APRIL, 2021
HOUSING DISCONNECT. Reports on housing market conditions during the past year have chronicled the disconnect between an economy hobbled by the pandemic and a housing market that seems to exist in an alternate universe, seemingly unaffected by lockdowns, job losses, and economic uncertainty. As economic indicators have trended downward, the housing market has seemed to gain strength.
Those trends continued in February. Home prices increased again, rising 15.8 percent above the year-ago level, according to the National Association of Realtors while existing home sales increased by almost 10 percent year-over year, retreating significantly from the 24 percent gain posted in January. February sales declined by 6.6 percent compared with January, Pending home sales, a marker for future transactions, declined for the fifth consecutive month in January, the most recent data available, reflecting the dearth of homes available for sale. Even with that decline, the National Association of Realtors’ (NAR’s) pending sales index beat the year-ago measure by 13 percent.
“It is not that demand is disappearing from the marketplace,” Lawrence Yun, chief economist for the NAR, told the Wall Street Journal. It is “the lack of supply,” he said, that explains the declines in both existing and pending home sales.
Real estate industry executives have been sounding the alarm for more than a year about the mismatch between the increasing demand for homes and the shrinking supply of available homes for sale. Rising prices, they have warned ─ a result of that imbalance – risk putting homeownership beyond reach for first-time buyers generally, and for lower-income minority buyers in particular. Some lawmakers are beginning to focus on the issue.
“The dream of homeownership is out of reach for so many working people,” Sen. Sherrod Brown (D-OH), chair of the Senate Banking Committee, told Politico. “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.” As prospects for controlling the pandemic brighten, Brown has said he intends to make housing affordability a priority for his committee this year.
BUILDING COSTS. Sustained strong demand for both new and existing homes ought to be making builders happy. So why has the index measuring builder confidence levels been declining? The rising cost of materials is a major reason. Lumber prices have more than doubled since the beginning of the year, adding $24,000 to the cost of a new home, the National Associations of Home Builders (NAHB) estimates.
Lumber isn’t the only problem. Crude oil, the chief component in paint, roof shingles and flooring, among other materials, has increased by more than 80 percent, according to the Bureau of Labor Statistics, copper has increased by nearly 30 percent since last fall, and prices for granite, insulation, and concrete are all setting new records. Land costs and labor shortages are compounding the problems, forcing some builders to halt projects already under way, Matthew Speakman, a Zillow economist, noted in a recent report. Robert Dietz, the NAHB’s chief economist, echoed that concern.
"Demand conditions remain solid due to demographics, low mortgage rates and the suburban shift to lower cost markets,” he observed, “but we expect to see some cooling in growth rates for residential construction in 2021 due to cost factors, supply chain issues and regulatory risks. Some builders are at capacity and may not be able to expand production due to these headwinds," he cautioned.
FORECLOSURE FEARS. With the prospects for taming the CORONA virus improving with the rapidly increasing vaccination rate, businesses and households are anticipating, and many already experiencing, significant relief from the pandemic’s economic damage. But for the millions of people behind on their rent or their mortgages, relief remains a distant hope.
Nearly nine million families owe three months or more of back rent and more than two million homeowners are in default by three months or more on their mortgage payments. – the largest number of homeowners in this position since the Great Recession, according to government data. Federal moratoria on evictions and foreclosures have protected these struggling households until now, but when those federal programs end, evictions and foreclosures will skyrocket, the Consumer Financial Protection Bureau (CFPB) warned in a recent report.
“We have very little time to prevent millions of families from losing their homes to eviction and foreclosure,” Director Dave Uejio, the CFPB’s acting director, noted.
Minorities are particularly vulnerable, according to the CFBP analysis, which found that Black and Hispanic families are more than twice as likely to report being behind on housing payments than white families.
It’s not just individuals who are struggling – Uejio acknowledged. “We know small landlords are struggling, too, with many dipping into savings or using credit cards to make it through the pandemic. Mortgage servicers, on the hook for payments to investors who purchased mortgage loans now in default, are also facing financial pressure, Uejio noted. “We want everyone—homeowners and renters, landlords, and mortgage servicers—to have the tools they need now to avoid unnecessary evictions and foreclosures.”
HIGHER RATES COMING? Are higher interest rates in the offing? Some analysts are predicting as much, anticipating that the Federal Reserve will reverse pandemic policies that have held the benchmark Fed funds rate near zero as an improving economy spurs concerns about inflationary pressures.
Federal Reserve Chairman Jerome Powell acknowledges that the Fed may have to adjust its low-rate strategy at some point, but not in the immediate future, he told lawmakers in recent Congressional testimony. The Fed won’t take its feet off the interest rate brakes, he said, until the economy has recovered further from the effects of the pandemic. “That is likely to take some time” he said noting that “the economy is a long way [from meeting] the Fed’s employment and inflation goals.” It is ”highly unlikely,” he said, that those goals will be achieved this year.
Higher rates, when they come, will almost certainly affect the housing market, “but not to an alarming level,” the NAR’s Lawrence Yun says, and probably not to a significant degree this year. Ruben Gonzalez, chief economist for Keller Williams, agrees. While higher mortgage “will likely weigh on demand some,” he told Housing Wire, “the market is currently so supply-constrained it will likely take some time for the impacts on affordability to have a noticeable impact on market conditions.”
DIVERSITY RISKS. The lack of diversity in their leadership ranks may be increasing the liability risks of U.S. corporations. That concern is leading insurance companies to focus more intently on the recruiting practices and succession plans of companies they insure.
Insurers are insisting on detailed information about diversity practices and recruitment strategies before issuing new Directors’ and Officers’(D&O) liability policies or renewing existing ones, Insurance Journal (IJ) reports.
Among other benchmarks, they want to see evidence that companies are using professional recruitment practices to vet a wide pool of prospective candidates for open positions.
The insurance industry’s concern about diversity results in part from the killing of George Floyd, which sparked nationwide protests and a number of law suits alleging that corporations without adequate minority representation on their boards or in leadership positions have breached their fiduciary duty to investors.
“This is an operational risk that’s not going to go away,” Amber Finch, an attorney who negotiates insurance coverage for corporations, told Insurance Journal.
Recent litigation is cause for concern, Tricia Melley, who heads the professional claims unit for a subsidiary of AXA SA, agreed. “It’s something we’re going to have to watch,” she told IJ.
IN CASE YOU MISSED THIS
The House and Senate have approved legislation extending the application deadline for the Payroll Protection Program from March 31 until May 31.
A government-funded study has concluded that workplace accommodations granted under the Americans with Disabilities Act (ADA) “not only are low cost, but also positively impact the workplace in many ways.”
The owners of a solar energy farm have agreed to pay $1 million to clean up wetlands and riverfronts the installation damaged in two Massachusetts communities (Goshen and Williamsburg. “The impacts to the wetlands and wildlife habitat areas were not only egregious, they were entirely avoidable,” Michael Gorski, director of Mass Department of Environmental Protection’s Western Regional Office in Springfield, said in a press statement.
Demand for cyber insurance is increasing, but as damage claims grow, insurers are becoming less enthusiastic about offering it.
While the housing market continues to suffer from a lack of listings, there is no shortage of real estate agents, who now outnumber the homes available for sale.
LEGAL BRIEF
ALLOWABLE CHANGES. Although condominium owners, in sufficient (typically super-majority) numbers, can usually approve significant changes in the governing documents for their communities, state law and the documents themselves typically limit just how extensive those changes can be. The plaintiffs in this Florida case (Riviera-Fort Myers Master Association Inc. v. GFH Investments)argued that the changes owners approved went too far; the appeals court disagreed.
More than 75 percent of owners in this mixed-use condominium community approved amendments to the declaration primarily affecting the commercial properties. GFH, which owned the two mixed use buildings in this four-building development sued, claiming the amendments were illegal. A trial court agreed and the association appealed the decision.
GFH challenged four key amendments and the court reviewed each independently, considering whether they were: Reasonable; produced unacceptable “radical changes” in the development plan the municipality had approved; impermissibly altered the ownership interests of owners; or impeded their ability to enforce their property rights.
Amendment one: Requiring the association to approve commercial and retail uses for non-residential property.
GFH argued that this amendment added a requirement that was not included in the original development plan. The court disagreed. The restrictions in that plan were ‘minimal” the court noted, and “did not preclude the imposition of additional restrictions” on the mixed-use properties. “Indeed, it is well established that restrictive covenants can be more restrictive than limitations imposed by municipalities,” the court said.
The court also rejected GFH’s argument that restricting its ability to control its property constituted a “radical change” in the relationship between GFH and the condominium association, and violated a provision of the declaration giving GFH the “sole discretion” to negotiate commercial leases it deemed acceptable.
But the court pointed to language elsewhere in the declaration authorizing the board to take any actions affecting the properties that it “shall deem advisable,” consistent with the declaration and applicable law. The declaration also gives the master association “the absolute right” to regulate the use of the properties, making it clear, the court noted, that the amendment “does not in itself alter the relationship between GFH and the Master Association by granting [the association] any power that it did not already possess.”
The court went on to note that language detailing the standards for approving retail or commercial uses actually limits the association’s otherwise “absolute authority,” to regulate use of property in the community. This language specifies that a proposed use can be rejected only if “in its reasonable discretion” the board concludes that it “would detract from the overall resort style residential atmosphere of the property and/or adversely affect property values of the units.”
These standards are “reasonable,” the court said, and consistent with those commonly imposed on residential properties. Any resulting shift in the relationship between GFH and the association “was to GFH’s benefit,” the court added.
Amendment Two: Specifying that the rules and regulations governing residential properties applied to commercial spaces as well.
GFH complained that this change gives the association “unfettered discretion” to create rules for the mixed-use buildings and “is unreasonable on its face,” because it deprives GFH of its right to govern activities within the property it owns. But GFH did not explain “and cannot show” how applying the community’s general rules and regulations to the mixed-use properties harms GFH or “or alters its rights in any way,” the court said, grounds, in the court’s view, for rejecting plaintiff’s argument that injunctive relief was warranted.
Amendment Three: Altering the percentage interests of commercial parcels.
The court found the same flaw in this argument it found in others: That the authority the plaintiff was challenging was authorized under either state law or the community’s governing documents. GFH noted correctly that Florida’s condominium statute requires owners to approve any change in their percentage ownership interest, the court agreed. But that statutory provision also adds the definitive phrase, “unless otherwise provided in the governing documents.” The association’s master deed specifies that the association “shall” alter ownership interests based on further development of the common areas, services provided to owners “and other relevant factors.” Given that clear language, the court said, the challenged amendment was “authorized and enforceable.”
Amendment Four: Specifying that restrictions on the ownership and handling of pets applied to commercial as well as residential units.
GFH argued that these restrictions improperly limited activities within commercial buildings, but the court agreed with the association that the restrictions were consistent with its authority to adopt rules “reasonably necessary to protect, maintain and operate the properties.” Restrictions applicable to the mixed-use buildings were identical to those imposed on the residential properties, the court noted. The regulations were also reasonable the court said. Because pets in the mixed-use buildings would necessarily have to use common areas outside, the court explained, “they can therefore be regulated to a reasonable degree to protect the community members’ mutual enjoyment of the common area.”
Amendment Five: Requiring the association to approve leases for residential properties in the multi-use buildings.
This amendment, which also imposed a minimum lease term of more than 30 days, did not improperly interfere with GFH’s authority to control actions within commercial spaces, the court reasoned, because it applied only to properties designed “primarily” for residential use. The court also emphatically affirmed the association’s interest in protecting the value and character of the community and the board’s broad authority to approve regulations related to that goal, noting:
“Given the unique problems of condominium living in general and the special problems endemic to a tourist oriented community in South Florida in particular, appellant's avowed objective—to inhibit transiency and to impart a certain degree of continuity of residence and a residential character to their community— is, we believe, a reasonable one, achieved in a not unreasonable manner by means of the restrictive provision in question.” The court concluded: “The attainment of this community goal outweighs the social value of retaining for the individual unit owner the absolutely unqualified right to dispose of his property in any way and for such duration or purpose as he alone so desires within that context.”
WORTH QUOTING
There’s going to be a lot of spending out there from pent-up demand, from low interest rates, from all the money consumers have saved up from rising incomes.” ─ Gus Faucher, chief economist at PNC Financial Services.
Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island, New Hampshire and Maine.