LEGAL/LEGISLATIVE UPDATE – NOVEMBER 1, 2018
HOUSING MARKET FALLING DOWN
After several months of declining home sales, analysts have begun using the f-word ─ falling ─ to describe the housing market’s trajectory. “The housing market is stumbling through its longest slump in four years, as the divergence between a booming U.S. economy and weakening home sales that many had dismissed as temporary now looks poised to continue,” the Wall Street Journal reported.
A combination of rising mortgage rates, relentless home price gains, inventory constraints, and the new tax (which reduced the appeal of the mortgage interest deduction) have largely undercut the momentum a strong economy should be producing.The bad news for housing continued in September, with a 4.1 percent year-over-year decline in existing home sales, the seventh consecutive dip for this sector. “Without a doubt there is a clear shift in the market,” Lawrence Yun, chief economist for the National Association of Realtors (NAR) acknowledged, noting the declines in sales, inventory levels (still skimpy despite a small, recent uptick) and more recently in the number of prospective buyers actively searching for homes. “Foot traffic has notably slowed in previously super-heated markets,” he noted in a recent report.Builders, hampered by the increasing cost of building materials, a shortage of skilled labor, and uncertainty about market trends, have not produced new housing fast enough to ease the inventory shortage. Ordinarily, owners selling their existing homes to trade up would be generating new listings. That has certainly been the case in past recoveries, but not in this one. Although rising prices have created the equity cushion owners need to trade up, rising interest rates are creating a disincentive for those with lower-rate mortgages to sell. The average tenure for homeowners in their existing home has increased from an average of 4 years in 2007 to 10 years in 2018, according to data compiled by First American.
“There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing monthly mortgage payment," Mark Fleming, chief economist at First American, said. "As rates rise, many existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate."The amalgamation of headwinds in the housing market have created an unusual dichotomy between an economy that is growing smartly, and a housing market, moving in the opposite direction. That situation can’t last indefinitely, analysts agree, suggesting one of two scenarios: Rising wages could overcome the affordability obstacles that are keeping many buyers on the sidelines and increase home sales; or the sales decline could create a serious drag on economic growth.Glenn Kelman, chief executive of real-estate brokerage Redfin, sees cause for concern. In an interview with the Wall Street Journal,” he cautioned: “If this is the first chink in the armor ─ if other parts of the economy, driven by increases in rates, start to weaken and if consumer confidence starts to wane, then I think it could be the beginning of a really soft year.”
AFFORDABLE HOUSING ISN’T
Affordable housing is becoming an oxymoron in many areas of the country, where zoning restrictions and building regulations are driving up the cost of producing it. A study by the General Accounting Office concluded that land use regulations are making the Low-Income Housing Tax Credit program considerably less efficient in some areas of the country than in others. High costs force state officials to allocate more credits to each project, reducing the number of housing units the program can finance in California, known for the intensity of its building regulations, compared with Texas, where regulations are less restrictive.States like California, where regulatory costs are high, “really need to monitor those costs closely and [recognize] the tradeoffs of having to spend more for a project,” and achieving social goals through the housing program, the report suggests.Stockton Williams, executive director of the National Council of State Housing Agencies, an association representing state housing agencies, agrees. “So much of what is going in into development costs and what is driving affordability challenges has to do with a set of costs and cost drivers that are local in nature,” he told reporters. Controlling those costs, he said, would go a long way toward increasing the chronic shortage of affordable housing.
LEFT OUT
Eleven years of historic stock market gains have made many people feel wealthier (some legitimately so), but they haven’t done much to boost the lagging retirement savings of most middle-income Americans. The Center for Retirement Research at Boston College estimates that more than half (54 percent) of the households in this category haven’t amassed sufficient savings to finance a “decent” retirement. That ratio has not changed in the past eight years, despite the stock market’s strong performance during that period.
In addition to unexpected emergencies (mainly health-related) and high debt loads, the report cites investment mistakes as a major reason many households have not shared in the stock market’s bounty. Many of the investors who lost money in either or both of the last two market crashes (in the recessions of 2000-2002 and 2007-2009) followed the “once (or twice)-burned strategy,” and stayed on the sidelines as the stock market rebounded.“Had investors simply closed their eyes and hung on during the carnage of a decade ago—turned off CNBC, stopped opening their 401(k) statements, not allowed their emotions to get the best of them—they would have more than recovered,” Wall Street Journal columnist Paul Brandus notes.That they didn’t leaves many in a “precarious” position as they near retirement age, he says, facing two equally unappealing choices: “Working longer or accepting a lower standard of living, [and] perhaps both.”
GETTING MAULED
A strong economy predicts a lucrative holiday season for retailers, but it isn’t expected to bring much needed relief to the nation’s shopping malls, many of which appear to be fighting a losing battle for survival in saturated markets.A strong economy and confident consumers have bolstered retail sales and holiday projections for retailers. The National Retail Federation expects sales in the crucial November-December period to increase by between 4.3 percent and 4.8 percent compared with last year – improving significantly on average gains of 4 percent during the last five years.
The outlook for malls is considerably less upbeat, as the struggles of major tenants, such as Sears (which recently declared bankruptcy) is leaving many of them with rising vacancy rates and shrinking consumer traffic. Ailing retail giants aren’t the only reason for these negative trends, analysts say; many healthy retailers are finding that they don’t need a mall presence – or a presence in as many malls ─ in order to reach their customers.Not surprisingly, malls in still depressed areas of the country have been particularly hard-hit, the Wall Street Journal reported, suffering, the Journal said, from “a glut of shopping centers but not enough consumers,”Reflecting those trends, Reis, an industry consulting firm, reports that mall vacancy rates topped 9 percent in the third quarter – their highest level in seven years. Average mall rents, meanwhile, fell in the third quarter from $43.36 to $43.25. The decline (0.3 percent) wasn’t large, but it was the first quarterly decline since 2011.
INFLATED APPRAISALS
The Federal Housing Administration (FHA) has found worrying signs of appraisal inflation in its portfolio of reverse mortgages. Agency researchers assessing that risk found that of 134,000 appraisals run through the agency’s automated valuation model, 37 percent (57,000) of them were off by at least 3 percent. To address the problem, the agency plans to begin requiring second appraisals on loans flagged as at high risk of having inflated valuations.“We were trying to understand why, in a still relatively low interest rate market where house prices have returned in most major markets including in many of these states where reverse mortgages were, why were we still hemorrhaging money,” FHA Commissioner Brian Montgomery told reporters on a conference call. “We thought this was a contributing factor that required further due diligence,” he added.FHA officials say they can’t predict how many appraisals will be targeted for the additional review, partly because analysts used different models in different years to identify appraisal risk. “It’s hard to predict going forward, especially given the fact that it has come down significantly through the years, but since it’s not yet zero or close to zero, we felt it was prudent to issue this policy change at this time,” FHA Commissioner Brian Montgomery told reporters on a conference call.
IN CASE YOU MISSED THIS
Homeowners and on-line platforms for listing vacation properties are fighting back against governmental efforts to clip the lucrative wings or the high-flying short-term rental business.A federal district judge has ruled that a group of young people suing the federal government for failing to address climate change can proceed with their suit but they can’t name President Trump as a defendant.Scientists have been wondering what it will take to galvanize public demands for action to counter the effects of climate change. Maybe this will do it: A recent report estimates that the increased frequency of extreme weather events will produce a shortage of barley, which will double the price of beer in some countries – Ireland among them.The economic expansion, already close to being the longest in history, still has room to run, according to Goldman Sachs analysts, who put the odds of a recession in the next three years as “below average.”Recent surveys have confirmed what critics have been alleging: Most companies are using the savings from last year’s corporate tax cuts to finance capital investment – not to raise employee wages.
LEGAL BRIEF
RESERVE REQUIREMENT
Condominium owners want their monthly fees to be as low as possible. Knowing that, some boards (probably many of them) skimp on, or skip entirely, the regular reserve contributions they should be making to cover repair and replacement costs, assuming that they will fund essential capital projects with special assessments instead. But an Ohio Appeals Court has ruled that while boards have the authority to levy special assessments, owners do not have the option of foregoing reserve funding if the association’s governing documents require it. (El Attar v. Marine Towers East Condominium Owners' Association, Inc.)
Facing the need to replace the community’s aging HVAC system, and lacking the reserves to cover the cost, the board of this 137-unit community approved a $4 million special assessment. Four owners filed suit, alleging that the board had breached its fiduciary duty by failing to fund a reserve account, which both the association’s governing documents and the state condominium law required. The trial court dismissed the suit, agreeing with the association that while the statute and the bylaws required reserve funding, owners had exercised the option under state law to waive the requirement. The appeals court disagreed.The association had argued first that the bylaws did not require the board to establish a reserve fund, because they did not use the specific word “fund.” Parsing the bylaw language, the board noted that it directed the association to maintain “a reasonable reserve for contingencies and replacement and specified that the reserve funding should be part of the ‘estimated cash requirement’ in the annual budget.The term “reserve” in this context, the board contended, referred only to money. The board argued further that the money was to be included in the general budget but was not intended to be separate from it. The court rejected both ideas. The bylaw language, the court said, established “a clear and unambiguous” reserve funding requirement. The directive to “build up and maintain” reasonable reserves, “permits no other conclusion than that the Association create an ongoing reserve fund or account separate from its yearly line-item budget.”That interpretation is supported, the court said, by the language specifying that if reserve funding falls short of the mandatory contribution in any year, the board is required to make up the shortfall in the following year’s budget. By distinguishing reserves from “actual expenditures,” the court said, “the bylaws indicate that reserves are more than just an item of the budget. They are “a collection of money separate and apart from money allocated to pay for routine services and expenditures.”
The bylaw also states specifically that the reserves are to be used for “extraordinary expenditures” that aren’t contemplated in the annual budget, the court noted. “This negates the association’s argument that the reserves are just ‘another part of the budget,’ the court said, because extraordinary expenditures, by definition “are items for which there is no budget. And even if we were to accept the Association’s argument that it was not required to establish a reserve fund but merely to maintain reserves as ‘just another part of the budget,’” the court added, “the fact remains that the Association offered no evidence to show that the budget contained any amount of money in reserve to pay for extraordinary expenditures.”The association had also argued that even if the bylaws did require the maintenance of a reserve account, a provision in the state law allowed a majority of owners to waive that requirement by voting annually to do so. But the court pointed out that the statutory reserve requirement applied “unless the declaration or bylaws specify otherwise.”“By its own terms,” the court noted,”[the statute] applies only to instances where a condominium’s declaration or bylaws do not ‘otherwise provide’ for reserves….But where an association’s declaration or bylaws specifically contemplate the establishment of a reserve fund,” the court said, “the statute does not apply.” Based on that interpretation of the law, the court concluded, because the association’s bylaws required reserves, the statute as a whole, including the option to waive the reserve requirement, did not apply here.The bottom line, according to the court: The association’s bylaws clearly required reserves, and owners did not have the option of waiving that requirement.
WORTH QUOTING
“Respect for government, respect for the Supreme Court, respect for the president, even respect for the Federal Reserve. It’s all gone. and it’s really bad. At least the military still has all the respect. But I don’t know: How can you run a democracy when nobody believes in the leadership of the country?” ─ Former Federal Reserve Chairman Paul Volcker, in an interview with the New York Times.