MAY 2022 - Inflation Risks
INFLATION RISKS. Can the Federal Reserve inflation without tanking the housing market and the economy? That’s the looming question following the quarter-point rate increase the Fed announced in March, as officials have indicated that future increases will probably be more aggressive,
“We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Fed Chair Jerome Powell told reporters at a news conference following the March meeting of the Federal Open Market Committee (FOMC). “The committee is determined to take the measures necessary to restore price stability,” he added.
More recently, speaking at a panel hosted by the International Monetary Fund, Powell said he thinks it is “appropriate….to be moving a little more quickly,” echoing the comments of other Fed directors who have said they favor increasing rates in half-point increments this year. “It is appropriate in my view to be moving a little more quickly” than the Fed has in the recent past, Powell said, adding, “I also think there’s something in the idea of front-end loading” those moves.
While most analysts agree that inflation must be controlled, they also note that the rate hikes needed to achieve that goal, coincide with evidence that economic growth is slowing – a result of supply chain glitches and, even more, the disruptions created by Russia’s invasion of Ukraine. The Fed’s challenge: Slowing inflation without sending the economy into a recessionary dive.
“We might be on the cusp of the Fed raising rates at the same time there is a minus sign in front of GDP,” Peter Boockvar, chief investment officer of Bleakley Advisory Group, wrote in a note to clients. “What an awful position to be in,” he acknowledged, “but until inflation falls sharply, they have no choice but to carry on.”
CONDO PRICES. As home prices have soared, many buyers have turned to condos as an affordable alternative. But increased demand is depleting inventories and pushing prices skyward in this sector, too. Redfin reports that the median sale price for condos hit a record $319,000 in February, 14.6 percent above the year-ago figure and up almost 23 percent over the past two years. Single-family home, with a current median price of $406,000, have increased by close to 15 percent year-over year and by almost 35 percent in the past two years. Condo inventories shrank by 28 percent in February compared with the same month a year ago (close to a record), outpacing chronically scarce single-family home inventories, which were down by 14 percent for the same period. Condos are also selling almost as quickly single-family homes; more than 55 percent of the units sold in February had been listed for only two weeks compared with about 62 percent of single-family homes, according to Redfin. More than 41 percent of condos sold in February sold for more than their asking price, again close to the 48 percent of single-family homes that garnered more than sellers were asking.
BUYING TO RENT…CONDOS. Condo associations in communities with attached dwellings have been struggling for some time with the complex questions and problems that arise when owners rent their units to tenants – a trend triggered largely by the income opportunities created by airbnb and other vacation rental platforms. Now, home owner associations in communities with detached single-family homes are confronting the same issue. But for these communities, the issue isn’t owners renting their units for short periods to vacationers; it’s investors buying single-family homes in large numbers and turning them into long-term rental properties.
Investor interest in single-family rentals has been increasing, as has renter demand for them. Investors purchased almost 20 percent of the 90,000 homes sold in the third quarter of 2021, according to a Redfin analysis. That’s up from 11 percent the year before. The trend has attracted the attention of lawmakers concerned about the impact on the cost and availability of housing. At a recent Senate Banking Committee hearing, Se. Sherrod Brown (D-Ohio) singled the large corporations and private equity firms for their large-scale home purchases. “One of the reasons housing prices have gotten so out of control is that corporate America sensed an opportunity,” he noted.
Homeowner associations complain that an influx of renters changes the residential character of their communities, creates maintenance and upkeep problems and makes the communities less desirable to prospective buyers – not unlike the concerns cited by condo boards in apartment-style communities. Like those boards, HOAs concerned about single-family rentals are trying to limit rentals or prohibit them entirely.
InspectHOA, a real estate technology company, calculated that of the more than 1,000 governing document amendments passed by HOAs in four states (Florida, Arizona North Carolina and Texas) since 2019, more than 30 percent focused on leasing and usage restrictions. That’s, up from 21 percent between 2016 and 2018, the Wall Street Journal reported.
Some communities are responding to an increase in rentals; others are responding proactively, anticipating problems that haven’t yet appeared. The WSJ article noted that residents of a 170-home community in Indianapolis approved rental restrictions after seeing an increase in rentals in a nearby community. Explaining the decision, a member of that HOA board told the Journal: “It’s creeping into our neighborhood.”
APPRAISAL REGULATION. Congress is considering legislation that would overhaul the self-regulatory structure of the appraisal industry, replacing the industry-controlled Appraisal Foundation with an independent federal regulatory agency responsible for developing appraisal standards and evaluation criteria. . The change is needed, lawmakers and consumer advocacy groups contend, to combat evidence of racial bias in residential appraisals.
The proposed legislation, sponsored by Rep. Maxine Waters (D-CA), chair of the Financial Services Committee, would also create a n “Office of Fair Lending” within the new Federal Valuation Agency., that would oversee fair lending compliance in the appraisal industry The legislation would also:
· Create a national appraiser registry of appraisers, containing information on the ethnicity, race and gender of appraisers and appraisal management companies involved in each appraisal report;
· Require the creation of a searchable national public valuation data base that would include census tract-level appraisal data from Fannie Mae, Freddie Mac and appraisal management companies; and
· Mandate penalties for victims of appraisal bias , equal to the difference in the corrected appraised value and the “discriminatory or improper” valuation.
Supporters of the bill say the data base is essential to assess the extent of the bias problem and the success of measures to correct it. The Federal Housing Finance Agency, conservator for Fannie and Freddie, supports the release of their appraisal data, but with adequate privacy safeguards, which FHFA officials say they are studying.
“Federal researchers, appraisers, academics, tax assessors, and private sector actors could all use these data in ways that inform better-understood valuations and mitigate racial and ethnic bias in valuations,” an FHFA spokesman told Housing Wire.
ENVIORNMENTAL REVIEWS. Citing concerns about environmental quality and climate change, the Biden Administration has reinstated the strict standards for approving major infrastructure projects (power plans, highways, pipelines, etc.) that the Trump Administration had rejected as overly cumbersome and unduly restrictive. The reinstated rules require federal agencies to expand their reviews of projects and regulations to consider not just their “direct and indirect” effects, but also their “cumulative effects in a variety of areas – air and water quality, climate change and wildlife habitat among them. “Restoring these basic community safeguards will provide regulatory certainty, reduce conflict, and help ensure that projects get built right the first time, Brenda Mallory, chair of the White House Council on Environmental Quality, said in a press statement. The new rules, which take effect in May, replace Trump-era standards that accelerate the environmental review process, requiring full environmental impact statements to be completed within two years and less extensive reviews to be completed within a year. Business groups, including the U.S. Chamber of Commerce, have opposed the Biden rules., saying they will impede essential construction projects and increase their cost. “With rapidly rising inflation, major supply chain disruptions and workforce shortages, the last thing our country needs is unnecessarily extensive and duplicative bureaucratic red tape and delayed project approvals,” Marty Durbin, senior vice president for policy ,at the Chamber of Commerce, said in a press statement.
IN CASE YOU MISSED THIS
As home prices and mortgage rates continue to rise, buyers are suffering ‘fear of missing out’ on the opportunity to purchase a home and sellers are worrying about missing out on the opportunity to sell their homes at the top of the market.
Engineers ordered the immediate evacuation of a condominium building in South Florida after discovering structural concerns that, they said, made it unsafe for residents. This is the second condominium to be evacuated in North Miami Beach since the collapse of Champlain Towers last year, spurred engineering reviews of other buildings in the area.
Droughts, wildfires, extreme heat and other byproducts of climate change could cost the federal government an additional $25 billion to $128 billion a year, a report by the Office of Management and Budget, has concluded.
The Department of Housing and Urban Development (HUD) is offering $2.6 billion in inventive awards to encourage the development of programs to combat homelessness.
A federal judge in Oregon has ruled that a state law prohibiting “love letters” from home buyers aimed at persuading sellers to accept their purchase offers violate the free speech rights of real estate agents who often deliver those communications.
LEGAL BRIEFS
BUT FOR A COMMA. Shakespeare’s Hamlet admonished his actors to “speak the speech…as I pronounce it to you.” For insurance professionals, he might have added, “and as it is punctuated.” Because, as the U.S. District Judge Robert Scola noted in this Florida case, “The placement (or omission) of one comma can make the difference between coverage and nothing.” (ECB USA vs. Chubb Insurance and Executive Risk Indemnity.)
Chubb and Executive Risk insured Control Group and its accounting subsidiary, Constantin Associates. ECB, an engineering company, sued Constantin for performing an allegedly faulty audit. Constantin settled the suit for $4.9 million and assigned the rights under the company’s professional liability policy to ECB. But Chubb and ERI rejected the claim, contending that the policy language had changed in 2017 and no longer covered audit services provided to non-financial firms. ECB sued the insurers, and it feel to Judge to Scola to analyze the applicable law and the grammar.
The language at issue specified that the policy covered “management consulting services,” defined as: “services directed toward expertise in banking finance, accounting, risk and systems analysis, design and implementation, asset recovery and strategy planning for financial institutions.” Chubb mounted two arguments against coverage, one involving the definition of a term, the other the placement of a comma.
On the first question, the insurers argued that “services directed toward expertise….in accounting” did not include the auditing of financial statements – the service Constantin had provided. They pointed to several business dictionaries , professional standards and SEC guidance to support that point. But the judge pointed out that courts can rely on outside sources to interpret contract language only if the language is ambiguous. In the context of this contract, he noted, the term “management consulting services’ is not “so confusingly ambiguous” (a standard set by previous decisions) ) to warrant extensive resort to extrinsic evidence.
“If the parties wished to limit coverage to ‘consulting’ services in a way that comported with certain trade usage,” he added, [they] could have done so. But [they] contracted to an expansive definition which must be interpreted in favor of coverage if a fair reading permits.”
So the plaintiff, ECB, prevailed on this question, but not on the defining one - -whether services to ECB weren’t covered because ECB is not a financial institution. The answer hinged on the placement of a comma. in the underlined portion of the phrase: “services directed toward expertise in banking finance…..asset recovery and strategy planning for financial institutions.”
PUNCTUATION LOCATION
The insurers argued that because the modifier (“for financial institutions” came at the end of the sentence, it applied to everything that came before. In that reading, all of the services cited were services provided for financial institutions. ECB argued that this grammatical rule would apply only if there were a comma before the modifier (“for financial institutions”). Since there wasn’t one, ECB contended, the proper reading was that the policy covered all the enumerated services in the first part of the phrase plus “strategy planning for financial institutions.” In other words, the only services limited to financial institutions were those related to strategy planning.
Interpreting the rules of grammar strictly, the court agreed with the insurers – the policy covered only services provide to financial institutions. “While commas at the end of a series can avoid ambiguity,” the court explained, “the use of such commas is discretionary…..A plain reading of the [policy] establishes that Chubb ad no duty to defend or duty to indemnify [in this case] as the services at issue….were not provided to a financial institution, as required for coverage.”
ECB prevailed on another argument – that the insurer had failed to provide the required notice that the renewal policy altered the definition of who was insured. But it was the punctuation of a key sentence and not the definition of the insureds that determined the outcome: Because of that missing comma, regardless of who was insured under the policy, it did not cover the claim.
WORTH QUOTING
“Fed actions to curb inflation will lead to a recession sooner rather than later.” ─ Amy Crews Cutts, AC Cutts & Associates