Proposal for National rent control, what does this mean for prices and supply, why are rents increasing

It is no secret that rent has skyrocketed throughout the country. Nationally rental growth peaked at 17.45% year over year in March of 2022. Some markets like NY and FL have exceeded over 31% rent growth annually. What are the three causes of huge jumps in rents? Will rent control solve the “rent inflation” or make matters even worse? What does this mean for property owners and renters? Who wins and what are the unintended consequences as a result?

What are 3 causes of skyrocketing rents?

There are the three key causes of National rent inflation: basic economics of supply and demand coupled with ultra low interest rates and onerous rules about evictions

Basic economics never fails, supply and demand have gotten out of balance. Demand has increases as prices of houses have gotten more expensive, furthermore with Covid more people wanted larger spaces or their own space due to quarantines. Unfortunately supply has not kept up for a few reasons. First, it is expensive to build due to land costs, labor, and zoning/taxes. As all of these items have increased builders have gravitated towards higher end properties since this is the only way for them to make a return on their investment. Zoning and taxes have exacerbated the situation. For example as taxes increase, rents have to increase to account for the taxes. Furthermore, zoning has limited the number of new properties coming online. All these factors have led developers to focus on higher tier properties further driving up the rent.
Ultra low interest rates have also caused issues with the supply/demand equation. Low rates have allowed more homes to be bought for investment purposes. Investors bought 24% of all single-family houses sold nationwide last year, up from 15% to 16% annually going back to 2012, according to a Stateline analysis of data provided by CoreLogic, a California-based data analytics firm. The issue is especially acute in some Sun Belt states amid evidence that investors often can outbid other buyers, keeping starter homes out of the hands of would-be owners. Ultra low interest rates have supercharged the purchase of homes by investors as leverage can substantially increase returns.
Eviction Moratoriums: Making it more difficult for owners to evict non paying tenants raises costs for everyone. For example, I had a property that it took over a year to evict a tenant due to the moratoriums. During this time period I was still paying utilities, taxes, mortgage, etc… so to recoup these costs, new rental rates were raised which is a contributor to the rent inflation. Furthermore, I am much more cautious on future tenants and I have made the decision to keep rates high and get the right tenant to alleviate future issues.

What would federal rent control look like?

Fifty Democrats in Congress last week sent a letter urging Mr. Biden “to pursue all possible strategies to end corporate price gouging in the real estate sector and ensure that renters and people experiencing homelessness across this country are stably housed this winter.” Here are the proposals:

Require Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises Fannie Mae and Freddie Mac, to establish “anti-price gouging protections” and “just cause eviction standards” in rental properties with government-backed mortgages.
Require the Federal Trade Commission to issue “new regulation defining excessive rent increases” as an unfair trade practice.
Conditioning Department of Housing and Urban Development (HUD) grants on localities “mitigating cost burden and adopting anti-rent gouging measures.” So if cities want federal funds to build more housing for their homeless, they’d have to cap rents.

It seems like legislating is now done by executive action as opposed to through the legislative process of Congress so I would not be surprised so see executive action taken on the above soon. Fortunately, the supreme court has not looked to fondly on legislating through executive action so it will likely be tied up in the courts for a while, but in the interim there is allot that can be done via executive action. Student loans are a great example as nobody has had to pay in the three years even though it will likely get overturned.

How has rent control worked in other cities?

Rent control is not widespread in the U.S. According to a recent study by the Urban Institute, 182 municipalities in the U.S. out of about 89,000 have rent control regulations, and all of them were in New York, New Jersey, California, Maryland, or Washington D.C. The reason it is not widespread is that rent control doesn’t work and over the long term has the opposite effect.

Rent Control reduces supply:

According to the Brooking institute, a liberal leaning organization:

DMQ find that rent-controlled buildings were 8 percentage points more likely to convert to a condo than buildings in the control group. Consistent with these findings, they find that rent control led to a 15 percentage point decline in the number of renters living in treated buildings and a 25 percentage point reduction in the number of renters living in rent-controlled units, relative to 1994 levels. This large reduction in rental housing supply was driven by converting existing structures to owner-occupied condominium housing and by replacing existing structures with new construction.

Rent Control reduces value:

To calculate the value of a commercial property, you take the Net Operating income by the rate of return (cap rate). With rent control the net operating income is reduced drastically (less rents) and therefore the property is worth less. Furthermore without profit motivation and a built in tenant base property owners are considerably less likely to take care of the properties. Cambridge is a unique study as they had rent control and passed legislation to remove rent control. The impacts on the market were profound:

From December 1970 through 1994, all rental units in Cambridge built prior to 1969 were regulated by a rent control ordinance that placed strict caps on rent increases and tightly restricted the removal of units from the rental stock. In November 1994, the Massachusetts electorate passed a referendum to eliminate rent control.

Author, Palmer, and Pathak (2014) (APP), studies the impact of this unexpected change and find that newly decontrolled properties’ market values increased by 45 percent. In addition to these direct effects of rent decontrol, APP find removing rent control has substantial indirect effects on neighboring properties, boosting their values too. Post-decontrol price appreciation was significantly greater at properties that had a larger fraction of formerly controlled neighbors: residential properties at the 75th percentile of rent control exposure gained approximately 13 percent more in property value following decontrol than did properties at the 25th percentile of exposure. This differential appreciation of properties in rent control–intensive locations was equally pronounced among decontrolled and never-controlled units, suggesting that the effect of rent control had been to reduce the whole neighborhood’s desirability.

The economic magnitude of the effect of rent control removal on the value of Cambridge’s housing stock is large, boosting property values by $2.0 billion between 1994 and 2004. Of this total effect, only $300 million is accounted for by the direct effect of decontrol on formerly controlled units, while $1.7 billion is due to the indirect effect. These estimates imply that more than half of the capitalized cost of rent control was borne by owners of never-controlled properties.

Rent Control increases taxes:

It is well established that rent control reduces values but nobody is talking about how rent control will increase everyone else’s taxes. As property values decline, so does the amount of property taxes collected as taxes are based off values. With steep declines in values caused by rent control to not only the apartment owners but entire neighborhoods, how will local governments continue to provide the services now. Either services will be cut (which never happens) or taxes will need to be increased on all property owners to make up for the lost revenue due to the decline in values.

New York Case Study:

When I think of rent control, the first city that comes to mind is New York (hopefully everyone remembers the sitcom friends based in rent-controlled apartments). So how has NY fared as a result of their rent control ordinance? Not so well. According to the NY Daily: Median apartment rents in the city have increased 75% since 2000 — a rise 31 points greater than in the rest of the country, according to a report released by the city controller’s office. Over the past decade, 400,000 affordable housing units renting for $1,000 or less have disappeared, Stringer said.

Even with the most restrictive rent control in the country, NY tops the list of rent appreciation at 31%, above almost every other metro area in the country

Summary

To counteract the skyrocketing rents, the federal government has come up with a worn-out idea to implement rent control. Who doesn’t want to see rent stay constant? Unfortunately, someone must pay. Countless studies on both the right and left have shown that rent control only addresses the symptoms not the root causes.

If there’s any consensus in economics it’s that rent control achieves the opposite of its intended goal. It leads to housing shortages by discouraging new development and maintenance of existing properties. Furthermore, rents rise faster in properties not subject to controls. We are seeing this first hand in cities like NY. The real solution is to increase supply which rent control would only make worse. Unfortunately, rent control is the wrong tool to fight the housing challenges facing cities throughout the country.

Resources/Additional reading:

We are a Private/ Hard Money Lender funding in cash!

If you were forwarded this message, please subscribe to our newsletter

I need your help! Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.

Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).

Tags: Hard Money Lender, Private lender, Denver hard money, Georgia hard money, Colorado hard money, Atlanta hard money, Florida hard money, Colorado private lender, Georgia private lender, Private real estate loans, Hard money loans, Private real estate mortgage, Hard money mortgage lender