National REIA Legislative Update
Very few people have the ability to clearly look into the future. Even fewer have the humility to acknowledge that they are supposed to do so and cannot. The latter group does not hold a seat at the U.S. Federal Reserve (or foreign central banks). In fact, using history as a guide, albeit at arm’s length because “things are different this time”, is not necessarily a bad way of addressing re-occurring problems. However, when the fuel of political pressure is added to the fire of hubris, there will be problems. Problems may be a bit of an understatement for gas going to $6/gallon and diesel potentially being rationed, food shortages growing with food riots already breaking out around the world. The loss of consumer confidence is somewhat inevitable as 24-hour news channels hype every mole hill as a mountain and politicians looking to make gains or hold their seat pontificate ever more dramatically; it becomes difficult to determine where the real landmines are buried.
Like many financial advisors say, don’t pay too close attention to the daily fluctuations, but look for the trends. Inflation is going up and housing demand is coming down, however, entry level market rate housing is, and likely will be, in high demand due to demographic trends. So too will rentals fall into that same niche. For example, rentals are often rated in 4 categories: from Luxury A properties to D properties awaiting demolition or rehab. During the Housing crisis of 2008-14, the B rated properties did quite well, in part because longer term market forces buoyed them. No matter the vacillation of the Fed, the right property can and will be a good buy.
Every investor has heard too often the mantra about location, however, please keep the impact of legislation in mind when buying real estate. For example, in some areas of the country, there was minimal impact due to Covid shutdowns, or none at all. In California, (yes, I’m picking on the Golden State) the ability to evict a resident who hasn’t paid rent since March of 2020 may be extended to sometime in mid-’23! And that’s just to start the eviction process. Some municipalities will require the new property owner to cover the cost of moving the resident at lease termination, or cover the cost of the attorney through other taxes in Right to Counsel areas.
Rent Control has been spreading, as bad ideas do, with social media hyping it as a solution, and political causes funding the effort for their own ends. When purchasing, the whole cost of the property, not only your plans, but your exit strategy can be greatly impacted by a new law or regulatory interpretation: be sure to check with your local REIA about ongoing legislative issues. Afterall, thousands of New York property owners lost their life savings that had been poured into a building when Rent Control first went into effect…and it’s happening again due to the most recent New York Rent Control & Stabilization rulings, which by the way approved their highest(!) rating increase ever at 2-4% for annual leases. With inflation hitting 8% in March of this year alone, fewer people will invest in areas where a return on investment (profit) is precluded, thereby exacerbating the current supply shortage!
Over the past several years, Covid notwithstanding, the Housing First and Housing as a Right groups have made noise about Affordable Housing: with this nebulous term, there is never enough, with some areas demanding more housing than the region has people (see LISC presentation 2017 to the Cincinnati Fed Reserve) which stated that 94,180 more housing units were needed immediately! 40K of those homes were to be completely free with government subsidy, the majority of the rest would have some subsidy. Of course, there was no funding plan for such an outrageous claim, because even they knew the claim was ridiculous. Nevertheless, they had a “study” and claimed a need, eventually their squeaky wheel gets the grease.
SIDENOTE: We do not have a Representative Democracy we have a Government of Squawker Response. Those who make the most noise, likes chicks in a nest, get fed the most.
As a corollary to the Affordable Housing call, there are several facets of impact that groups have focused on based upon the receptiveness of their region and they range from screening limitations to anti-eviction efforts, from Source of Income to Right-to-Counsel, from affordability carve-outs in new developments to Rent Control and full government take-over of housing as a matter of public principle vs capitalist profiteering.
From Louisiana investors fighting back screening restrictions, to Illinois passing HB 2775 that protects the Source of Income with broadly expansive language requiring property owners to accept the government as their business partner and comply with all local housing authority regulations, or Right to Counsel expanding in New Orleans, Detroit and Chicago, the activists are in full force. Rent Control efforts are expanding in California, Minnesota and cities across the Midwest: What you don’t know could really hurt your investment!
Be sure to click on the Advocacy tab on National REIA’s website (www.NationalREIA.org) and then, once there, click on “Bill Tracking” to stay up to date with state specific issues.
In May the Biden Administration rolled out a new (mostly) Housing Shortage response which included a large mix of regulatory and legislative fixes. The legislative projects are pretty much D.O.A. in this political environment, so we’ll save space and focus on the things that can actually impact RE investors. Regulatorily, and of great interest, there was instruction by the White House to HUD and thereby FHA and FHFA and the subsequent Fannie, Freddie Mac, & Ginnie Mae organizations to consider supporting various housing finance options.
The primary focus was on Modular Housing and building a federal support mechanism for currently utilized chattel loans. As modular homes (typically trailers) are classed as personal property they have not had the benefits of standard mortgages. Banks will typically require a personal loan at a higher interest rate, and have to keep the loan “on their books”. Providing a federal support system could create additional appetite and support for the modular home classification as well as improve overall values as financing options increase. One caution, as the chattel loan values are quite low in contrast to most mortgages, banks may still regard them as too costly due to Dodd-Frank requirements and eschew them. However, the expansion of CRA considerations with regard to housing finance options may balance out the high cost to loan value. More to come on this as the program is developed and comments sought.
A standing proverb to those in law-making circles: “What the Legislator, gives the Regulator takes away,” may be more true now than ever. With legislative logjams in place in part due to razor thin margins, as well as a loss of bipartisanship and the upcoming election, the Biden Administration perceives the most expedient option to be regulatory rule making. The Department of Energy is focused on Energy Benchmarking for all real estate with residential property viewed as the low hanging fruit, and most impactful for their constituency. The Environmental Protection Agency is reviewing Lead and Radon rules with expansions of both issues already announced.
Of course, the Department of Housing and Urban Development, now that many of its political positions are filled either by confirmation or by temporary assignment, is quickly increasing review and repeal of previous administration regulations. From Flood Insurance which has had recent hearings in the House for a 2.0 version, to mandates on Internet Accessibility for all residents of federally subsidized properties – which can include Housing Choice Voucher Holders: This is a head’s up to those in Illinois that may have new requirements coming with those vouchers that must now be accepted! National REIA is tracking these Regulatory efforts and weighing in with key leaders and as part of the larger housing coalition as appropriate.
Cyber updates: Phishing …
From the early 2000’s when state-sponsored cyberwarfare became publicly recognized until by China, Russia, North Korea and Iran, to the substantial increase with the most recent Russo-Ukraine war, US citizens and businesses have been the target de jour. Most of us are aware of phishing efforts: that unknown name email asking for help, etc. And most of wouldn’t click a link in an email that we don’t know who it’s from. However, the substantial increase in fake emails simulating your bank, or various business partners with invoices to download – appearing to be PDFs – are increasingly a venue for malicious software, i.e. malware. Please make sure your virus protection software is up to date, automatically updating if possible. Additionally, even in this quick response world, if an email, invoice or otherwise, raises suspicions, pick up the phone an make a quick call. It may save your hard drive and your sanity!
Fair Housing Training: get it.
Testing…1, 2, 3…
HUD has significantly increased funding for testers and fair housing violations – please make sure you and your business (ALL employees) are up to date on ALL fair housing requirements. This is especially true for reasonable accommodation requests. The housing industry is quite familiar with the highly abused issue of companion animals (not pets!) and a mistake or misstep can cost thousands of dollars. As the new federal administration is settling in and making adjustments, please take an updated fair housing class! Besides, with local, state and various federal programs having potential jurisdiction, not to mention all the bad advice and misinformation on the Internet, a professional in the housing industry really does need to stay up to date on these issues. Many cases are often related to misunderstandings of rights on both sides that should have been resolved early on, but personalities and stubbornness resulted in litigation rather solution seeking. Please don’t let a lack of knowledge cost your company or your reputation.