BOOM, BUBBLE, BUST?
BOOM, BUBBLE, BUST? Is the housing boom creating a dangerous bubble? In every boom-and-bust real estate cycle – and there have been a lot of them – experts have suggested and consumers have believed that the boom they were seeing, unlike all the others, would not be followed by a decline. And every boom-bust cycle in the past has proven them wrong.
Analysts are making the same ‘this one is different’ argument about the current boom, which has persisted despite pandemic forces that have dragged other sectors of the economy down. They see the same frenzied buying activity that preceded previous market busts, but they also see critical differences that, they contend, will prevent a market collapse like the one that produced the Great Recession 15 years ago. They cite two key differences:
· Underwriting standards are stricter, reflecting a combination of regulatory requirements and the caution of lenders who were burned badly by the last downturn and aren’t anxious to repeat that experience. “A lot of the people who are buying today ... are among the most creditworthy in the history of mortgage lending,” Reggie Edwards, an economist at Redfin, told The Hill.
· There is no hint of the speculative building and speculative investing that produced an over-supply of homes, glutting the market and triggering a downward price spiral when the buying frenzy stopped. The problem in the market today isn’t a glut of homes but a dearth of them. Competition for homes among people who can afford to buy them is pushing prices up – a market-driven, reality-based supply-demand dynamic that, analysts say, will support continued growth.
PRICE PROBLEMS. While most analysts agree that market fundamentals are driving the housing boom (see above item), many also fear that rising prices – a product of the boom – could undermine it. Recent statistics suggest the erosion they fear may have begun. Although nearly half of the homes listed for sale continue to sell above their asking price and at a record pace (17 days on average), according to Redfin, existing home sales in April declined for the third consecutive month. pending sales tracked by the National Association of Realtors. The consensus view continues to hold that the decline reflects a limited supply of homes for sale (inventories have reached record lows) rather than an ebb in buyer demand. But Daryl Fairweather, Redfin’s chief economist, suggests that shrinking demand may be a factor, too.
“Make no mistake, the housing market is still very hot and will remain hot for the rest of the year,” he told Housing Wire. “But there may be signs that some buyers would rather spend their money on restaurants, vacations, and other things they have held back on for the past year, instead of on housing now that the threat of the pandemic is dissipating in America.”
EVICTION MORATORIUM. Even as the pandemic seems to be receding, the battle over the nationwide eviction moratorium imposed to protect renters during the crisis continues. A federal district judge recently vacated the eviction ban the Centers for Disease Control(CDC) had imposed last September (extended until June of this year), finding that the action exceeded the agency’s authority. Other courts have issued conflicting decisions, with slightly more than half rejecting the ban but a large number (including a Massachusetts court) supporting it. This recent decision, by U.S. District Court Judge Dabney Friedrich, is the first to apply nationwide; other decisions have been limited to the parties involved in the actions.
“It is the role of the political branches, and not the courts, to assess the merits of policy measures designed to combat the spread of disease, even during a global pandemic,” Friedrich wrote in his decision. “The question for the Court is a narrow one: Does the Public Health Service Act grant the CDC the legal authority to impose a nationwide eviction moratorium? It does not.”
Health and Human Services Secretary Xavier Becerra said the Department of Justice is going to appeal the decision. "I believe the president will want to try to correct this, or certainly continue to fight to make sure we don't see Americans dispossessed and out on the street, not at this time,” he told reporters. “We're making too much success on Covid to go backwards, so I know this administration will be looking for ways to try to make sure we keep people in their homes.”
INTEREST RATE FEARS. Raise your hands if you’re concerned about rising interest rates – or think you should be? That instruction would no doubt produce a large number of fingers in any gathering of real estate professionals and no small number of them from economists, who are convinced that continuing robust pandemic stimulus initiatives on top of a rapidly strengthening economy will soon trigger a damaging inflationary reaction. However, Federal Reserve officials are emphasizing that while they will boost interest rates, if necessary to douse inflationary fires, they don’t think Fed action will be needed, if at all, any time soon. In an interview with MSNBC, Fed Vice Chairman Richard Clarida said he thinks the Fed should maintain its current easy-money policy in place for the foreseeable future. Although the economy is gaining strength, he noted, “We’re still a long way from out [employment and inflation] goals. As we go into next year and beyond, if there are unforeseen, persistent upward pressures on prices that would move inflation to a level inconsistent with our mandate, we would use our tools to bring it down,” he added “[But] In our new [policy] framework, we want to see actual progress and not just forecast progress,” before responding to inflationary concerns.
Treasury Secretary Janet Yellen seemed to veer somewhat from that Fed consensus view, when she acknowledged in a policy forum, "It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat.” But when the markets shivered in response to her comments, she backtracked quickly, telling the Wall Street Journal later the same day, that if inflationary pressures surfaced, they would probably be short-lived. "I don't think there's going to be an inflationary problem,” she stated. “But if there is, the Fed will be counted on to address [it]."
EMPLOYMENT SHOCK. The nation seemed to be on something of an employment roll, with job creation numbers improving steadily month after month – until April. Economists had expected a slight dip compared with the gangbuster statistics in March, but they didn’t anticipate the anemic 266,000 jobs the Labor Department reported – about one-quarter of the one million the consensus forecast had projected.
The report triggered a flood of explanations, some blaming the dearth of child care options for workers with young children at home (many still unable to go to schools operating under COVID protocols); others blamed generous federal employment assistance, paying some workers more to stay home than they could earn by returning to old jobs or accepting new ones. The most likely explanation: A variety of economic and social forces are at play, affecting different workers in different ways.
“What is causing these supply constraints in the job market? Is it unemployment benefits that are too high? Schools that are still closed for full-time in-person instruction? A skills mismatch between available jobs and available workers? A lack of business startups?” Nationwide Chief Economist David Berson asked in an interview wit The Hill. “All of these probably are playing a role,” he concluded.
While the April job report was jarring and disappointing, it was not necessarily indicative of a trend, Treasury Secretary Janet Yellen cautioned. “It may be bumpy from month to month for a variety of factors,” she said in a recent speech, ‘[but] one should never take one month’s data as an underlying trend.”
The weak April employment report doesn’t indicate a serious setback in the nation’s recovery, Robert Frick, chief economist for Navy Federal Credit Union, agreed, but it does suggest that the recovery will be slower and “rockier” than expected. “Given the fundamentals, with so much money that’s been banked and all the good things that have come so far — strength in hiring, manufacturing, and so on — I think things are generally headed in a good direction,” he told The Hill, “but there’s going to be friction coming.”
IN CASE YOU MISSED THIS
Two indicators of today’s sizzling housing market: More real estate agents are entering the field and inventory levels are shrinking. As a result: The number of agents prepared to sell homes now exceeds the number of homes available for sale.
Here’s another, lesser known, economic indicator: Sales of deodorants, perfume and sunscreen are soaring, suggesting that as vaccination rates rise and COVID restrictions ease, Americans are hibernating less and socializing more. Looking at recent sales of personal products, Walmart’s chief finance officer, Brett Briggs, told the Wall Street Journal, “You can tell that the masks are coming off.”
Just how crazy is the housing market? A desperate Maryland homebuyer included in her offer for a home a promise to name her first-born child after the seller. “She lost,” Redfin economist Glenn Kelman reported.
Sixteen states considered legislation last year requiring insurers to provide business interruption coverage for pandemic-related losses. Lawmakers in at least a dozen states have filed measures this year. Although none have passed, “the interest is clearly not fading,” Stef Zielezienski, executive vice president of the APCIA told the Insurance Journal.
More than 60 percent of recent buyers surveyed by Redfin bid on the homes they purchased without seeing them in person.
Bankruptcy filings are beginning to rise, pushing rates close to pre-pandemic levels.
LEGAL BRIEF
BOARD VS. BOARD. Condominium board members don’t always agree on everything; sometimes they don’t agree on much of anything. But what happens when they can’t even agree on who is legally serving on the board? That was the question a Pennsylvania Appeals Court had to answer in this dispute between two groups of board members, each claiming that their group was duly elected and “legitimate” and that the other was not. (Pocono Mountain Lake Forest Community Association, Inc. v. Swift).
Even compared with often extraordinary board disputes, this one was a doozy. The then current board (the “old board”) was presiding over an annual meeting of the Pocono Mountain Lake Forest Community Association in November of 2020. Saying they felt threatened by some attendees, three board members (Floss, Mall and Evcimen) left the meeting and locked themselves in another room in the association clubhouse. In the words of the trial court transcript, “chaos ensued” and the police were called to retore order.
With the three board members who had left sill absent, the meeting continued and the owners present allegedly (allegedly, because the vote was challenged for lack of a quorum) elected five new board members (Swift, Winkler, Griger, White and Gardner), who began operating as what they described as an “interim board.” Just to add to the confusion, Floss, who serving as president of the old board, had submitted a letter of resignation two years before. Although he insisted the old board had never accepted the resignation, there was some dispute about that and a question about whether he had been serving legally for the previous two years.)
The old board and the interim board began to battle over the right to govern the association. The old board froze existing association bank accounts to prevent the interim board from accessing them. Both boards adopted annual budgets and sent dues bills to owners. Understandably confused by the tug-of-war, some owners paid one board, some paid the other and some paid neither.
Members of the old board sought a temporary injunction, asking a court to “restore the status quo” by recognizing their board as legitimate and prohibiting the interim board from interfering in association affairs, pending a final court ruling on the dispute.
Confronted with this mess, the trial judge found that neither board had proved itself to be legitimately elected. “The animosity of the parties is so severe, [there is] no likelihood [they] would be able to rationally resolve [the dispute over the board’s composition] without the court’s intervention,” the trial judge ruled. As a result, he declared that all five board seats were vacant and prohibited both boards from billing owners, pending a new election to be held under the court’s supervision.
The old board appealed, arguing that the trial court had abused its discretion by failing to issue the temporary injunction the group had sought and failing to restore the “status quo” as it existed before the interim board purported to replace the old one.
In its review, the Appeals Court noted that the only question before it was “whether there were any apparently reasonable grounds” for the trial court’s decision – the standard for determining whether to uphold or overturn the denial or granting of an injunction. “Apparently reasonable grounds” for denying an injunction exist, the court noted, when a trial court finds that plaintiffs have failed to meet at least one of the prerequisites for granting it.
“Here, the record is replete with conflicting evidence,” the Appeals Court noted. “As a result, the trial court, understandably, did not find that the [old board] had met its burden, as the party seeking a preliminary injunction”. The board’s argument for granting the injunction assumed that its members had been duly elected, the Appeals Court noted. But the trial court determined, (reasonably, the Appeals Court agreed) that neither of the two boards had proven itself to be “the legitimate, duly elected board.”
“Because the narrow issue before this Court is limited to whether the trial court had ‘apparently reasonable grounds’ for its actions, and our review of the record reveals there were,” the Appeals Court concluded, “we affirm the trial court's Order denying the preliminary injunction.”
WORTH QUOTING
“It’s a historic amount of money, but we have a historic-size problem, and even this amount of money is not going to solve the problem.” ─David Dworkin, president of the National Housing Conference., supporting President Biden’s proposed infrastructure investment plan.
Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island, and New Hampshire.