I was born in 1948, at the foot of an enchanted mountain whose spirit enjoins me to rise higher

Ordinary citizen, empathetic contemplator (maybe a little too empathetic to be fully comfortable in the world, as it is). Don't look for academic credentials; this guy has none, save those gained over the course of many interesting (and, at times, difficult) life chapters, spent surviving on a shoestring budget.

Followers

Thursday, September 24, 2015

Why the rental market is not deserving of free market status

Normally, the free and open commercial market is the best controller of the price charged for ordinary goods. Presuming that this principle can be extended to all things that are sold, is a mistake. Anyone who has actually owned and run a business, as I have, will have a much more nuanced view of the issue of supply and demand.

If one is to understand why rents are continuing to climb, in spite of an apparent abundance of supply, the issue of competitor psychology has to be investigated. Imagine the scenario in which you, a business owner, become aware that a competitor of yours is selling a comparable product at a lower price. Do you, then, lower the price you are charging? Not necessarily. In fact, it would be foolish of you to do so, if you knew, full well, that your competitor was about to run out of the stock he was holding in that product and would have a hard time replenishing his inventory of that item. Every savvy business owner would simply wait for his competitor's stock to run out and then, either do nothing, or raise his own price. Thus, it is how one perceives the competition's supply line that has the greatest influence on price-setting. Seen from this perspective, it is hardly surprising, then, that prices never rose in the wake of the Federal Reserve's quantitative easing actions. The global race to the bottom, with respect to what suppliers were being paid, had another component to it, namely, apparent inexhaustibility. The general view was that competitors had uninterruptible access to an abundance in supply that was dirt cheap, which they could use to mount a discount price war, for as long as it took to freeze your product on the shelf at the price you were charging. As a result, retailers of food, clothing and just about anything else that could be produced at volume, kept prices in check.

A permanently inexhaustible supply of replacement inventory in housing cannot be produced dirt cheap and landlords know this. There may be a real score to be found, here and there, based on your luck, but that is, clearly, the exception and economic trends are not produced by exceptions. A rare steal is not going to depress the price of general housing, whether it's homes to own or homes to rent.

Another aspect of price competitiveness is the cost of dead inventory. A shelf of tee shirts or past-due food items has a really low recapture value on the salvage market. Not so with real estate. Getting back what you paid for something, plus some, is generally only a matter of waiting for the right swing in real estate values. If you don't manage to rent the house, so what? You're probably still making money off the long-term appreciation in its value. As long as the national population keeps growing, urban centers will continue to draw in an abundant supply of new renters and real estate prices will continue to rise. The apparent supply of housing, for the foreseeable future, will continue to fall short of the kind of supply that allows retailers to compete on price so effectively. It is simply naive to believe that market forces are adequate to keeping the cost of rental housing at a level where it does not place such a demand on incomes as to be a depressive force on the general economy. As things stand now, a very substantial slice of the general population must forego all kinds of other spending that prior generations, between 1950 and 1980, engaged in regularly. It is certainly not a good time to go into business in lines of retail enterprise that rely on casual and impulse buying.

The nut of the issue, with respect to price control, resides in how market sector principals regard their competitors' access to replacement inventory. If it seems inexhaustible, they will consider reducing their own prices, but, if not, they won't. It's as simple as that. And, in that respect, if for no other reason, the rental market resides in a category of its own, where customers can, and generally are, gouged for all they can afford to part with.

As a result of the above principle, the rental market should be regarded much more like the market for water or electricity. Housing, household water and household electricity are all essential to the prevention of discomfort. Without around a gallon of water a day, or so, you may well die, but beyond that, its consumption can only be construed to be preventing discomfort. Indeed, in the arid areas of the world, hundreds of millions of poor people survive without having access to water beyond that needed for potable purposes. It can easily be argued that the use of household water beyond a gallon a day is needed only for progressively indulgent purposes. Bathing, washing clothes, housecleaning, watering plants, washing vehicles - all activities Americans engage in without a second thought (except now, in California, with its terrible drought) - are only essential in the very smallest amounts to the preservation of either life or health under the auspices of disciplined action. Ask any ex-POW or homeless person. Nevertheless, the government does not balk at regulating the price suppliers can charge Americans for water used in those less than utterly essential ways. Why? Because having affordable water to do those things is absolutely essential to preserving the civilized character of our society out of which the demand for a huge range of goods and services is born. Civilized people, enjoying a high standard of living, buy more things to flesh out the inner vision they have of themselves. They also tend to buy from the higher end of the market, in search of better quality. The same kind of argument can be applied to the provision of electricity. People have learned that, without the tempering hand of state regulators on the market, prices for water and electricity might, in some areas, rise so high as to cause widespread suffering and socially couter-productive effects. It is not a scenario people are prepared to abide, so control of utility prices is accepted as necessary to the the long-term interests of society.

Somehow, left out of this debate the recognition that on-demand access to some sort of dignified housing is as essential as on-demand water or power. Forget the bells and whistles, what I'm talking about is the very bare essentials - a roof overhead that doesn't leak, a toilet, a shower, a wash basin, a stove, a refrigerator, a kitchen sink, winter heating, electricity, lights, a securable interior, a smoke alarm, windows that are whole in form and function. The housing occupied by the poorest third of renters qualifies as minimal housing, in my opinion, though most of it doesn't meet even these minimal standards. Nevertheless, even in its compromised state, it is comparable in its essentialness to the access to water and electricity consumed by Americans. So it somewhat astounding that, even in this day and age, those who make money from this sector have, by and large, succeeded in preventing states from regulating what they can charge for even the most abject of rental housing. Purchasers of rental housing in these states have almost no consumer power to use against prices running up and, typically, landlords set their prices according to what they see other landlords getting, with no regard to what prospective renters might feel about it because they are well aware that the overwhelming balance of landlords is doing exactly the same thing. It isn't a question of whether an upward spiral, against incomes, is occurring; it is simply a question of learning to hitch one's own rises in price to that background trend, so that one's pricing seems to be consistent with what is being charged in the general market.

On the demand side of the market, there is additional deviation from what free-marketers like to call customers. For free market price controls to work, the ability of the customer to switch to another provider needs to be effortless and as little belabored with process as possible. This is not a characteristic that applies to the average renter. The process of moving to another rental is not just a dicy bet, it's also very expensive and a logistical nightmare. Shopping for a new rental home isn't even slightly like shopping for food or clothing, or even for services. It's a totally different kettle of fish, only slightly less traumatizing than going on a combat mission.

Knowing this, landlords as not as concerned as, say, shopkeepers or contractors that a price hike is going to get their customer to switch to another provider, even when there is statistical proof that a surplus of rentable units exists.

These points have often been made before, but not so convincingly as to induce government to intervene - up to now, that is. The kicker, this time, is the gradual awakening of the political establishment that the public has begun to take a robust interest in this issue and that, if one continues to play dumb, one's time in office might well be cut short.

Finally, it seems, the worm has turned and renters in large cities are beginning to fight back. In particular, I'm thinking of current events in Washington state, where voters, under the leadership of Kshama Sawant and Nick Licata, have compelled the city council to petition state legislators to overturn the constitutionally provided ban against any form of rent control in the state.

Whether these efforts prove to be fruitful, or not, hereafter, the pricing habits of landlords will continue to come under increasing scrutiny for their effect on the general well-being of society. My hope is that the assertion of the business establishment that the rental market can control itself, without some sort of corrective action by government, will be soundly dismantled by arguments put forward in the heat of the current period of popular anger against exorbitant rents.