FEBRUARY 2022
A CLEAR FED MESSAGE. Critics have sometimes complained that the Federal Reserve’s policy announcement are difficult to fathom But there was nothing opaque about the message Fed Chair Jerome Powell) delivered following the January FOMC meeting: The Fed is going to begin raising interest rates in multiple steps beginning in mid-March.
“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Powell told reporters.
While he didn’t specify how large the rate increases will be or how quickly they will come, Powell did suggest the possibility that rates might jump in consecutive FOMC policy meetings, which are held approximately every six weeks.
The central bank slashed short-term interest rates to near zero in 2020 and has held them there since, while increasing bond purchases, to help insulate the economy from the effects of the pandemic. When inflationary pressures surfaced last year, Fed officials insisted initially that the increases in consumer prices were temporary and would soon subside. But when the price increases continued and employee wage gains threatened to spur a damaging wage-price spiral, the Fed shifted policy course, laying the ground work for the rate hikes Powell announced in January.
“I don’t think it’s possible to say exactly how this is going to go,” Powell said in his press conference, having noted earlier, “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”
The minutes of the December FOMC meeting indicated that Fed officials have discussed three quarter-percentage-point interest rate increases this year and three more next year, based on the assumption that inflation will ease significantly by the end of this year. Since the December meeting, Powell told reporters, the inflation picture has worsened “slightly….To the extent that the situation deteriorates further, our policy will have to address that,” he said.
JAGGED HOME SALES TRAJECTORY. Existing home sales followed a jagged path last year, rising for several months, losing ground during the traditionally busy spring buying season, rebounding in the fall and then slipping again in December. Despite that year-end decline, December’s annualized sales pace totaled 6.12 million transactions, up 8 percent year-over-year and a 15-year high. Inflation fears, rising mortgage rates and rising prices deterred some buyers, but the prospect that rates will move higher as the Fed focuses on inflation motivated many more buyers to remain in the market, analysts said, keeping overall demand strong.
Anemic inventories provided a countervailing force, however. The supply of homes for sale sank to an all-time low (910,000 units) in December, down more than 14 percent for the year. Although builders have increased their construction pace, Lawrence Yun, chief economist for the National Association of Realtors (NAR) noted, the supply-demand gap has been building for many years “and will take years to correct.” After increasing (unexpectedly) in October, pending sales slipped in November and December, as buyer demand collided with limited supply and rising prices intensified affordability pressures. Looking ahead, Yun said he anticipates “neither a price reduction nor another year of record-pace price gains. The market will see more inventory in 2022,” he predicts, “and that will help some consumers with affordability”
THE PANDEMIC VARIABLE. Every January, economists, business analysts, pundits and fortune tellers collect, analyze and interpret financial data, business trends and tarot cards, to predict how the economy will fare in the coming year. This year’s forecasts indicate that the pandemic has become the largest variable in these calculations, producing both humility and a measure of frustration. A few examples drawn from analysts’ reports:
"The emergence of the Omicron variant increases the risks and uncertainty around the U.S. economic outlook,” Jan Hatzis at Goldman Sachs, observed. “We’re all sort of at the whims of these [COVID] variants and surges in cases, and it’s hard to know when they might strike,” Nick Bunker, director of economic research at Indeed Hiring Lab, agreed. ”Any sort of projections or outlook on the pace of [hiring] gains over the next year or so is still dependent on the virus.”
Those hoping the pandemic clouds would have lifted by now have been disappointed. Suzy Welch, a CNBC contributor, is among them. “[We expected 2021] to give us back our visibility into the future, give us back some kind of feeling that the earth was not moving under our feet at every moment,” she wrote. “And of course, it just didn’t happen. ... You sort of get to a place where you think, ‘What can I know anymore?’”
A LITTLE NIGHT MUSIC. Noise is one of the most common complaints condo owners lodge against their neighbors, and boards, wisely, try to avoid getting in the middle of these disputes. Board members should be grateful they weren’t involved in this 19-year battle between neighbors in an Italian apartment building. Owners of one unit complained that the noise from a new toilet their neighbors had installed was “intolerable” and kept them awake at night. A lower court was unsympathetic, so the owners appealed. A higher court in Genoa ordered an investigation that identified the problem: The owners of the adjacent apartment (four brothers) had embedded the water tank for their modern toilet in a wall on the other side of which the complaining owners had placed their bed. Pillow talk was drowned out by the flushing sounds behind their headboard. The appeals court agreed that the noise, “aggravated by frequent night use” of the toilet, affected their quality of life and violated their right to “free exercise of daily habits.” The court ordered the toilet’s owners to move the water tank and pay their neighbors about $10,000 – roughly $565 for every year the offending toilet had violated their rights. The brothers appealed to Italy’s Supreme Court which also ruled against them. An Italian journalist suggested that the dispute said as much about the failures of the Italian legal system (which took almost two decades to resolve the battle) as it did about the idiosyncrasies of Italian plumbing. “If Franz Kafka had been an Italian citizen of today,” this journalist wrote, “ he would not have written ’The Trial,' he would have written ‘The Toilet’ to describe justice in our country.”
CLASS ACTIONS THRIVING. The ongoing pandemic has slowed many things – the supply chain notoriously among them. But it hasn’t reduced either the number of workplace class action suits or the damages paid in settlements resolving them, both of which set records last year. Seyfarth Shaw, a Chicago law firm, reported that conclusion, based on an analysis the 1,607 class action settlements recorded in state and federal courts. The top 10 settlements in each of five major workplace litigation categories totaled more than $3.6 billion – blowing well past the previous high of $2.72 billion in 2017 and far exceeding the $1.58 billion in settlements recorded in 2020. “The plaintiffs’ bar capitalized on a recovering economy and aligned priorities with the new Biden Administration to secure a record financial haul in 2021,” the report’s author, Seyfarth partner Gerald Maatman Jr., wrote. “As the [standard] defense based on arbitration agreements [containing] class action waivers faces increased attacks across the country,” he warned, “employers can look at this past year as a precursor to new legal challenges and an explosion of class and collective actions in 2022.”
IN CASE YOU MISSED THIS
To anyone who’s been following home appreciation rates over the past couple of years, this will hardly count as breaking news: Housing is becoming less affordable. ATTOM reports that homes were less affordable in the fourth quarter than in the third quarter in 77 percent of the markets analyzed, compared with 39 percent in the same quarter-to-quarter comparison in 2020.
Speaking of current the affordability trends (see above), a recent survey found that millennials and members of Gen Z have become less optimistic about their home ownership prospects.
The pandemic-spawned foreclosure tsunami many analysts predicted hasn’t materialized. Foreclosure activity last year fell to the lowest level since 2005, an analysis by ATTOM found.
More women than men are going to college these days, a statistic that has implications for the economy, employment trends and marriage.
Average monthly rents in the residential market increased by 21 percent year-over year in November,2021, jumping by almost 7 percent in November alone. “First inflation came for the for-sale housing market and now it’s coming for the rental market,” Redfin Chief Economist Daryl Fairweather said of that report.
LEGAL BRIEF
CONSTRUCTION DEFECT LIABILITY. For condo associations seeking construction defect damages, the liability links may not be as clear or as direct as they would like. In this Illinois case (1400 Museum Park Condominium Association v. Kenny Construction Company), the courts found that an association could not sue the general contractor for the more than $1 million it cost the community to repair latent defects.
The developer(1400 Museum Park) hired Kenny Construction to build the 260-unit community. In 2011, after all the units had been sold, the development company was dissolved. Two years later, the association found leaks in the plumbing system resulting from latent defects in the design, materials and construction of the water supply line. When Kenny refused to investigate, the association paid for the repairs and then sued the contractor for violating the implied warranty of habitability.
An appeals court ruled that owners had a contract with the (now defunct) developer, but not with Kenny; as a result, the court reasoned, the association could not sue Kenny for breaching the warranty of habitability. The Illinois Supreme Court agreed.
The court based its decision on a 2018 case (Sienna) in which the court held that to recover purely economic losses, plaintiffs must have a contract with the defendant. In this case, where the owner of a condominium unit had sued a subcontractor for breach of the implied warranty, the court rejected the owner’s claim because he had no contractual relationship with the subcontractor. ”We find the reasoning and analysis our supreme court applied to subcontractors applies equally as well to general contractors,” the court said, explaining: “Where the losses resulting from defective design and workmanship of a home are solely economic in nature, the economic loss rule bars a homeowner from seeking recovery under a theory of implied warranty of habitability unless there is privity of contract between the homeowner and the defendant.”
The association in Museum Park argued that because Sienna was decided after the condominium was completed, it should not be applied retroactively, because it overruled past precedent. The court disagreed. “Sienna” did not establish a new legal principle, the court said, it simply “clarified that a claim for breach of implied warranty of habitability requires privity of contract to recover purely economic losses resulting from latent defects in the design, materials, and construction of a building….In Sienna, our supreme court reiterated [previous holdings] that the implied warranty of habitability arises out of contract law and determined that, under the economic loss rule, privity of contract is required to bring a claim for breach of implied warranty of habitability.”
The association argued that ‘privity’ wasn’t required here, nonetheless, based on a 2016 decision in which the Illinois Supreme Court found that “privity of contract was not required” to uphold the claim of the second purchaser of a home who had discovered latent defects in the property. That argument fails, the court ruled, because subsequent decisions (including Sienna) “have determined that extending the implied warranty of habitability to subsequent purchasers of a home does nothing more than hold the builder-vendor to obligations arising from its original contract with the first purchaser and recognizes an implied assignment of the first purchaser’s warranty rights, with the second purchaser ‘merely stepping into the shoes of the first [purchaser].’ ”
The association contended that if privity was required, it was established by language in the sales contracts giving the developers “employees agents and contractors” the right to complete construction in accordance with the development plans, and granting them “the right of entry and egress for purposes related to completing the construction of the development. But the court noted that the paragraphs cited are in contracts between the developer and unit owners.
“Kenny is not a party to these sales contracts,” the court noted, adding, “It was museum Park, not Kenny, who agreed to construct the condominium building in accordance with the plans and specifications of the contract, and it was Museum Park, not Kenny, who hired the subcontractor” who constructed the defective water supply line. “There is no evidence” in the contract language or in the record, the court added, that the developer “intended to assign or delegate its rights, obligations, and liabilities…under the sales contract to Kenny,” and nothing to support the association’s claim that owners simply stepped into the developer’s shoes,
The association argued that “privity” could also be found in the “right of entry” provision in the condominium declaration granting access to Museum Park’s “agents, associates, employees, contractors, subcontractors, successors and assigns” for purposes of completing construction of the development. According to the association, Kenny and owners “exchanged valuable consideration” through Kenny’s agreement to construct the development and the owners’ agreement to grant access for that purpose . But the court found that the association had cited “no authority to support its proposition that a condominium declaration, which grants a blanket easement in favor of a builder-vendor for the purpose of constructing a condominium building, establishes contractual privity between the builder-vendor’s general contractor and the individual unit owners, and we have found no such authority….”
The association also sued Kenny for breach of contract, but the court found that the lack of a contract between the company and the owners also defeated this claim. “It is well settled in Illinois that, absent privity of contract, a purchaser or owner of real property has no cause of action against a defendant for breach of contract unless he can demonstrate that the contractual obligations and duties were undertaken for his direct benefit….). “It is not enough that the parties to the contract know, expect or even intend that others will benefit from the construction of the building in that they will be users of it,” the court emphasized. “The contract must be undertaken for the plaintiff’s direct benefit and the contract itself must affirmatively make this intention clear.”
In this case, the court found no language either in the sales contracts between the developer and the owners or in the contract between the developer and Kenny establishing that Kenny was acting “for the direct benefit” of the owners. “Because the association has failed to establish that there was contractual privity between the individual unit owners and Kenny,” the court concluded, “the association cannot pursue a breach of contract claim against [the company].”
WORTH QUOTING: “It’s not a bubble, it really is about the fundamentals… It really is about supply and demand — not enough houses, and huge numbers of people wanting homes.” ─ Jenny Schuetz, a housing researcher at the Brookings Institution.