Tuesday, April 30, 2013

It's Not Supply and Demand

One of the fun things about writing on tenant issues is that you get to keep re-using stuff that you knew 20 or 30 years ago.  You never have to study up because nothing changes.  The landlord/real estate/economist interests make the same arguments year after year, no one ever challenges them, and so they never have to say they were wrong.  Ever.

This piece is stolen from an article by Ted Gullicksen, published in the Tenant Times in 1992--yeah, more than 20 years ago.  I found it in the process of throwing away old papers that I don't want to keep. 

But one of the things we should have learned about rental housing is that supply and demand doesn't determine its cost.  It just doesn't.  And that's simply because there ain't no free market in rental housing.  Let's look at the conditions for a free market (from Edgar Olsen, Professor of Economics at the University of Virginia):

1.  Buyers and sellers are numerous. Well, buyers (tenants) are numerous, but sellers not so much.  There are far more tenants than landlords. Simple counting.  And tenants need to rent housing more than landlords need to find tenants.  A tenant needs a place to live every month, while a landlord can leave an unit vacant for months.

2.  Neither buyers nor sellers collude.  Well, Adam Smith pointed out a long time ago that employers didn't need to directly collude to push down wages.  Sellers of rental housing don't need to collude--they just get on Craigslist and see what the going rates are.  If landlords see those rates going up, they can increase their asking rent pretty easily.

(In fact, I once had the experience of a prospective landlord announcing that he had discovered that he could get more rent for the place we were looking at and was therefore raising the asking rent.  That's an automatic "no" from us, but other people may not have a choice.)

3.  Entry/exit from the market by consumers is easy.  Weeks of time, thousands of dollars, need I say more?

4.  Producers and consumers possess thorough knowledge of comparative prices and qualities.  Luckily I have a husband who checks the place out thoroughly--using this meter thing to make sure the house is wired correctly, checking the cabinets for evidence of vermin, turning on the water and flushing the toilet to check the water pressure etc.  But there are a lot of things tenants won't know until they move in.  Is there sufficient power to run more than one appliance at a time?  Are there mold or water leaks that have been painted over?  In addition, tenants can't go to see every unit for rent at any given time to compare them.

(In addition, the law makes it very difficult to get out of a lease once the tenant has signed it, if the tenant finds that conditions were not as advertised.  A tenant who breaks a lease and moves faces serious legal risks.  Interestingly, a landlord who doesn't allow a tenant to move in after signing a lease faces some risk, but far greater hassle is borne by the tenant.)

5.  No artificial restrictions are placed on demand or supply.  Doesn't require comment.  And I'm not talking about the kind of zoning restrictions that prevent apartments from being constructed near fertilizer plants.  Many communities don't want rental housing, and have the clout to prevent it.  That, folks, is an artificial restriction.

6.  The service or product is homogeneous.  Every rental unit has a monopoly on its location.  No two units are identical, as anyone who has looked at two identical units in the same complex and chosen one over the other knows.  It's not like buying a TV or a new dress.

7.  The individual sale or transaction is small in relation to the overall number of transactions.  Gullicksen notes that the market does work in this respect!

So why, if this is so obvious, do people from Paul Krugman on right think that rent control is bad because it impinges on the free market?  Uh, political power, economic power, and laziness, not necessarily in that order.

You can look at the rental vacancy rate and median rent graphs here.

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