Rent Control & Proposition 10

This is for all those who have asked my professional opinion regarding Proposition 10, which makes rent control possible in California, basically by voiding the 1995 Costa-Hawkins Rental Housing Act.

In the process of evaluating this ballot item, I researched a number of relatively contemporary studies and reports. Doing so was an interesting study in how arguments are crafted without ever saying what the source of information is, or proving the validity of same. Below you’ll find a collection of web-based documents I used. Happy reading!

I am not including support for my position in this writing. The facts and arguments are contained in the documents below. If my statement is not convincing, you’re welcome to do your own research.

What I have been able to determine is that rent control most benefits those people who are living in a rental at the time rent control is applied, assuming they remain in that unit. Those people have two benefits. First is the social benefit of being able to continue living where they have been living and know the locale, the neighbors and are close to the places where they regularly travel. Second is the financial benefit that attends having a predictable rent which does not periodically take huge jumps in concert with the ebb and flow of US economic conditions.

As time goes on, laws are gradually changed, and landlords find work-arounds that avoid rent control. As it was stated in one paper, “Rent-controlled buildings were almost 10 percent more likely to convert to a condo or a Tenancy in Common (TIC) than buildings in the control group, representing a substantial reduction in the supply of rental housing.” At that point rent control becomes not only useless, but acts as a constraint on those who would find a more effective or fair way of dealing with the problem of income inequity.

There appear to be lots of different ways to address the problem of inadequate housing for lower and middle class households. The basic rent control mechanisms employed today have not been updated to contemporary standards of research, thinking, and analysis. If we were to apply some “big data” techniques to the problem, there could be some newer, more successful plans developed, much as is being done right now in the field of public housing projects. Ideas that have failed over time should be trashed and new emphasis placed on finding solutions. That has not been done. We are still tossing up the same tired ideas and unproven concepts, and arguing over ancient “facts.”

None of those improvements will take place as long as the current prohibition on rent control continues to exist. While the Costa-Hawkins act remains in place there is no motivation for government or landlords to look for a solution. As is stated in the Haas report, “California can protect cost-burdened renters from exorbitant rent increases and displacement while also increasing the needed supply of housing, provided that we take a comprehensive approach that includes rent control among multiple policy mechanisms and investments.”

We need that comprehensive approach, and we need a serious, unbiased look at how to make housing a “non-concern” for our citizens. In short, we need to vote “Yes” on Prop 10 and then put our elected representatives to work funding a serious study and solution. Note I said “funding,” not “finding.” This needs to be accomplished with government money, not with money from an industry noted for finding ways to make more money, more easily. Profit cannot legitimately be the goal.

https://www.gsb.stanford.edu/insights/rent-controls-winners-losers
https://psmag.com/economics/can-california-repeal-state-wide-l
https://sf.curbed.com/2018/9/27/17910948/uc-berkeley-haas-rent-control-prop-10
https://haasinstitute.berkeley.edu/sites/default/files/haasinstitute_rentcontrol.pdf
https://psmag.com/economics/in-defense-of-rent-control
https://caanet.org/app/uploads/2016/02/Jan2016_Rent_Control_Study.pdf
http://www.lao.ca.gov/Publications/Report/3345
https://www.nmhc.org/news/articles/the-high-cost-of-rent-control/

Investors Predicting Increase in Renters

Investors are taking a gamble on the future of renting. They are actively seeking out more homes to buy — but not live in — and setting aside funds explicitly for this purpose, expecting that the number of renters will be increasing. However, they don’t think it’s because people can’t afford to buy; investors think more people will be choosing to rent. More than ever, they are looking at single-family homes, as apartment vacancies are growing, and investors believe it’s because more renters are looking for single-family homes.

The target demographic is wealthier renters in metro areas who presumably want to stay in a better school district and are willing to pay higher rents to make sure they have enough bedrooms to house themselves and their children. Some investors are even building new, since inventory is currently low, which would also increase the rental price and therefore mandate more well-to-do renters.

More: https://magazine.realtor/daily-news/2018/07/11/wall-street-is-taking-an-even-bigger-bet-on-rentals

Los Angeles Develops New Incentive to House Homeless

In May, Los Angeles County set into motion a plan drafted in August of last year that would hopefully be the solution to multiple problems at once. The ordinance seeks to create new housing for the homeless through the development of accessory dwelling units, or ADUs. Nonpermitted ADUs have been quite common, and recent changes have made it easier to get them permitted. To take advantage of homeowners’ desire to build ADUs, LA county now wants to grant homeowners a financial incentive of $75,000 for new units or up to $50,000 for converted units, under the condition they follow the new, easier guidelines and also are rented out to formerly homeless individuals or families. The goal is that this is a solution to affordable housing and also one that homeowners are on board with, as it gives them a financial incentive to do what they already wanted to do, which was build ADUs on their properties to collect rent. Could, or should, other regions follow Los Angeles’ lead?

The Nation’s Most Expensive Places to Rent

Rental costs are on the rise everywhere in the US, at an average of 1.4% year-over-year. Most of this is caused by coastal cities. One state in particular boasts three of the top 5 most expensive cities to rent: California. San Francisco is #1, San Jose #3, and Los Angeles at #4 (tied with Boston, MA). Typical rental prices per month for a one-bedroom apartment in these cities are $3440, $2500, and $2300 respectively.

Rental prices in these individual cities aren’t necessarily growing fast, though. Some of them already had high rent prices. New York, despite being #2 in the list, actually had a negative growth rate — minus 0.30 month-over month and minus 0.70 year-over-year. The cities with the highest growth rates are Houston and Las Vegas at 15.6% year-over-year, but are #27 and #60 on the list respectively.

The top 10 list is below:

1. San Francisco
2. New York
3. San Jose
4. Boston
4. Los Angeles
6. Washington D.C.
7. Oakland
8. Seattle
9. San Diego
10. Miami

The full top 100 list is available at https://www.zumper.com/blog/rental-price-data.

More: https://www.housingwire.com/articles/43253-here-are-the-top-10-most-expensive-rental-markets-in-the-us

Do Foreign Investors Cause Rising Prices?

Imagine finding the perfect home for you and providing an offer above asking price. You’re going to feel good about your chances. But there’s a problem. Many sellers are more likely to take an all-cash offer over an offer including a down payment and a loan. You’d need to really wow the seller with a much higher price to compete with an all-cash offer, driving sale prices above already high asking prices. Chances are it’s a foreign investor that doesn’t even plan to live there, which can be even more frustrating when you don’t get the deal.

It’s very difficult to know whether a buyer is a foreign investor, though, since California does not require buyers to disclose citizenship or residency. There are a few signs. One of the biggest indicators is an all-cash offer. Foreign buyers are roughly twice as likely to pay all cash as domestic buyers. If the tax address is out of state, you know that the buyer probably doesn’t live here, though you don’t necessarily know where they live. You can try to look at the surname, but that isn’t a great indicator given the ethnic diversity of California as a state. What if all three look like a foreign investor? Is that a good indicator? Probably, but even that isn’t guaranteed.

What we do know is where foreign investors are coming from. In California, it’s predominantly East Asia. China in particular has historically dominated California’s foreign investment scene. Even as that number is dropping due to legislation in China making it more difficult to take money out of the country, investors from other countries in East Asia are picking up what Chinese investors are leaving behind. And the numbers are still rising overall.

Does foreign investment actually affect prices, though? Maybe. In Vancouver, Canada, instituting a tax on foreign investment drove prices down initially, then they rebounded back to where they were before despite the number of foreign investors dropping. Prices had been rising quickly, so perhaps it gave a short reprieve without much long-term effect. In California, it’s clear that there is some effect. How large of an effect is up for debate, and foreign buyers probably don’t affect the market as much as lack of construction and outdated zoning laws.

US Sees Shifts in Foreign Buyers

For quite some time, foreign real estate investors have predominantly been coming from mainland China, with a total of $31.7 billion spent by Chinese buyers between April 2016 and March 2017. Changes in the laws in China have seen these numbers decrease recently. Despite this, the number of international buyers is actually increasing. Among the countries now more greatly represented are Taiwan, Vietnam, Thailand, Dubai, Kuwait, Georgia, and Turkey. Buyers hailing from Great Britain are eyeing the luxury market in the US.  Foreigners continue to view the US real estate market as stable and secure, and are even expanding the geographical range of their investments.

More: http://realtormag.realtor.org/daily-news/2018/03/05/foreign-buyers-coming-us-are-changing

Investors to feel the impact of the new Tax Plan

The new tax plan includes some changes to income property investments that owners of income property should be aware of. The ownership period to include carried interest in the lower capital gains rate has increased from a minimum of one year to a minimum of three years. Before three years, it will be taxed as regular income. The depreciation schedule for residential rental property has been adjusted and is now a 30-year schedule. The 40-year nonresidential schedule remains unchanged. The tax changes also affect pass-through businesses, usually small business partnerships and LLCs, adding a 20% deduction phasing out for income above $315,00 for joint tax returns. What has not changed is that investors will still be able to take §1031 exchanges on like-kind property and still receive reduced tax rates on gains/profits taken on the sale of property.