DECEMBER 2021
TAPERING OFF. The Federal Open Market Committee (FOMC) has begun “tapering” the aggressive bond purchases that have supported the Federal Reserve (Fed) has used to support the economy during the pandemic. Only those who have just emerged from an extended coma would have been surprised by the move, which Fed officials have been telegraphing clearly for months.
But the action, announced in early November, left unanswered the question of when the Fed will begin to increase interest rates – a topic of intensifying debate and increasing concern as inflationary pressures have surfaced.
Until now, Fed Chair Jerome Powell has argued, and many economists have agreed, that the pressures were the product of short-term pandemic-related problems that would dissipate as those problems – primarily supply chain logjams, manufacturing delays and strong consumer demand for lagging supplies – were resolved. But persistent and significant increases in consumer prices and wages have begun to challenge that assumption.
The Consumer Price Index (CPI) increased at an annual rate of 6.2 percent in October, the fifth straight increase and the fastest growth in this key index in three decades. Consumers’ inflation expectations, which can become something of a self-fulfilling prophesy, jumped to 7 percent – the highest rate in 13 years, the Conference Board reported.
Labor costs have also been rising as employers have struggled to add workers needed to keep up with growing demand for goods and services. Wages increased by nearly 5 percent year-over-year in October, according to the Department of Labor DOL), which said third quarter wage growth was the largest on record.
"The rise will add to concerns about inflation becoming more entrenched and/or the growing risk to profits, as businesses are not able to offset higher wage costs via productivity gains," Sarah House, a senior economist at Wells Fargo, told Reuters.
WHAT SEASONAL SLOWDOWN? The seasonal slowdown, which usually begins in the fall, hasn’t materialized. Existing home sales increased by 0.8 percent in October, following a 7 percent jump in September, reversing an August dip and creating what Lawrence Yun, chief economist for the National Association of Realtors, predicted will be “one of the best autumn home-sale seasons in 15 years.” New home sales gained a scant 0.4 percent after an outsized 14 percent month-over month increase in September.
Those sales gains came despite rising home prices (up 19.8 percent year-over-year in the CoreLogic Case-Shiller index), spurred by the continuing gap between buyer demand for homes and shrinking inventories of homes for them to buy.
An increase in housing inventories would also have a moderating impact. The NAR’s Yun thinks inventory levels will being to improve next year , but Jeremy Sicklick, CEO of House Canary doesn’t share his optimism. He thinks the “negative movement’ in inventory levels we’ve seen this year “will likely extend the length of the ongoing shortage of homes well into 2022,” which, he told DS News, “could lead in the spring to more of the rapid price growth that characterized 2021.”
HEALTH RISKS. Inflation could threaten the economic recovery but it isn’t the only concern. The prospect that the Covid-19 pandemic could worsen also poses a near-term risk to the nation’s financial health, the Federal Reserve has warned. “Asset prices may be vulnerable to significant declines should risk appetite fall, progress on containing the virus disappoint, or the recovery stall,” the Fed noted in its semiannual Financial Stability Report. The report was published before the discovery of the new Omnicron variant rattled health experts around the world.
Fed analysts noted several indicators of “resilience” in the financial system, among them: banks are “well-capitalized” household debt levels have fallen to pre-pandemic levels and there is “little evidence of widespread erosion in mortgage underwriting standards or speculative practices.” But rising home prices area concern, the report notes, making home values “particularly sensitive to shocks.”
NATIONAL CYBER-SECURITY While inflation and the pandemic threaten the nation’s economy (see above), cyber-attacks threaten its infrastructure and its way of life. That warning comes from Jen Easterly, director of the Cybersecurity and Infrastructure Security Agency (CISA), who cited ransomware attacks as “a prime example of the vulnerabilities that are emerging as our digital and our physical infrastructure increasingly converge.”
Testifying before the House Homeland Security Committee, Easterly and Charles Inglis, appointed recently to the new position of National Cyber Director, emphasized the need for public-private cooperation to ensure the data security of critical infrastructure. Noting that 85 percent of the nation’s critical infrastructure is privately owned, Inglis said, “Shared defense is not a choice but an imperative.”
CRITICAL SHORTAGE. As homebuyer demand continues to outpace the supply of homes for sale, and scant inventories push home prices higher, analysts are counting on new construction to ease those pressures, and builders have been scrambling to respond. But shortages of materials and workers have impeded their efforts. While supplies remain problematic, the shortage of construction workers has reached “crisis levels,’ a report by the Home Builders Institute has warned.
“The construction industry needs more than 61,000 new hires every month if we are to keep up with both industry growth and the loss of workers who are retiring or leaving the sector],” Ed Brady, CEO of the HBI, said. That adds up to a total of 2.2 million new workers – “a staggering number,” Brady noted.
The National Association of Home Builders has reported that the industry is losing ground in the effort to meet buyer demand. Although 12 million new households were created over the past decade, only 10 million new homes were added to the nation’s housing stock. The supply-demand imbalance will become more “acute” Biden noted, as the pandemic recedes and the economy continues to recover.
Longer term, Brady said, the construction industry has to concentrate on attracting and training more workers. “One of our most important tasks as an industry is to work with parents, educators and students, as early as the middle school years, to demonstrate that young people can have the promise of great jobs and careers in the trades.”
IN CASE YOU MISSED THIS
If a tree falls on a porta-potty – sounds like the beginning of a bad joke, but it’s actually the question posed in a recent Tennessee Supreme Court case. The court held that an employer wasn’t responsible for injuries an employee suffered when taking a bathroom break. “Nature, not his employment” caused the injuries, the court ruled.
Despite opposition from some liberal Democrats, President Bident nominated Federal Reserve chairman Jerome Powell for a second four-year term.
Foreclosure rates are rising “gradually” as federal and state pandemic protections are phased out, Auction.com reports. Mortgage delinquency rates are declining, but remain well above the pre-pandemic levels, according to a recent Freddie Mac report.
The pandemic has triggered an entrepreneurial explosion. More than 9.4 million workers are now self-employed, an increase of 500,000 since the start of the pandemic, the Wall Street Journal reports. The number of workers employed by a company with at least 1000 employees, meanwhile, has declined for the first time in in almost 25 years.
Homes in Black and Latino neighborhoods appraise for less than buyers agree to pay for them more often than homes in majority white neighborhoods, a study by Freddie Mac has found.
LEGAL BRIEF
ORIGINAL INTENT. Is a driving range potentially a “nuisance?” Is a golf course consistent with a ‘residential purpose? Those were the questions a Maryland Appeals Court had to resolve in this dispute between a developer and owners in a small, six-lot subdivision. (Melanie Drive RDC, LLC v. Eppard.)
RDC purchased the golf course adjacent to this community in 2015. At the same time, the company purchased Lot 6 in the subdivision, consisting of approximately 30 acres. As part of its plan to redevelop the golf course, RDC sought a zoning change altering the boundaries of lot six to include a driving range planned as an extension of the golf course. The Zoning Board approved the plan, but said it could not rule on how any covenants in the community association’s declaration plans for the lot.
Two years later, owners amended the declaration to prohibit commercial uses on any lots. The amendment specifically prohibited converting the lot for use as a golf course or for any use related to a golf course.
When RDC proceeded with its development plan, filing a plat incorporating 13 acres of Lot 6 within the golf course, owners sued. Lower courts upheld the zoning approval, ruling that the declaration allowed RDC to adjust the boundary lines of Lot 6,. But the courts also agreed that the declaration as amended prohibited the construction of a driving range on the lot. Both sides appealed. RDC contended that the amendment wasn’t enforceable, because it imposed a restriction (barring the golf course) that wasn’t included in the original declaration. The owners, for their part, said the court erred by permitting RDC to adjust the Lot 6 boundary lines.
Disposing of the boundary question first – and easily – the Appeals Court said the amendment permitted the revision of existing lot lines. While the declaration clearly barred subdivision of the lot, the court agreed, it also stated that “this restriction shall not be construed to prohibit the adjustment or realignment of boundary lines between lots as long as such adjustment or realignment shall not create4 an additional lot.” That language is clear, the court said, noting: “There is nothing in the record to suggest that RDC created a new lot” from the realignment of the boundary lines.
Turning to the broader question, whether the prohibition of the driving range was consistent with the original declaration, the court focused on both the wording and the intent of that document. RDC contended that because the declaration did not specifically prohibit non-residential uses, those uses should be allowed. And even if non-residential uses were barred, RDC argued, the golf course had operated “continuously and contiguously” next to the community and was not inconsistent with its residential character.
The declaration did not specifically bar nonresidential uses, the court agreed, but the preamble stated that the covenants were intended to “preserve the values and amenities” of the community, which the court said, reflected a desire to maintain the community’s residential character.
Considering the intent of the drafters the appeals court said, “it is plain from the four corners of the original declaration that the purpose of the instrument was to maintain the residential character of a small subdivision comprised of single-family homes.” The provision barring any “noxious or offensive trade or activity…which may become an annoyance or nuisance to the neighborhood or other owners” underscores that intent, the court said. While that language “may be capacious,” the court agreed, “it is not ambiguous in context of the entire covenant and this present dispute….It illustrates the intention of the original declaration to preserve the residential character of the subdivision by broadly restricting activities that would disturb [property owners in the community].
The amendment specifically prohibiting development of a golf course or golf-course-related uses on Lot 6 did not add a new restriction, the court found; it simply interpreted the original intent reflected in the declaration. Within that context, the court concluded, defining a golf course as one of the “offensive, noxious, annoying, or nuisance” activities prohibited by the declaration was reasonable.
The lower courts concluded correctly that Swan Point’s “uniform plan of development” intended for it to be a residential community, the appeals court agreed, and consistent with that intent, “we conclude that the Original Declaration unambiguously imposed restrictions on certain activities, both residential and commercial, to preserve the residential character and uniform plan of development of a small, single-family community.”
WORTH QUOTING: “How you don’t discriminate, how you deal with vaccination and testing – those are all difficult things for employers to work through.” ─ Adrian Cox, chief executive of Beazley (an insurance company), discussing Covid-related employment liability risks facing employers as workers return to their offices.