time homebuyers today are waiting longer before entering the market and devoting a larger chunk of their income to homeownership when they do. Median income for first-time buyers averages $54,340 today – about the same as in the 1970s, according to an analysis by Zillow economists. But today’s buyers are paying roughly 2.7 times their income for a median priced home that would have taken 1.7 times their income 40 years ago.

sale-2-1232740-1598x1062One obvious result of that disparity – it’s taking buyers longer to amass the down payment they need so they are on average older than their predecessors – 33 vs. 30 – and they are renting for a long longer before buying, six years vs. an average of two-and-a-half years in the 1970s.

But today’s buyers are also stumbling over a financial Catch-22 – rents are rising steadily, absorbing an increasing percentage of their income, and making it harder for them to save for a down payment. The Harvard Joint Center for Housing Studies estimates that half of all renters were spending 30 percent of their income on housing costs in 2013, with many (approximately 11 million of them) spending more than 50 percent of their income on housing.

Svenja Gudell, Zillow’s chief economist, describes the litany of problems first-time buyers face. “We know millennials value home-ownership and want to buy,” she notes in this recent report. “The[ir] next challenge will be figuring out how they can save for a down payment and qualify for a mortgage, especially while the rental market is so unaffordable all over the country. The last hurdle will be finding a home they like amidst very tight inventory, especially among starter homes.”


Will they or won’t they? The Federal Reserve has finally answered the question industry analysts and the financial markets have been asking for most of this year, opting to hold off for a while longer on the rate increase that most analysts have been expecting and that fed officials themselves seem anxious to approve.

federal-reserveThe consensus guess of what the Federal Open Market Committee – the Fed’s policy-setting arm – would do at its September meeting had been seesawing back and forth for weeks, as signs of a strengthening U.S. economy pointed toward an increase, while stock market volatility, triggered largely by China’s weakening economy, and the ham-handed governmental efforts to bolster it, pointed in the opposite direction,

In the end, concerns about the international economic picture prevailed. In a press statement following its meeting, the FOMC said that while labor market conditions and other growth indicators remain favorable, “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

In a subsequent press conference, Fed Chairwoman Janet Yellen added, “In light of the developments that we have seen and the impacts on financial markets, we want to take a little bit more time to evaluate the likely impacts on the United States.” Some analysts think the increase could come as soon as October; others say the Fed isn’t likely to act until next year.
Yellen did not eliminate the prospect of a ‘sooner-rather-than-later’ move, noting, “Every meeting is a live meeting where the committee can make a decision to move to change our target for the federal funds rate. That certainly includes October.”

But the FOMC statement seems to suggest otherwise. “The Committee currently anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”


As the Federal Reserve weighs when (not if) to begin increasing interest rates, housing industry executives are wondering, and many are worrying), about the impact on the housing market. The fear is that higher mortgage rates will curb demand, especially at the lower end of the market. But some economists are predicting that the impact on buyers, sellers and the market as a whole will be modest.

“Housing is in a real sweet spot, moving higher but not dangerously so,” Eric Green, head of U.S. economic research at TD Securities wrote in a recent note to investors. “The housing market will be strengthening over the second half of the year,” he predicts, “and the Fed Raising rates will not change that.”

Mark Fleming, chief economist at First American, shares that view, based on his analysis of underlying demand and supply factors. Strong pent-up demand, an improving labor market, and a growing perception that conditions are favorable for sellers are boosting sales and “closing the gap between market capacity and actual existing-homes sales quickly,” he told Housing Wire.

janet_yellenEqually important, Fleming and other analysts point out, Fed Chairman Janet Yellen has emphasized that the Fed’s rate moves will be measured, gradual, and tied closely to economic conditions. While the housing market will feel the impact, Fleming acknowledged, he’s predicting that higher rates “will have a moderating, but not a devastating impact on market capacity for existing-home sales.”

The July housing reports generally support these optimistic assessments. Recovering from their June swoon, new home sales rebounded, rising 5.4 per cent; sales for the first half of the year are running more than 20 percent above the year-ago pace. Housing starts inched up by only 0.2 percent over the June rate, but the totals were depressed by a steep drop in the volatile multi-family sector. Single-family construction increased by almost 13 percent to the highest level since December of 2007.

Existing home sales posted their third consecutive month-over-month gain, rising 2 percent over the June total, which was revised downward. Although pending sales increased by a scant 0.5 percent compared with June, that still put this index 7.4 percent higher year-over year, producing the eleventh consecutive month of year-over-year increases.

The static pending sales report suggests that the robust sales gains recorded in the past several months may not continue into the fall, “but we see no reason to expect an extended decline,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, told clients in a research note. Given likely interest rate trends and signs that credit conditions are easing, he said, “the existing homes market looks to us to be in pretty good shape.”


Higher interest rates may not short-circuit the housing recovery, but shortages of builders and construction workers could have that effect. The Census Bureau reports that the number of businesses engaged primarily in residential construction declined by half between 2007 and 2012 – casualties of the most severe contraction in the housing industry since the Depression. The 48,557 enterprises reported for 2012 represented the smallest total since 1997, when the Census Bureau first began separating home builders from remodelers in this survey.

Companies that survived the downturn and should be celebrating the housing recovery are instead struggling to find the construction workers they need to keep pace with increasing buyer demand.

“The lack of labor is a national problem for all the builders,” Jay McCanless, a homebuilding analyst with Sterne Agee CRT in Nashville, Tennessee, told Bloomberg News. “The thing we’re seeing and we’re hearing in the field is there’s just not enough qualified people at all,” he added.

More than half the builders responding to a recent National Association of Home Builders (NAHB) survey complained about labor shortages , up from 46 percent last year and 21 percent in 2012. The problem is so severe in some markets that builders are telling buyers who purchase their homes today that it will be a year or more before they are completed.
The industry has added nearly 470,000 jobs since the depths of the recession in 2011, but that still represents nearly 1 million fewer workers than in 2006, at the market’s peak. Builders say they will eventually find and train the workers they need, but in the meantime, industry executives fear that inability to keep up with buyer demand will boost home prices and exacerbate affordability problems that are already surfacing in many markets.

“Lagging new home construction – especially single-family – has kept available inventory far below balanced levels,” Lawrence Yun, chief economist for the National Association of Realtors (NAR) explains in a recent report. “Our research shows that even as the labor market began to strengthen, homebuilding failed to keep up and is now contributing to the stronger price appreciation and eroding affordability currently seen throughout the U.S.”

Noting the growing mismatch between employment growth and new home construction, Yun repeats his oft-cited argument that builders need to shift their focus from multi-family to single-family construction, both to meet current demand and “make up for lost time.” If they don’t, he warns, “severe housing shortages and faster price appreciation will erode affordability and remain a burden for buyers trying to reach the market.”


wildfire-568617_1280As wildfires consume thousands of homes, droughts tighten their grip on many areas, and violent storms become more frequent and more deadly, I t is getting more difficult to assume that natural disasters affect someone else. A study published in The New England Journal of Medicine found that the number of disasters tallied between 200 and 2009 was triple the number recorded between 1980 and 1989, with more than 80 percent of those disasters attributable to “climate-related events – specifically “higher temperatures, extreme precipitation, and more violent wind and water storms.”

A recent report by RealtyTrac quantifies the increased risks homeowners face. This analysis of homes in more than 2,300 counties nationwide found that 43 percent of them – that’s nearly 36 million homes – face high or very high risks of at least one type of natural disaster. The risks are greater in some states than in others. California, Florida and New York topped the list, with 8.4 million, 6.7 million and 2.4 million homes, respectively located in high or very high-risk counties.

The RealtyTrac report also found a correlation between disaster risks and sale prices. Over the last decade, home appreciation rates have been “steadier and larger” in low-risk areas, Daren Blomquist, vice president of RealtyTrac, notes. Sales prices in high- or very-high risk counties declined by an average of 2.5 percent and 6.4 percent, respectively between 2005 and 2015, compared with gains of 6.6 percent and 9.5 percent in low- and very-low risk areas.

However, in the past three years, appreciation rates have been stronger in higher risk counties – a seemingly counter-intuitive result that Blomquist attributes to the inherently higher volatility in markets that are better known and “sexier,” and so likely to attract “more speculative buyers and investors who will jump on the buying bandwagon when the market hits bottom.”


The nation’s home builders are distressed, to say the least, about a recent ruling by the National Labor Relations Board defining many subcontractors as “joint employees.” It’s not clear how the new standard will be applied, but builders are predicting that the impact on the homebuilding industry could be “disruptive” and possibly “devastating.”

Upward mobility – the assumption that anyone can make it in America – has long been a bedrock belief. But a recent study finds that it is largely a myth. The best indicator of where you will end up economically, two Stanford University economists have found, is not how hard you are willing to work on the road to success, but where you begin that trip.

The Consumer Financial Protection Bureau (CFPB) has released its second monthly report on consumer complaints, and mortgage lenders didn’t top the list this time. They came in third behind debt collection agencies (first) followed closely by credit reporting agencies.

Congressional concerns about drones, and the likelihood of legislative action targeting them, are growing.

Remember the Glass-Steagall Act? Sens. Elizabeth Warren (D-MA) and John McCain (R-AZ) remember it fondly. And they are co-sponsoring legislation to resurrect the 1933 statute, which largely prohibited banks from engaging in both banking and investment activities.

Easier credit standards and lower down payments are creating a “massively leveraged” housing market, highly susceptible to future downturns, some economists are warning.

An improving economy and a strengthening labor market should be encouraging more millenials who have been living with their parents to form their own households. But soaring rents and skimpy housing inventories are preventing what should be a predictable (and presumably a desirable) move.



Condo attorneys often caution association boards about the liability risks they incur by assuming obligations that aren’t imposed by the association’s governing documents. A decision by an Illinois Appeals Court underscores that risk, but also suggests that voluntarily undertaking a task does not always create a contractual obligation on which owners can rely.
The dispute in this case (Dietch v. Carl Sandburg Village Home Owners Association) stemmed from injuries the plaintiff (Dietch) suffered when she slipped on an ice-covered public sidewalk behind her building. She claimed that the condo association’s snow removal responsibilities extended to the public sidewalk. She based that claim on a snow removal manual distributed to association employees, directing them to remove snow from the public sidewalk as well as from the common areas of the community.

instruction-manual-pages-1057134-1599x1066Dietch claimed that this manual created an obligation to her and other owners that the association had breached. The association argued that the manual was an internal document that did not create a contact with owners. The trial court agreed, granting summary judgment to the association. Dietch appealed the decision.

The manual clearly included the public sidewalks in the areas association employees were instructed to clear. And association staff acknowledged that they were responding to a city ordinance requiring owners to keep city sidewalks clear of snow and ice. But the Appeals Court held that the association’s legal obligation to clear the sidewalk did not create a contractual obligation to do so.

The court might have viewed this question differently had the association distributed the maintenance manual to owners, and had Dietch argued that she had walked on the sidewalk assuming that the association would keep it clear. But the plaintiff didn’t clear either of those legal hurdles.

“The evidence established that the manual was not part of the declarations and bylaws and it was not distributed to the residents; it was intended for internal use only,” the court noted. Moreover, the court pointed out, “Dietch did not allege her reliance on the snow removal provisions of the manual,” nor did she indicate that she was even aware of those provisions. In fact, the court noted, “it was not until her second amended complaint that she even alleged the existence of the manual.”

Based on those legal shortcomings, the court concluded, “as a matter of law, the manual did not create a duty on the part of the defendants to the plaintiff to remove the snow and ice from the sidewalk where she fell. And in the absence of a duty, the court said, “the plaintiff’s negligence claim against the defendants fails.”


“[Our mission] is not to recover the largest amount of money from the greatest number of corporations, [but rather] “to seek accountability from those who break our laws and victimize our citizens.” ─ Deputy Attorney General Sally Yates, explaining a new Department of Justice policy under which corporate executives will increasingly face personal liability for violations of laws or regulations that occur on their watch.