Rent Control and the Current Financial Mess – A Look at an Incredibly Silly Story
There’s a trope going around among libertarians and many Republicans– I’ve seen it in a few places – that the mess on Wall Street is due to excessive regulation.
This tripe by Richard Epstein in Forbes.com is a good example, as it contains both elements of the trope.
The first part of the trope (though the order appears interchangeable) is an inexplicable need to mention rent control in NYC. Now, we’re told that “ruined New York City real estate markets.” Those are Epstein’s words, but we’re heard it before. Rent control has been around in NYC since 1943, and libertarians and Republicans have been telling us its “ruined New York City real estate markets” literally for generations now.
Now, I haven’t been in NYC in decades, but I do know this. After a few decades, there’s time for a market to adjust. If it doesn’t pay to be a landlord, expect fewer people to want to be landlords – the supply of dwellings for rent relative to dwellings for sale will dwindle. If it doesn’t pay to be a renter, expect fewer people to want to be renters – the demand for dwellings for rent relative to dwellings for sale will dwindle. Either way, if rent control “ruined New York City real estate markets” and has been doing so since 1943, one thing we should expect is that the percent of occupied housing units that are owner-occupied (as opposed to renter occupied) in NYC is much higher than in places where the real estate markets were not ruined by rent control.
According to this fact sheet on the New York City statistical area, the NYC area had a total of 3,020,284 occupied dwellings in 2006, of which 1,040,037 were owner occupied. Put another way, 34% of occupied dwellings were owner occupied. Two-thirds were renter occupied.
This table from the Census shows us the percentage of occupied housing units that are owner-occupied for all states in the US plus the District of Columbia. The average for the US is: 67.2.
Put another way, in NYC, where generations of rent control has destroyed the rental market, two thirds of all occupied dwellings are rentals. In the rest of the US, two thirds of all occupied dwellings are not rentals. By the numbers, it seems the rental market is extremely healthy in NYC relative to the rest of the country. And BTW… the bottom three slots of the national ranking of states and the District of Columbia, the three locations with the lowest percentage of owner occupied housing as a percentage of total occupied housing, were taken up by the Washington DC, New York, and California. It just so happens that when I hear people talk about how rent control has destroyed a market, driving out landlords and renters alike, the story is usually about DC, NYC, or San Francisco. Funny, huh?
Two more points… fourth from the bottom of the list, right above California, is Hawaii, while at the other end (i.e., at the top of the list) we find we find Minnesota, West Virginia, Michigan and New Hampshire. Also, if you work your way through the data, you’ll find that big cities like Boston, LA and Houston all tend to have relatively low homeownership rates. I’m guessing anyone whose mouth isn’t automatically programmed to say “rent control” can noodle out for him/herself exactly what is going on here.
I could go on, but I’ve wasted enough time on what is only a secondary topic to the main story, namely that excessive regulation has destroyed the market. Back to Epstein:
Yet once regulators slow down foreclosures, other potential homeowners are denied opportunities to purchase housing they can afford. The housing stock cannot recirculate. Banks that acquired this mortgage paper see their portfolios nosedive. That dicey paper, as William Isaac noted in last week’s Wall Street Journal, drives the entire economy over the edge by strict government regulations that require all financial institutions to “mark-to-market” the various instruments in their portfolio.
Allow me to translate this from gibberish into English using an analogy. Say I own a ritzy apartment building in NYC, and one fine Thursday, the gubmint passes a new law requiring all apartment buildings to be booked at zero value. This is essentially mark-to-market on steroids, so any effect that mark-to-market would have would be exacerbated under this scenario. But does that change anything at all? Does it in any way change my income? Would it change the amount a bank is willing to lend me in order to renovate the lobby or to buy another building (whose value on paper would also be zero at this point)? Unless I was a complete moron, that new law wouldn’t change the amount which I would have to receive from a buyer in order to sell it. And if I was such a complete moron, there’d be a horde of eager buyers fighting to take advantage of that arbitrage opportunity. Anyone spot the horde of eager buyers fighting to take advantage of the arbitrage opportunity mark-to-market has created according to folks like Epstein? It looks to me that what little paper is selling is selling for significantly less, not more, than its book value, which is the opposite of what Epstein and company would have predicted if Epstein and company had bothered to think through their argument to its logical conclusion.
Come to think of it, there is one real world change that would result from the government forcing me to mark down the book value of a piece of property I own. Granted, I’m no accountant, so I may be wrong, but I would think the new law would provide me with one heck of a write-off (a supposed capital loss) on my taxes.
A bonus we find in Epstein’s piece is the little gem about how laws preventing foreclosures are making things worse. Does Epstein really think home prices, and hence the value of the paper backed by mortgages would rise if more houses hit the market right now? Snark fails me.
Which brings me back to a bugaboo of mine. There’s a huge group of people arguing things that don’t just part company with reality, they’re arguing things that literally contradict reality as completely and thoroughly as humanly possible. It can’t be a good thing for society when the criteria for being a writer at a major publication is essentially the same one for getting you admitted to an asylum and given a heavy dose of medication.