MILLENNIAL MINDSET
Although most industry surveys continue to indicate that homeownership remains an important part of the American Dream, some analysts have detected what they think may be a sea change in the attitudes of millennials, who have not yet jumped on the housing ladder.
Caren Maio, a millennial and a real estate professional, described that change in a recent blog: “In the span of a decade, the American Dream of homeownership has lost a good deal of its luster,” she wrote. “In its place, renting, long considered a stopgap solution, is quietly emerging as the new American choice.”
“The forces that have given rise to renting, not to mention Uber, Airbnb and other iterations of the sharing economy, aren’t entirely economic,” Maio suggests. The millennial embrace of “no-ownership,” she says, “is also motivated by a desire to minimize environmental footprint and avoid being bogged down by an abundance of stuff we might want to use, but certainly don’t need to own. Renting fits squarely into this generational ethos.”
Industry executives generally believe that it is not a diminished interest in home ownership but a lack of financial capacity that is keeping Millennials on the home buying sidelines. Rising interest rates, increasing home prices, record low inventories (limiting choices and pressuring prices) and student debt, they say, are creating obstacles many prospective buyers can’t overcome.
Student debt is a particular problem. In a recent survey by the National Association of Realtors, 60 percent of the non-owners who have outstanding student loans said they are not comfortable taking on a mortgage.
BREATHING ROOM FOR THE FED
With the spring home buying season just a couple of calendar page turns away, industry executives are focusing on the employment picture and interest rates as key indicators of what to expect. The December labor market report surprised on both the up side (the gain of 227,000 jobs was better than expected) and the down side – the pace of wage growth fell below expectations.
Analysts generally agreed that the mixed results will support the Fed’s view that additional rate hikes are indicated this year, but ease the pressure to enact them quickly.
“This buys them some breathing room,” Mark Doms, senior economist at Nomura Holdings Inc., told the Wall Street Journal. Rob Martin, an economist at Barclays, agreed, telling the Journal: “On balance, this reduces the probability of a near-term rate hike but it is not a fundamental game changer. “If you’re an FOMC member that wanted to hike in March, you can argue for that,” he added. “But if you’re an FOMC member that wants to be cautious, there is plenty of evidence for that.”
To no one’s surprise, the Fed left interest rates unchanged at its January meeting, issuing a statement that emphasized the economy’s continued improvement (reflected in the labor market, consumer spending and consumer confidence), while also noting ongoing concern about business investment, which remains soft. Analysts will be listening closely to Fed Chair Janet Yellen’s Congressional testimony Feb. 15th for a clearer indication of what the Fed is going to do — and when.
CONFIDENCE RISING – AND FALLING
Consumer confidence in the housing market recovered slightly in January, following five consecutive monthly declines, but confidence in the economy overall, measured by The Conference Board, weakened. The broader Consumer Confidence Index fell to 11.8 in January from a three-year high of 113.3 in December, reflecting diminished expectations for business conditions, employment and consumer income. But the critical current conditions measure improved, Lynn Franco, the Conference Board’s director of economic indicators, noted, indicating that consumers “remain confident that the economy will continue to expand in the coming months.” Separately, the University of Michigan’s Index of Consumer Sentiment reached its highest level in 12 years in January.
Fannie Mae’s monthly Home Purchase Sentiment Index also increased in January, driven by improvements in four of its six components, with more Americans reporting increases in their personal income, and an increasing number predicting that home prices will continue to rise. The share of respondents who agree that this is a good time to sell their homes increased by 7 percentage points, while the percentage who judge now to be a good time to buy slipped by 2 percentage points.
“Three months after the presidential election, measures of consumer optimism regarding personal financial prospects and the economy are at or near the highest levels we’ve seen in the nearly seven-year history of the National Housing Survey,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “However, any significant acceleration in housing activity will depend on whether consumers’ favorable expectations are realized in the form of income gains sufficient to offset constrained housing affordability. If consumers’ anticipation of further increases in home prices and mortgage rates materialize over the next 12 months, then we may see housing affordability tighten even more.”
NOT SO BAD
The Trump Administration’s decision to suspend the cut in the FHA mortgage insurance premium cut the Obama Administration had announced in its waning hours drew an angry backlash from housing industry executives and consumers. But analysts at the Urban Institute recently weighed in on the other side of that argument, suggesting that the impact on prospective homebuyers will be minimal, and more than offset by the opportunity to further strengthen the FHA’s insurance fund.
Analysts Laurie Goodman and Bing Bain note in a blog that the scant 25 basis point reduction in borrowing costs would have been more than offset by recent increases in mortgge interest rates, “so no borrower would have been in a better position to borrow after the price reduction than they were two to three months ago when rates were lower.” Other policy changes – including “reducing the costs and complexities” of servicing troubled loans, and eliminating uncertainty about enforcement of the False Claims Act, they suggest, would do far more than the FHA premium reduction to increase access to mortgage credit.
DRONES DELAYED
Regulations that would expand commercial uses of drones, delayed last year because of security concerns, may be delayed further because of the Trump administration’s temporary freeze on the issuance of new regulations.
The Federal Aviation Administration (FAA) had promised the long-awaited regs by the end of last year, but backed away from that timetable when law enforcement officials expressed concern that unidentified drones flying overhead at public event created a serious security threat.
“As drone flights over people become more and more common place, imagine the challenge of a local police officer who is trying to determine which drones are properly there to photograph the festivities and which might be being operated by individuals with more nefarious purposes,” Michael Huerta, the FAA’s Administrator, explained at a recent trade show.
Until the security issues surfaced, the agency had been grappling primarily with the safety risks posed by aircraft that could cause serious injuries if they fell from the sky. Drone advocacy groups – representing commercial enterprises that want to take advantage of the technology – have suggested allowing virtually unrestricted overhead flight for the lightest vehicles, while imposing safety-related limits on larger ones, for example, limiting how close they can come to crowds.
Business executives, who usually argue against regulations, are in the uncharacteristic position of urging the FAA to act quickly to finalize the drone rules, because drones won’t be able to take flight in large numbers without them.
“It’s counter intuitive to think that rules will create economic activity,” Lisa Ellman, co-director of the Commercial Drone Alliance, told Insurance Journal. “But in this case it does.”
IN CASE YOU MISSED THIS
The rise in rates during the last three months has lowered the median size mortgage that borrowers can qualify for by 9%, according to a new report from Fitch Ratings.
The negative equity rate fell to its lowest level in more than 10 years last year, while the inventory of foreclosed properties declined by nearly one-third.
Republicans are pressuring President Trump to remove Richard Cordray from his position as head of the Consumer Financial Protection Bureau; Democrats are pushing equally hard in the opposite direction.
Forty percent of the IT professionals responding to a recent survey said their companies don’t have a disaster recovery plan, and fewer than half of those that have plans test them regularly.
How’s this for a stark choice? Economists are predicting that the next four years will bring either a severe downturn – or the longest economic expansion in the country’s history.
LEGAL BRIEFS
FOUL PLAY
The basketball court Rob Hoffman constructed in his back yard was a dream answered for his six children, but a living nightmare for his neighbors, the Bedows, who complained about the noise and the annoyance of stray balls landing in their yard. Not surprisingly, the dispute escalated over time and eventually wound up in court, with the Bedows contending that the basketball court violated both the setback requirements in the neighborhood association’s covenants and the association’s prohibition of nuisances. The trial court rejected both claims, concluding that playing basketball was not inherently a nuisance, and that the basketball court was not subject to the setback requirements. An Illinois Appeals Court agreed on both counts (Bedows v. Hoffman).
On the setback issue, the Bedows relied on the covenant language requiring that any “main or accessory building” located on a lot be set back at least 10 feet from the side boundary line of an adjacent property. The key question for the court was whether a basketball court is a building. The court concluded that it was not, because it did not meet the dictionary definition of a building as “a roofed and walled structure built for permanent use.” While the basketball court might well be deemed a permanent structure, the court said, “it in no other way resembles a ‘building,’ [which] in our view…must contain open space within its interior, a quality a slab of concrete obviously lacks. Nor does a slab have walls or a roof.” The basketball court was, indeed, ‘built,’ “in the sense that it was constructed,” the court agreed, but that did not make the basketball court a building.
Focusing more intently on the nuisance question, the Appeals Court found no grounds for defining basketball playing as a nuisance either under the association’s covenants or under Common Law. The covenants prohibit activities that are “noxious or offensive” of that “may become an annoyance to the neighborhood.” The trial court found that there was nothing “noxious or offensive” about playing basketball in a residential neighborhood, where the activity would be viewed as normal, and the Appeals Court agreed.
“Children playing basketball at reasonable hours is neither ‘noxious’ nor ‘offensive,’ the court said. “Although such playing clearly annoyed [the Bedows], their subjective annoyance is insufficient to constitute a violation of the nuisances covenant. Instead, an objective standard applies,” and under that standard, the court said “we conclude that no objectively reasonable person would find the basketball playing about which the Bedows complained to be either a nuisance or annoying.”
To establish a Common Law nuisance, the court noted, the Bedows would have to demonstrate that the basketball playing constituted a “substantial, intentional and unreasonable” infringement on the use of their property, and that it was distinguishable from activities that are “everyday and commonplace.”
While the Bedows claimed that the Hoffman kids played basketball incessantly, “at all hours of the day and night,” they cited only one example of a situation when the evening play went past 10:00. Apart from that apparently isolated incident, the court said, the evidence documented “normal and healthy outdoor play…at reasonable hours….It was [the Bedows’] burden to plead sufficient facts to distinguish the Hoffmans’ play from the normal, everyday occurrences that a person should reasonably expect to encounter in a residential community such as [this],” the court concluded. And the Bedows, in the court’s view, ‘failed to meet that burden.”
WORTH QUOTING
“It’s a great political statement to say you’re going to make America great again by bringing back the homeownership rate, but some of the reasons the homeownership rate is falling don’t have to do with economic policy at all. [They have] a lot to do with demographics.” ─ Ralph McLaughlin, chief economist at Trulia.
Marcus, Errico, Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.
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