LEGAL/LEGISLATIVE UPDATE – JULY 15, 2019
A SURE THING?
Within the space of a week, interest rate speculation has veered from a consensus that the Fed would cut rates, to a widely shared belief that they would not, and back to virtual certainty that the Federal Open Market Committee (FOMC), the Fed’s policy-making arm, will cut rates when it meets at the end of July.Growing concern that the economic recovery is weakening, the strongest argument in favor of a rate reduction, seemed to be undercut by an unexpectedly strong June employment report. Employers added 224,000 jobs in June, blowing past more modest projections, erasing memories of May’s anemic employment report, and easing concerns that the expansion, which has entered record-breaking territory, may be losing steam. A surge in workers seeking jobs pushed the unemployment rate up to 3.7 percent, but left it still at a 50-year low.While most analysts cited the continued employment gains as evidence that the recovery remains intact, with room to grow, some noted the continued lag in wage gains (barely keeping pace with the cost of living over the past year), and the intensifying trade war, as causes for concern.
Fed Chairman Jerome Powell landed in the “concern” camp, focusing less on the positive signals conveyed by the employment report, and more on the “uncertainty’ created by trade tensions between the U.S., China and others, and by signs that economic growth worldwide is slowing.Following the decision to leave rates unchanged in June, Powell noted that concerns about global growth and trade seemed to be receding. But testifying before the House Financial Service Committee in early July, Powell said, “these crosscurrents have reemerged, creating greater uncertainty….The bottom line for me is the uncertainties around global growth and trade continue to weigh on the outlook,” Powell told legislators. Repeating the promise he made in June, the Fed chairman said the central bank will continue to monitor economic developments and “act as appropriate to sustain the expansion.”Analysts interpreted Powell’s comments as a clear signal that the Fed will cut rates this month. Goldman-Sachs analysts pegged the odds of a rate reduction at 90 percent, with another cut likely in September.The Fed is “looking to cut before they see confirmation in the U.S. data that those risks have softened growth,” Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, told the Wall Street Journal. WSJThe rate cut Meyer and others are predicting would be the first since the Fed launched a series of rate hikes, beginning in late 2015.
WORRISOME GAPS
Rising prices are pushing homes beyond the reach of an increasing number of folks who would like to buy them. Median-priced homes are now unaffordable to median-wage earners in 353 of 473 counties, a recent survey by ATTOM found. Appreciation in home prices has outpaced wage gains in 40 percent of those markets, according to this analysis, forcing workers in 67 percent of the markets to spend more than 30 percent of their income to purchase a home.
“Despite falling mortgage rates and rising wages, the cost of owning the typical home remains out of reach for a significant financial stretch for the nation’s average wage earners,” Todd Teta, ATTOM’s chief product officer, told Housing Wire.A separate analysis by Realtor.com found an equally problematic gap between the homes prospective buyers want and the properties available for them to purchase. Half of the buyers responding to a recent survey said they were looking for homes costing less than $288,000 – about 10 percent below the median price of available listings nationwide.“The price differences between what buyers are searching for and what’s available on the market demonstrates just how big the gap is for entry-level home buyers,” Danielle Hale, chief economist for Realtor.com, said in the report. “Entry-level homes continue to be difficult to come by as the inventory composition shifts more and more toward higher priced homes,” she added. “This is causing smaller and more affordable homes to appreciate rapidly, resulting in a mismatch between what buyers are able to spend and what sellers expect to receive.”STILL STRUGGLING
With periodic glimmers of strength clouded by signs of weakness, the housing market continues to struggle to balance competing forces: Increasing demand spurred by a strong job market and wage gains (albeit modest ones) on one hand; rising prices and affordability constraints produced by a chronic inventory shortage on the other.Although existing home sales increased slightly in May compared with April, the pace still fell short of the year-ago level. New home sales fell by almost 8 percent in May to a seasonally adjusted annual rate of 626,000 units – the slowest pace in five months.Pending sales – an indicator of future existing home purchases – increased in May, but they were also almost 1 percent lower than the same month a year ago – the 17th consecutive year-over year decline for this National Association of Realtors (NAR) index. 
The solution is obvious, Lawrence Yun, the NAR’s chief economist, maintains: Builders need to produce more homes. “Otherwise, we risk worsening the housing shortage, and an increasing number of middle-class families will be unable to achieve homeownership,” he warned in a recent report.Builders have not responded to those entreaties. Housing starts, which had inched up in April, reversed direction in May, falling 4.7 percent below the year-ago level. Permits for future production were 0.3 percent higher than the previous month, but 5 percent below May of 2018.“The numbers show the housing industry continues to slip from last year.” Robert Frick, chief economist for Navy Federal Credit Union, told Housing Wire. At the current pace, he noted, builders will continue to fall short of the 200,000 units per year needed to meet growing demand.COMMON GROUND
Republicans and Democrats, at odds on virtually everything, have found one issue on which they can agree ─ marijuana. Tension between the legalization of marijuana at the state level and federal law that continues to classify the substance as an illegal drug, is driving the bipartisan consensus on the need for reform.“The present conflict between state and federal law is no longer sustainable, and it must be resolved,” Republican Congressman Tom McClintock (R-CA) said at a hearing held by the House Judiciary Committee’s subcommittee on crime and terrorism.In a comment that hasn’t been heard very often in a divided Congress, Rep. Jerrold Nadler (D-NY), who chairs the House Judiciary Committee, said he had “the pleasure of agreeing with [almost] every word,” of what McClintock had said.
The hearing focused on proposed legislation (the “Entrusting States” Act) that would create a legal safe harbor preventing enforcement of the federal prohibition on the use or sale of marijuana in states that have legalized medical or recreational use of the drug. A separate measure, known as the STATES Act, would create a similar safe harbor permitting banks to do business with companies involved in the cannabis industry.Testifying at the hearing, an executive with one of those companies said the emphasis should be on a third measure, the “Marijuana Justice Act” that would eliminate the federal ban on the drug and expunge the records of individuals jailed for marijuana offenses. The current bifurcated legal structure has created “two Americas,” Malik Burnett, chief operating officer with Tribe Companies, told lawmakers. “In one America, there are men and women — most of them wealthy, white and well-connected — who are starting cannabis companies, creating jobs, amassing significant personal wealth and generating billions in tax dollars for states which sanction cannabis programs. In the other America, there are men and women — most of them poor, people of color — who are arrested for cannabis and suffer the collateral consequences associated with criminal conviction.” The Marijuana Justice Act, he said, would address that inequity.
FLIPPING OUT
Home flipping activity is increasing, but it isn’t becoming more profitable. A recent analysis found that more than 49,000 homes – about 7.2 percent of home sales nationally – were flipped (sold within two years of being purchased) in the first quarter of this year, the highest level in nearly a decade, according to this analysis by Attom. The median profit on a flipped home was $60,000 ─ $8,000 less than the profit netted a year earlier and a three-year low. Declining profitability may explain why investors have been withdrawing from the market, Todd Teta, chief product officer for Attom, told Market Watch. “If investors are seeing profit margins drop, they may be selling now before [profit margins] drop even more,” he suggested. Undeterred by these trends, iBuyers (tech firms that make instant offers on properties based on computer algorithms), apparently still see opportunity in the flipping arena. Zillow launched its own stock flipping operation (Zillow Offers) last year and says it is investing more money in the venture.A separate report by CoreLogic concludes that investors pursuing flipping deals are becoming more sophisticated. The report notes “growing signs that flippers are getting increasingly good at buying properties at a discount while the premium they’re selling for has remained mostly constant….This [provides] yet more evidence,” the report suggests, “that flipping today is less risky and less speculative than during the 2000s,” when flipping was part of the frenzy that preceded the real estate crash.
IN CASE YOU MISSED THIS
Citing the “ratcheting up of trade tensions,” Fannie Mae has slashed its economic growth forecast for 2020, now predicting “the weakest performance in more than five years.”It now takes an average of 14 years for someone earning the median income to save a down payment for a median-priced home, according to Unison’s “Home Affordability Report.” That timeline rises to 30 years or more in the nation’s priciest housing markets.Apartment demand nationally has reached a five-year high, reflecting a chronic shortage of entry-level homes available for sale. RealPage estimates that the national rental occupancy rate now stands at 95.8 percent, up from 95.4 percent last year.Affordability restrictions on rental properties constructed with low-income housing tax credits are starting to expire. The 30-year limits on rent increases will end for more than 485,000 units over the next decade, making them potentially unaffordable for low-income residents, “including existing tenants,” according to a recent report.Respondents to a LendingTree survey said they would sacrifice many things to buy their dream home – dining out, vacations, shopping and chocolate, among them. But more than 80 percent said they would not give up their smartphones.
LEGAL BRIEF
THE MEANING OF WORDS
Words have meaning, and should be chosen carefully because of that, especially in the drafting of legal documents. The placement of words in a sentence also has meaning, in this case, determining the outcome of a dispute over the enforceability of a Maine community association’s rules and regulations. (Scott v. Fall Line Condominium Association).The dispute itself was relatively minor. When the Scott’s failed to pay the full amount of a fine, the board of this 128-unit condominium association went to small claims court seeking about $40 in interest and $500 in attorney’s fees related to the collection effort. The mole hill morphed into a mountain, however, when the Scotts counter-sued, alleging that all of the rules and regulations adopted by the board were invalid because owners had not approved them, as required by the association’s bylaws.The Maine Business Court agreed with the Scotts and issued summary judgment in their favor, which the association appealed. The Maine Supreme Judicial Court upheld the decision.In its analysis, the court focused on a provision of the association’s bylaws (Section 5.17) describing “rules of conduct” in the community. That provision states that rules governing the use of units, common areas and facilities “may be promulgated and amended by the board with the approval of a majority of the unit owners.”
The Scotts argued that the sentence should be interpreted to mean that the board has the authority to adopt rules and regulations, but owners must approve them. The association argued that the board has broad authority to adopt rules, for which it may seek the approval of owners, but is not required to do so.The court said the placement of the word “may” at the beginning of the sentence must be read to modify the entire phrase “unless doing so creates an absurd result.” That was not the case here, according to the court, which found that the Scotts’ interpretation was both logical and consistent with other provisions of the bylaws.The association had argued, in fact, that another provision (section 2.03e) supported its position. That provision stated that the board had “all the powers and duties” necessary for the “administration of the affairs” of the association, and had broad authority to undertake “all such acts and things,” except those that could not be delegated to the board by law or by unit owners.The court agreed that this language gave the board broad authority to adopt rules and regulations. But it pointed out that the wording also acknowledged that this authority could be “curtailed or held in check” by other provisions in the bylaws. And Section 5.17 – the provision the court found required owner approval of “rules of conduct” represents “just such a check,” the court said. “Because we are careful not to render any language in a contract superfluous, we read section 5.17 to unambiguously limit the Board’s broad authority under section 2.03(e) to adopt and amend rules and regulations, at least those rules and regulations of conduct concerning the use of the units, common areas, and facilities.”
But the high court also found that the Business Court had gone too far in its conclusion that all of the association’s rules and regulations were invalid. Section 5.17, the court noted, covered only “rules of conduct” concerning the use of units, common areas and facilities. Section 2.03 gave the board unfettered authority to enact rules governing the general “operation and use” of the property. Because of that distinction, the court said, “the Business Court’s declaratory judgment invalidating all rules and regulations established ty the Association is overbroad.”The requirement for owner approval applies only to rules and regulations governing “the use of units, common areas and facilities,” the court said, and so only those regulations are void. If the Scotts and the association can’t agree on which rules require owner approval and which do not, the court said, they may have to ask the courts to make that distinction.Making no effort to disguise its feeling that judicial time would be better spent dealing with more significant issues, the court added: “We sincerely hope that such a use of judicial resources will not be necessary to make common sense determinations that should be within the parties’ own capabilities… [But] if the parties insist on prolonging this litigation, the question of what is or is not a rule of conduct regarding the use of a unit, common area, or facility would be a question of fact appropriate for a factfinder.”
WORTH QUOTING
“The moral of the story is when you see things inflated and things look so good, it’s time to pull back and worry. When you sense it, if that’s one of the options, get out.”— Angelo Mozilo, founder of Countrywide Mortgage, a gigantic casualty of, and according to some, a giant contributor to, the financial meltdown.