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.

Tuesday, April 23, 2013

Happy Birthday to Me

Yes, I'm 58.  My husband thinks I am a "youngster".  And a belated Happy Birthday--her 21st--to L, daughter of friend A.

Saturday, April 20, 2013

Oh, Please, Just Decide Already

Sacramentans are being treated to the continuing saga of the Kings. They've been treated to this for years, so much so that it's likely that my reaction is shared by the vast majority of my fellows.

But the NBA has a problem.  A big one.  In the great scheme of things, Seattle should be the obvious choice.  Ben Stein says so, and I'm inclined to agree with him.  Stein noted that Seattle was a much better choice, as that city is a "powerhouse," while Sacramento is simply a very nice town. (One might argue with that, but it's not important to my point.) So why is the NBA dragging this out?

It's simple.  Seattle's arena deal requires that the owners put in a lot more money, and that Seattle not only put in less, but make money off the deal. Seattle has been burned before, and the voters responded with I-91, which requires that any sports' complex deal guarantee a profit for the taxpayers.  Sacramento's deal gives away the store.  Not only won't the city make money, the city may be on the hook for the bonds if the income projections don't pan out.

So on the one hand, Seattle is a much more desirable choice.  But the Sacramento precedent is one that the NBA owners want to set--cities that want teams, or want to keep teams, should be willing to pay handsomely for the privilege.  And if they aren't, even a "powerhouse" city won't get a team.

Sunday, April 14, 2013

Is It Walmart, or Is It Everywhere?

It's one of those moments when your not sure that it's for real, or if it's something mistakenly reprinted from The Onion.  But Walmart is thinking of experimenting with a system that would ask customers to deliver online orders to their neighbors for a slight discount on their purchases.  Yeah, the problems with this idea should be obvious--liability, theft, and so on.

But as part of the discussion of this stupidity, someone raised the point that WalMart generally doesn't pay suppliers for products until they're sold. If they aren't sold, the supplier takes the loss.  But it's not just Walmart that does that.  It is well-known that a national purveyor of plant material does the same thing.  That's why any plant that's been there for more than a couple of days is near death.  (J once described the place as Plant Auschwitz.)  My objection to this is that, while it may be very "efficient" for the corporate owners--they don't have to hire anyone who knows about plants, or have people take the time to dump water on them--it's environmental evil.  All of the resources devoted to planting and nurturing the tree, shrub, petunia, or whatever is wasted.  And then people wonder why little planet Earth is slowly dying...

Wednesday, April 10, 2013

Blackstone in Sacramento

The basketball "whales" aren't the only whales who've come to town.  Our local paper reports that Blackstone, the investment group, has purchased more than a thousand houses in the region.  Most of them were foreclosures, either purchased at auction or in bulk sales from lenders, and Blackstone intends to fix them up and rent them out.  While the article isn't bad overall (this is high praise from this critic of the Bee), we get the usual "omigod they're going to let tenants live here" mantra, as well as the "will the landlord keep the place up" junk.  Sacramento, a city which is 48% tenants, likes to believe that it's really made up of respectable homeowners who spend their time on home improvement and civic involvement, while the lowlife tenants put their junked cars up on blocks, never clean the bathroom, and deal drugs out of the garage while running a bordello out of the living room.

Blackstone, much like several other hedge funds and the like, saw an opportunity to buy foreclosed houses on the cheap, fix them up, and rent them to former homeowners.  This enables them to charge relatively high rents, as the former homeowners have credit problems that preclude them from renting elsewhere.  They buy in bulk, standardize their improvements, and manage the properties much like apartment complexes.  This isn't necessarily a bad management model, as small landlords often hire as needed or, heaven forfend, try to make repairs themselves.  (I remember once having a prospective landlord tell me that it had taken five attempts to fix the shower in a unit he wanted us to rent.  We didn't move there.)  Having regular staff to take care of maintenance and repair problems is a good thing.

So,the most curious construction was the complaint of unnamed "tenant advocates" who were concerned that Blackstone might not be able to fix a broken kitchen faucet.  Now the faucets are new, so they aren't likely to break anytime soon, unless you believe that the first thing a tenant does on moving in is to head for the kitchen faucet with a hammer.  (I should note here that my husband has replaced two kitchen faucets, one of them in our present rental.  It wasn't that it was broken.  It produced two water temperatures, tepid and scalding, and I wasn't willing to live with that.  He proceeded to the hardware store, purchased a new faucet and the needed supplies, and replaced it for me.  He noted that all you have to do is follow the instructions.)

But getting back to the main point, that isn't what the named tenant advocates said.  In fact, one of them, Dean Preston, said that "he wasn't surprised that a multibillion-dollar investment fund could hire competent property managers and fix toilets."  Preston, Executive Director of Tenants Together, and Melody  Simpson, of watchthisproperty.com, were more concerned about the expected return on investment--some 15%--and what would happen to the tenants when Blackstone decided to liquidate their investment (sell the houses).  Now a 15% ROI might be possible, not because of their superior management, but because they have a captive group of tenants who have few options, and will pay any price for housing.  I couldn't find any information on their income/credit requirements, but one of the other groups will allow tenants to pay 41% of their gross income for rent.  For most people that would leave them precarious every month.

Finally, it always irritates me when reporters don't do simple research to check the assertions of their interviewees.  Blackstone, unlike some of the investor groups, regularly files unlawful detainer actions against the former homeowners, although they asserted that they were filing eviction actions against tenants.  I found at least ten for 2012, and at least 12 more for 2013.  (Yes, I know it's only April, and I can only search for UDs through the beginning of February.)  I know this because I did a simple search of the Sacramento County records, and found Notice of Default and Notice of Trustee Sale for many of those evicted.  It's likely that many of the former homeowners had already moved, so Blackstone's action was simple cruelty, as it makes it much harder for the evicted to find new housing.