LEGAL/LEGISLATIVE ALERT FOR JANUARY, 2020
EMPLOYMENT RAVES
Analysts reached for superlatives – “blowout” and “blockbuster” among them ─ to describe November’s surprisingly strong employment report. Employers added 266,000 workers to their payrolls, blowing well past the 187,000 economists had predicted. October’s anemic 128,000 gain was revised upward slightly, to 156,000, and the unemployment rate remained unchanged at 3.5 percent. Average hourly earnings increased by 7 cents – a 3.1 percent year-over-year gain.The strong employment report replaced suspicions that a recession was becoming more likely with growing confidence that the economic recovery, now in its 11th year, still has room to run. Responding in part to the robust job gains, the Federal Reserve decided to leave interest rates unchanged at its final meeting of 2019, concluding that the three rate cuts the Fed approved this year have stabilized the economy and kept the recovery on track.Emphasizing that point, the Federal Open Market Committee, the Fed’s policy-making arm, said in a statement following its meeting: “The committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2% objective.”
Most analysts are now predicting that the Fed will leave rates unchanged throughout most of next year. No FOMC members appear to think additional rate cuts will be in order, but 4 of the 17 members of the committee are anticipating the need to raise rates to prevent the economy from overheating. Fed Chairman Jerome Powell is not among them. Speaking at a press conference following the FOMC meeting, Powell said that while the Fed will respond, if necessary, to combat inflationary pressures, “in order to move rates up, I would want to see inflation that’s persistent and that’s significant. We haven’t tried to turn it into some sort of official forward guidance,” he added. “It [just] happens to be my view that that’s what it would take to [warrant moving] interest rates up.”
FORECASTING SEASON
‘Tis the season for economic forecasts, and we’ve collected a sampling of what analysts are predicting for the economy and the housing industry. You might want to take them with a grain (or several grains) of salt, bearing in mind this caution from an anonymous source: “Forecasting is the art of saying what will happen and then explaining why it didn’t.”
ECONOMY: SOLID, UNCERTAIN, OR HEADING DOWN
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- Douglas Duncan, chief economist for Fannie Mae. “Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth,”
- Justin Lahart, Wall Street Journal. “ If heightened trade worries lead [the Fed] to lower rates more, investors might become legitimately concerned that it is running out of ammunition. Throw in uncertainties surrounding the presidential election hitting in the latter part of the year, and 2020 could be anything but easy.”
- Diane Swonk, chief economist at Grant Thornton. Economic growth will slow to an average of 16 percent and employment gains will falter, with a better-than-even chance of a recession beginning next year.
- Robert Kaplan, president of the Dallas Federal Reserve Bank. “The consumer is in pretty good shape. That’s a great underpinning to the economy and even though growth is sluggish, I don’t expect a recession in 2020.”
- Bloomberg Economics. “The odds may favor another year of economic growth [as the expansion enters its 11th year], but no one’s betting the farm on it.”
HOUSING: STRONG DEMAND – OR MAYBE GRIDLOCK
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- Odeta Jushi, Deputy Chief Economist for First American. “Today’s numbers point to a more competitive housing market next year… [as] surging house-buying power fuels greater potential demand in a supply-constrained market….There's no evidence that these dynamics will change in 2020.”
- Daryl Fairweather, chief economist for Redfin. Low mortgage rates will continue to fuel demand, leading to the renewal of bidding wars in a supply-constrained market. “Buyers will have fewer homes to choose from than they have in five years. But the return of bidding wars is good news for sellers who may have been holding out this year as the market stabilized.”
- George Ratiu, senior economist at REALTOR.COM. U.S. home sales will decline by close to 2 percent next year as Baby Boomers “gridlock” the housing market by remaining in place, keeping a needed supply of homes off the market….2020 will prove to be the most challenging year for buyers, not because of what they can afford but rather what they can find.”
- Zillow economists. The Baby Boomer gridlock won’t last for long. Zillow predicts a “silver tsunami” over the next two decades, as aging boomers, who own about one-third of the nation’s homes, begin to sell them.
- Sam Khater, chief economist for Freddie Mac. The housing market “remains on solid ground with housing starts, building permits, existing home sales, and new home sales all outperforming the broader economy….
- National Association of Realtors. Builders will ramp up construction, easing the inventory shortage that is crimping sales – especially in the first-time buyer segment of the market. housing starts likely will hit the 1 million mark in 2020, the highest since 2007.
- Fannie Mae. “Hopes for an acceleration of housing supply growth will be disappointed.”
PASS THE SALT
The House of Representatives has approved legislation that would eliminate the $10,000 cap on federal deductions allowed for state and local taxes. Enacted as part of the massive 2017 tax reform bill backed by Republications, the cap hit residents of high-housing-cost, high-income states hardest – primarily “blue” states that tend to support Democrats and did not vote for President Trump. Elected officials in some of those states complained that the cap curbed housing demand and spurred many of their older residents to move to states where housing costs are lower and the property tax cap less problematic.
“Republicans gave away almost $2 trillion in tax cuts to corporations and the wealthy,” Rep. Norma Torres (D-CA) said during the floor debate preceding the party-line vote to approve the SALT bill. “They paid for this tax scam on the backs of hardworking American families.”Critics countered that SALT deductions primarily benefit higher income residents. “Though the majority likes to claim that Republicans only want to cut taxes for the rich, it’s ironic that the majority is now pushing a special tax break that literally only benefits the rich.” Rep. Tom Cole (R-OK), complained.The House measure doubles the SALT cap to $20,000 per household for 2019 and eliminates it after that, recouping the lost revenue by returning the top income tax rate, which the tax reform bill lowered to 37 percent, to its former level - 39.7 percent.The legislation now goes to the Senate, which isn’t expected to consider the measure until after lawmakers complete President Trump’s impeachment trial, the timing of which is uncertain.
PLAY IT AGAIN
More lenders are responding to housing affordability pressures by reducing credit standards to enable more buyers to qualify for loans, Moody’s Investors Services reports. “Reduced home-purchase affordability will continue to drive lenders to loosen credit standards to maintain volumes,” Moody’s analyst Donald Lee, the report’s author, notes. “With shrinking home affordability, the underwriting quality for non-prime mortgages will weaken as increased lender competition leads to lower standards,” he predicts. Lee doesn’t anticipate a return of the “liar loans” and “no-documentation” mortgages that contributed to the housing market collapse, triggering the Great Recession a decade ago. But he does expect competition to lead lenders to originate “a higher percentage of limited or alternative documentation loans” to non-prime borrowers that will be packaged and sold to investors. To anyone with even a faint memory of what happened a decade ago, that sounds awfully familiar. We may not be in the process of repeating history, but it doesn’t seem we’ve learned much form it either.
IN CASE YOU MISSED THIS
The Bank of England is implementing a climate change stress test for insurers, to gauge their ability to manage extreme weather events.Consumers appear to be living within their means. That is good news for consumers, but it could threaten economic growth, which depends a lot on consumer spending.The National Association of Realtors has identified the 10 housing markets the trade group’s members expect to grow fastest over the next five years, and Boston isn’t on it. In fact, no cities in New England made the cut.Home flipping is not nearly as profitable as it was a couple of years ago, according to ATTOM Data Solutions. The research firm blames broader market forces “that are making it harder and harder for investors to complete the kinds of deals they were getting as recently as last year.”Fannie Mae’s Home Purchase Sentiment Index, which had been trending steadily downward, has rebounded sharply. The November reading (91.5) was 5.3 points higher year-over-year, nearing the all-time high (93.8) it reached in August of 2019.
LEGAL BRIEF
A BAD SIGN
Courts in many jurisdictions have broadly defined the obligations of community associations to ensure the safety of owners and visitors and have imposed extensive liability on associations that fall short. But sometimes the courts draw a line in their favor, as the Maryland Appeals Court did in this case (Macias v. Summit Management, Inc.).
The plaintiff (Damien Macias) sued Waters House Condominium and its management company (Summit) when his eight-year-old son (also named Damien) fell from a five-foot-tall stone fence on whicih Damien and his younger brother had climbed while visiting their grandparents, who lived in the condominium community. A flat stone sign embedded in the wall came loose when Damien grabbed it and fell on him, resulting in serious injuries. Macias alleged in his suit that the association had negligently failed to ensure that the sign was safe. The key question addressed by the circuit court was the standard of care the association owed young Damien.The plaintiff (Macias) said Damien was a visitor, for whom the association was required to use “reasonable care” to ensure his safety; the association contended that young Damien was a trespasser to whom the association had no obligation, because there was no express or implied invitation to climb the wall.The trial court declined to classify Damien as a trespasser, but found that he was a “bare licensee” (because he climbed the wall without permission) and granted summary judgment to the association for that reason. The court also found that even if Damien qualified as “a social guest,” entitled to a higher level of care, the association could not be held liable for his injuries because it had no knowledge nor reason to know that the sign was unsafe. Macias appealed the decision.
Trespasser or Invitee
The Appeals court analyzed at length the key question raised on appeal – whether the lower court erred in classifying Damien as a “bare licensee.” Because the Maryland courts had not previously determined the standard of care a condominium association owes owners and guests, the Appeals Court decided that the “landlord-tenant paradigm” was “most fitting.”
Under that framework, trespassers occupy the lowest rung – entitled to expect only that the owner will “abstain from willful or wanton misconduct or entrapment.” “Social guests” are a rung above that, requiring that hosts “exercise reasonable care to make the premises safe [for guests]” and warn them of “known dangerous conditions” that guests cannot reasonably discover.”Invitees are on the top rung in this hierarchy, the court explained, entitled to expect that a host “will make far greater preparation [to secure their safety] than a householder will make for his social or even his business visitors.” Property owners, the Appeals Court explained, are required “to use reasonable and ordinary care to keep the premises safe for [invitees] and to protect [them] from injury caused by an unreasonable risk which the invitee, by exercising ordinary care [for their own safety] will not discover.”The court concluded that condominium owners and their guests “occupy the legal status of invitee when they are in the common areas of the complex over which the condominium association maintains control.”
Change in Status?
Anticipating that interpretation, the association argued on appeal that, as a guest of his grandparents, Damien may have been an invitee when playing in the common areas. But his status changed to that of a trespasser or bare licensee when he climbed on the sign, which he had not been invited to do.“Nothing about the [community] sign or the wall … implied or otherwise induced the general public or [Damien] in particular, into thinking that the [community] sign was something upon which children were allowed to climb, hang and/or play,” the association argued.Macias countered that there was, in fact, an “implied invitation” to climb on the sign, because Damien frequently played on the grounds near the sign, the sign blended in with the grounds, there was no warning against sitting or climbing on it, and it was reasonable for the association to assume that children might do just that.On this point, the Appeals Court agreed with Macias. “There is no dispute in the record that the community sign existed within the common areas of the condominium complex, and there is no evidence to suggest that there were any hard limits on which areas children could or could not play in,” the court reasoned. There was no “demarcation” separating the sign from areas in which Damien regularly played, the court pointed out, and there was ample evidence that Damien and his brother had climbed on the sign in the past.Although invitee status applies only if individuals are in areas “where they are permitted or expected to be,” the court agreed, there was no evidence that invitees in the common areas of the community “were not permitted on or near the community sign. On balance, we think it is reasonable and conceivable that a child may climb a stone sign that blends naturally into the grounds upon which the child is accustomed to playing,” the court added. “We conclude, therefore, that the mere act of climbing a climbable object, located in an area of the complex in which he was allowed to be, did not suddenly change Damien’s legal status from an invitee to a trespasser.”
The court emphasized, however, that it was not implying an unlimited obligation on the part of the association “to put up signs and barriers on every inch of their property to avoid liability,” as the association had contended would be the effect of a ruling against it. “We reject both parties’ arguments on the issue of invitation,” the court asserted, noting: “We can no more conclude that property owners invite children to climb structures in common areas that are not surrounded by signs and barriers than we can conclude that property owners forbid climbing on all structures in common areas not surrounded by mulched tire tread.”So far, so good for the plaintiff. But the plaintiff’s good news ends here. The court emphasized that it was concluding only that Damien was not transformed from an invitee to a trespasser when he climbed on a sign located on the condominium’s common grounds. That meant the association owed a higher duty of care to Damien, the court agreed, but whether the association had breached that duty by failing to identify the hazard the sign posed was another question, which the court resolved in the association’s favor.“The Court of Appeals has made plain that to generate a triable issue, under even the most demanding standard of care, some evidence that the premises owner knew or should have known of the dangerous condition is required,” the court observed. In this case, the court said, there was no evidence “of direct or constructive knowledge on the part of [the association] that would give rise to a duty to inspect the community sign. Without some showing that [the association] could, or did, perceive a risk posed by the sign,” the court concluded, “there can be no liability based in negligence.”
WORTH QUOTING
“The most scary thing out there is trade.” ─ Jamie Cox, managing partner at Harris Financial Group.