News

Landmark Links February 27th – Bad Medicine

 

Lead Story….  Housing affordability has taken center stage in California of late so I suppose it’s no surprise that rent control is rearing it’s head once again.  One potential proposal on the table is an effort to overturn the Costa-Hawkins Rental Housing Act, 20 year old piece of legislation which stipulates that cities can only control rents on certain types of properties.  As you can imagine, there is also quite a bit of opposition to this move, essentially based on the idea that anything that discourages more building of any type would be bad for a market that is already in such a drastic shortage.  Rent control has long been a four letter word in most economic circles and with it on the cusp of yet another push, it makes some sense to revisit why.  Noah Smith of Bloomberg View took up this task recently in a story called Yup, Rent Control Does More Harm Than Good where he reviewed a recent paper on rent control in San Francisco (emphasis mine):

As with so many questions, the answer can only come from looking at data. Economists Rebecca Diamond, Timothy McQuade and Franklin Qian have a new paper that looks at the effects of rent control in San Francisco, a city notorious for high housing costs. They find that the effects of rent control are pretty much what economics textbooks would predict.

Many studies rely on patchy or incomplete data, but not this one. Diamond and her colleagues used data from a private company that was able to combine public records to track the addresses of all San Francisco residents between 1980 and 2016, even if they moved out of California. This allowed them to study the effects of a change in San Francisco’s rent control policy in 1995. Previously, all small multi-family buildings were exempt from rent control, but since 1995, only buildings built after 1980 are exempt.

How did this large increase in rent control affect renters? Predictably, people subject to the new policy became less likely to move — between 8 and 9 percent less likely, over the medium to long term.

But not all renters benefited equally. The new policy created a powerful incentive for landlords either to convert rental units into condominiums or to demolish old buildings and build new ones. Either course forced existing tenants — especially younger renters — to move. Landlords affected by the new 1995 policy tended to reduce rental-unit supply by 15 percent.

This part of the study is important but has also been known by most people who understand housing markets for a very long time.  Rent control is wonderful for the individual tenants who fall under it’s blanket but can be quite damaging to those who don’t as landlord incentives change.  Smith went on to detail two other largely invisible groups who felt the impact of rent control in San Francisco since 1995 (emphasis mine):

There are two other important but invisible groups of people who were hurt by San Francisco’s rent policy. First, there are people who want to move to the city, but can’t. Second, converting apartments into condos reduces the supply of rental housing and raises rents. The authors’ model estimates that the 1995 policy raised rents in San Francisco by 5.1 percent. That is certainly an unwelcome development in a region plagued by high housing costs.

So rent control helped some people and hurt others. How can these effects be weighed? Diamond and the others constructed an economic model of the demand for housing that let them measure the utilitarian consequences of the policy, and found that the benefit to those who get to stay in their homes almost exactly balances out the various harms the policy causes. Ultimately, they say, rent control is a wash.

But few people are likely to believe strongly in the assumptions of this particular model — there’s the risk that rent control could be more harmful than the authors realize. For example, if greater housing density increases citywide productivity, as is probably the case, the effects of rent control are even more pernicious. And policymakers who believe in an ethos of “first do no harm” have reason to be skeptical of a policy whose effects are so ambiguous.

So, if rent control drives up rents and ultimately reduces productivity by limiting density, why is it still being pushed as a solution to soaring housing costs?  Simple: it is a far more palatable outcome for entrenched NIMBY interests to have housing units removed from the rental pool while fixing rental costs for a few than to have more units built but stabilize costs for many.  Just as with many prevailing wage statutes, rent control acts as a near-zero-growth neighborhood preservation mechanism for many areas where current residents don’t want to see any new housing built since it makes new development less viable.  While there are some true believers out there it’s primarily just another way of achieving a no-growth agenda cloaked in the veneer of altruism for the less fortunate.

Economy

Laggard: The economy now looks more like a boom than a recovery.  However, while wage gains look strong in dollar terms, they are still growing less than half the rate of the overall economy in real terms.

Flipping the Script: Higher oil prices used to spell trouble for the domestic economy, but with the emergence of the U.S. as a leading producer, that no longer holds true.

This (Almost Always) Ends in Tears: Investors have borrowed a record $643 billion against their portfolios as they try to pocket bigger gains by ramping up exposure to stocks, leaving markets vulnerable in a downturn.

Commercial

Cloud Mining: Startups are now leasing vacant warehouse space in areas with low cost electricity, building them out to house servers and leasing space to independent bitcoin “miners.”

No Vacancy: Hotel occupancy rates are off to a solid start in 2018.

Residential

Priced Out: California employers are having a nearly impossible time attracting out-of-state employees because none of them can afford housing here unless willing to spend 5 hours a day in a car.  I found the following quote about economic drag particularly instructive:

But some economists say housing costs are slowing growth by making businesses and employees less productive, by pushing firms to expand in cheaper states and by leaving California residents with less money to spend on iPhones, amusement parks and sporting events.

Exodus:  So many people are moving out of the Bay Area that it’s led to a shortage of U-Haul trucks and a massive price surge:

Rent a moving truck from Las Vegas to San Jose and you’ll pay about $100. In the opposite direction, the same truck will cost you 16 times that, or nearly $2,000.

Profiles

Shake Out: Colleges that struggle to prepare students for success are losing ground as push-back against high-cost, low-return institutions gains steam.

It’s All Relative: JC Penney’s experience in eliminating so-called sales and simply marking items at their intended price – which was the exact same as the “discounted” price to begin with – is proof of the adage that it’s easier to fool people than convince them that they have been fooled.

All Is Well! GE’s business strategy under former CEO Jeffrey Immelt was little more than pretending everything was going great, even when it was not.  Now Immelt is gone and GE is suffering the fallout.

Delusion: Some hoarders…..I mean owners of Beanie Babies are holding out hope that their collectibles are rising in value again thanks to a a deluge of fake news.  However, almost no one wants them.

Chart of the Day

Bringing the wood.  Gets worse when you consider that this is before any impact from proposed infrastructure plans.

WTF

It’s Lit: A man was arrested on allegations that he set fire to the upholstery of his neighbor’s 1984 red Chevy Corvette since he felt the neighbors as a thief and a “crack head,” because Florida.

Morons: Students at a Louisiana high school called the police because they thought that a square root symbol looked like a gun.  Your tax dollars at work.

Gotta Hear Both Sides: A 51 year old Australian man was found drunk and naked inside a huge pipe organ in a Masonic temple with a toy gun and remote-controlled police car.  The man claimed that he got lost while trying to hand out cheeseburgers to the homeless.  Seriously though, who among us….

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

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