Dakota Beacon

I have friends who are enthusiastically - no, aggressively - touting our old friend, Bernie Sanders for president.  I have a lot of problems with this. My biggest problem is that he’s a communist and that communism does not coexist with freedom and I like freedom.  So there’s that. Their answer, of course, is that he’s not a “communist”. He’s a harmless old socialist and who doesn’t like that? So, I guess we’ll have to take these matters one at a time.  

Why not like a socialist?  They give you free stuff and everyone likes free stuff, right?  Let’s look at something basic, like where you live. You’d love to pay less for living indoors, wouldn’t you?  I know I would. The cost of housing is killing me. Now, if I were renting I might be tempted to crave “rent control”.  Here is where Bernie would be my guy.  

But here is where I would be snookered.  Just as with all other government-forced controls, it tries to up-end nature.  You can’t succeed with something that literally defies nature. I have rented.  I have been a landlord. I can tell you about the facts of life and they are irrefutable facts.  Let’s look at the little guy. The blueprint looks like this: An investor decides he wants to put his savings to work for him.  He has access through his savings and his 401K to put a down payment on a modest 3-bedroom home in a nice, stable blue-collar neighborhood. Nothing fancy, but sound and clean.  He goes and borrows the rest because he has kept up with his bills and has good credit. This is his reward. He puts a fresh coat of paint on it, has the carpet cleaned, fixes a drip in the tub faucet, puts some cinnamon rolls in the oven and shows the house.  He has two or three applications to rent it at about $200 more than his monthly payment. Out of that $200 he will pay for his insurance and reserve the balance for maintenance.  

He reviews his applications and the first one in hand which has sufficient income and decent enough credit to pay the rent signs an agreement and moves in.  When the term of the agreement expires there might be a review to determine whether the rent needs to go up. This could depend on things such as an increase or a decrease in special assessments, etc.  If the tenant has taken decent care of the property and kept the rent paid on time the landlord is inclined not to want to have to find a new tenant and will be most likely to keep the rent where it is if possible, bearing in mind that he has made the rent low enough that he is not clearing a lot of money over his costs.  After all, he’s just starting out and probably has another job. He’s, let’s say, a plumber during the day. He doesn’t have time to find new tenants. Meanwhile, his monthly mortgage payments are increasing both his credit and his equity in the property, his tenant is living in a clean, safe and pleasant house in a decent neighborhood.

If, on the other hand, costs climb, the landlord-owner must cover them.  His property supports the costs. If the tenant is careless and breaks a couple of windows or shreds the carpet, these repairs must be made and if the tenant has not done so then the owner must, because he needs to maintain the value of the home while he is paying it off.  If his real estate taxes increase he will have to cover that from the rent. So there might be a need to raise the rent. If the tenant decides he can find a better rate somewhere else he will move. Somewhere there is another investor who is trying to earn some money by doing the same thing.  If he is better at negotiating a price or has the credit to get a better interest rate maybe he can rent his property for less. It is a lot like buying a can of coffee. If you can get a pound of coffee for $5 instead of $8 you will. That is how the market controls the price of coffee and the rent.  

So let’s talk about the coffee.  You go to the store and find that coffee is on sale.  You buy the sale stuff. Right next to it is the brand you bought last time.  Now if the government set the price of coffee at $5, the stuff next to it will disappear from the shelf.  It’s no longer available. The seller of the coffee isn’t making a profit. When the $5 brand’s costs go up the promotion will end and that brand, also, will no longer be for sale.  Perhaps the coffee bean crop is not great. Perhaps somewhere they can sell it for more. You always wanted to cut down on caffeine anyway, right?  

It is similar with rent.  The government tells owners/landlords they cannot raise the rent on the home that they own.  In other words, they take control of the man’s property. The tenant might think this is great for about five minutes, but then the landlord quits repairing the steps.  He won’t come by to fix the clogged kitchen drain. He won’t pay to have the peeling paint repainted. The landlord is now looking for a buyer and is having to show the house in a worse condition than when he bought it.  Prices aren’t going up either, because other investors have decided they can’t make a profit if they are under the control of the government. They have decided to invest in anything else - gold, the boat business, corn futures, maybe.  The tenant’s smile has faded as he finds he might have to move. If the owner doesn’t find a buyer he might lose the house in foreclosure. Either way the tenant loses. His home’s front door latch is broken and won’t be fixed. His kitchen sink if clogged.  The paint is now peeling and for some reason the landlord doesn’t care like he did six years ago. Now there are intrusions of potential buyers tramping through his bedrooms, looking in his closets and the threat of having to move hangs over him. His landlord is miserable.  His investment is losing ground every day. Instead of buying the house across the street and increasing his rental income and business he is trying desperately to escape it. Meanwhile he is getting blamed for not wanting the government to tell him how to run his business. He is “greedy”.

Now we have seen how not to make housing affordable for renters.  Here is how to keep rents low: encourage competition. You noticed how the rent control idea put the cork in the landlord/investor’s plans for expansion.  He’s practically out of business. Now look at the other option. No rent controls. If Landlord X decides he wants to gouge his tenant and jacks up his rent to double the initial rate, the tenant shops around.  He finds a much better deal three blocks down the street. He gives notice. He moves out and the Mr. X is now running over to show his house on his lunch break and every night after work. He’s paying his mortgage without any rental income.  He’s shoveling the snow, cutting the grass, worrying about keeping the furnace running or the vandals off of the property. He is not being rewarded for his gouging tactic. Another, reasonable, investor is now happy with a new tenant, the tenant is happy with his rent rate and a nice home.  The greedy Mr. X is now offering his home for the original rate and has fixed that clog, repainted and repaired the front door. It’s looking respectable again and he finds another tenant. This time he will raise rents only when he needs to, or as the market trends upward. Both Landlord X and Landlord Y are making offers on another house.  The market also controls the price they will pay to buy it, not the government. Because if the government controlled the price of the house, no builder would take the risk of building it. See how that works? It is so simple when you look at it from the point of view of the other parties involved.  

Rent controls are an old, stale idea, like Bernie himself.  They have been tried like one might try to use a hammer to fix your television set.  They don’t work and never have. Only a fool would think they would. But rent controls are a staple of the Bernie campaign and policy.  

You don’t need to speculate about any of this.  It has, as I say, been tried. Just look at the result.  In New York they have had rent controls forever. Bernie himself lived in a rent controlled apartment as a kid, so we know it has been a long, long time.  Is housing cheaper in New York? No. It is notoriously expensive. What about that other most expensive city in America, San Francisco? Well, they, too, have rent controls.  If you doubt this, think about the fact that housing in San Francisco is 284%  higher than it is in Phoenix, AZ.  Arizona has a law prohibiting rent controls.  Think that's bad?  Manhattan has rent control.  Alabama, like Arizona, prohibits rent control.   Housing in Manhattanis 1,737.5% more in Manhattan than in Birmingham, AL.  Government rent control does not work. Market rent control does work. 

In the end, rent controls, like all other socialist schemes, will cause the most harm to the “little guy” - the tenant and the private investor/landlord.  The big guys, the crony-capitalist oligarchs, will always find that they can make a buck. It is always the people at the bottom of the economic totem pole who lose and find they have been trapped by socialism, unable to escape poverty.  People will still need to rent a home. With the small investor out of the picture, only the bigger investors will be providing housing. Competition will fall away. Instead of a healthy choice in housing, tenants will be forced to take whatever they can get.  

If we find that rent controls do what they always do - reduce the amount of private-sector housing, then there will be someone who says we have a housing crisis.  The government will have to step in and build apartment complexes. We also have a history to learn from in this department - ghettos, housing projects which become so teeming with rats and so derelict that they breed crime and eventually are torn down.  Chicago’s Cabrini Green Housing Project has been a horror story almost from its beginning.  We can either choose a public housing “solution” or its twin, a possible crony capitalist arrangement with a similar result, or we can have a true private-sector marketplace.  In the latter case there will be cheaper housing, more expensive housing, different neighborhoods, freedom of choice for both landlord and tenant, and as a bonus, a good likelihood that the tenant could become the next owner of the house or even six-plex apartment building, when the landlord decides to sell.  Nothing is perfect. But this comes closer than anything else to providing the most affordable and the best housing. Costs are compared, they are controlled by the most fair and just of all arbiters - the market.

The more people who find providing housing for others profitable, the more they will provide houses.  If they provide too many it will no longer be profitable. Until then they will continue to invest in building and buying homes to rent, apartment buildings to rent.  It is a matter of incentive, that magic which causes us to be able to compare prices in the grocery store, shop for a better rate for internet, choose the best option on a car deal.  Incentive is magic. Incentive to make a profit causes the builder to invest in land and materials and labor. Incentive to save money drives the tenant to insist on a fair price. He is the end user.  He is the customer who is always right - unless we implement “rent controls”.  

Housing is like all other aspects of the economy.  It is like a well-oiled machine. The homeowner seeks sufficient and affordable home insurance.  The builder shops for the best prices on lumber and fixtures. The investor looks for the best deal he can find on a home in a neighborhood where he can make enough profit to make the deal work for him.  The tenant looks for the best rate of rent on a home he feels is safe and sound and adequate to his needs. Someday he, too, will be shopping for his own house. Just like the competitive brands of coffee, the competitive offers on cable or internet service, the competition among car dealerships, ample supply of affordable housing is a matter of competition.  There is no place for government in the area of rent control. Anywhere. Ever. The best control for both the landlord and tenant will always be the marketplace.  The same principle applies to any other kind of control of the business between landlord and tenant.  If a landlord does not wish to rent to a particular tenant that is his business and possibly his loss.  His decision will limit his options but if he has the responsibility of paying for the property he must also have control over whom to rent to.

Here is someone else who can discuss rent controls (and a few other important issues) - one of the most plain-spoken, clear-headed thinkers of our time - Thomas Sowell.

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