Rent Control? White House, Just Say No.

Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Coming at you live from Nashville, TN.

Fuel for the day: Jocko! Man I love this guy, not only is he the most decent, honorable, motivational person of all time. Now he has an energy drink? Sold. Don’t need to know anything else (it’s one of few that aren’t terrible for you, which is amazing). Highly recommend the Lemon Iced Tea flavor, on ice. And, if I may be so bold, his book Extreme Ownership changed my perspective on life.

Ok, now I’m fired up. LFG!

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Interest Rates are 👇SOON.
• - Deep Dive: Rent Control is Counterproductive
• - A Skeptic’s Take.

The Weekly 3: News, Data and Education to Keep You Informed

1. - What's the main reason people move out of high cost states, like New York or California, to lower cost ones? Jobs jobs jobs...(HomeEconomics).
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3. - Fannie Mae expects interest rates to average 6.7% in Q42024 (NewsLambert).
4. 
   
5. - Austin home market is down again, is this a trend that will continue? (ResiClub)
6. 
   

Today’s Interest Rate: 6.87%

(☝️.04%, from this time last week, 30-yr mortgage)

Interest Rates, are still on track to be 👇!

Last week, I drew a big fat red line in the sand, which I have now firmly crossed.

And despite all that’s happened in the last 7 days in our big wide world, we are still on track.

A quick review if you missed it before we get to our topic du jour:

We have likely already reached the Federal Reserve’s target inflation rate of 2%, the we look back in hindsight a few months from now. This should translate into 2 interest rate cuts this year, likely .25% each, starting in September. I also believe spreads between the 10-yr and 30-yr mortgages will come down, resulting in additional reductions in mortgage rates.

The Bottom Line: in the next 6 months the 30-yr mortgage will likely drop by a full 1%. Bold call: Rates may even hit 6.25% by year’s end.

Inflation, shelter and labor are normalizing. Real estate is and has been in a home sales recession for a long time. The current pace is 3.89 million home sales vs 5.3 million in 2019.

Economic indicators are signaling the start of a new real estate bull market, until further notice.

Deep Dive: Rent Control is Counterproductive

The President/White House recently announced a rent control proposal to cap rent increases at 5% nationally. The plan is to limit large landlords from raising rents by taking away tax depreciation benefits. *(For argument’s sake we will assume he intends on finishing out his term and his successor, VP Harris, would continue pursuing this policy).

The problem?…

This is not a serious proposal from the White House.

Why? I’ll tell you.

Now ignoring the President’s misspeak at his NAACP announcement speech (where he said rents would be capped at $55, not 5%) there are a variety of large issues with the proposal.

** Side Note Alert: Why do we have only a few choices for President? If I only had 2 car choices I’d be pretty disappointed.

But I digress…

1. 
   
2. The Proposal does not apply to most all single family rentals. The proposal exempts new construction and only applies to “Corporate Landlords” with 50 or more units. This means that this policy will mainly target apartment owners, and will have no effect on the vast majority of rentals. It’s important to know that mom and pop landlords (9 or fewer properties) own ~71% of the rental market. Side note: It’s also a bit odd that one renter gets their rent capped, and one not, simply because of who owns the property. If this is about helping renters, we would want to help them all regardless of who the owners is, no?
3. Rent control does not work. President Obama’s top economist, @jasonfurma said it best:

   Here hear.

4. Developers are reluctant to build in areas where government imposes rent controls. Developers need investors (and lenders) and they won’t invest (or lend) if their return is restricted. Less development = lower supply = higher prices. See San Francisco.
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6. Exempting new construction seems like a way to get around the developer disincentive issue, but it’s not. If you look at cities / states with rent control policies they are all lower-construction (low new supply) areas. And in the future, there is an incentive for government to change the policy to capture more homes under the rent control umbrella. Ex: in New York, where the policy has had to be revised 4 times to recapture units previously exempt from rent control. Developers recognize this bait and switch.
7. 
   
8. Rent control leads to evictions and subsidies for the well-off. If the landlord cannot raise rents to the market rate, they will not renew a tenant’s lease or find a way to evict them so they can reset rents and rent at a higher rate to a new tenant. And because rent control is not means-based, the low rent can often go to wealthier/middle class people who don’t need it while the poorer are stuck without a place to live, or living 10 to a house, due to low supply.

   This is an important point, so I will reiterate. Rent control is (almost always) NOT MEANS BASED. I know doctors in SF and DC who living in rent-controlled units (which they got by a lottery, ie evidence of short supply). Even if rent control worked, for god’s sake make it means-based for low / middle class folks.
   

9. The proposal relies on misleading facts, that “more units are under construction than at any time in over 50 years.” This is no longer true, and regardless is hyper-misleading. Apartment completions are high because of 0% rate policies 4 years ago, which is about how long it takes to build a building. No more. Unit completions are about to fall off a literal cliff. “Housing construction, according to the U.S. Census, peaked in October 2022 at 1.71 million units, it’s now down to 1.59 million and it’s plunging fast due to plummeting starts in multifamily (the vast majority of which are rentals) due to aforementioned drop of 51.7% YoY (Parsons).
10. 
    
11. Multifamily completions are outpacing starts at a historic pace a la the 1970s. Supply is about to plummet.

12. The Proposal claims “the policy is a bridge to rents stabilizing as President Biden’s plan to build more takes hold” and that the plan “effectively balances the needs of tenants without limiting incentives for more supply.” As I wrote about previously, the White House’s March 2024 housing proposals were a pipe dreamand 1) will not happen and 2) will also be counterproductive as they once again stoke demand, not supply!
13. 
    
14. It should be noted, to keep intellectually honest, that the White House did include some potentially positive steps for construction, in repurposing some federal land for affordable housing. However, the amount proposed would be a drop in the bucket. It won’t even move the needle to offset macro challenges facing developers today, which they caused. You can’t spend $10 Trillion and expect inflation to be “transitory” (the last 2 Administrations and the Fed are responsible for our inflation and interest rate woes).
15. It disincentivizes home maintenance and adding value. I’m building new backyard decks and fenced-in yards for pets at a variety of my rentals this year. For this investment, I hope to see a return by slowly increasing rents. If I was unable to, I wouldn’t make this investment. Similarly, if a landlord is unable to raise rents to market, they will neglect the property. I have seen this firsthand.
16. Lastly, let’s just say, for argument’s sake, that a 5% across-the-board rent decrease was possible. The ironic short-term consequence would be an immediate 5% increase by landlords in 2024, at a time when rents have actually been cooling. In other words, this policy would be horribly timed and be directly responsible for rents rising in the near term.

These are what I could think of at the moment, but there are many more reasons why rent control is a bad idea.

So, like drug commercials in the 80’s…

So what should we do?

As I have written before, we need to SMASH that supply button.

More supply = lower costs. It’s Econ 101.

And one idea I saw recently has real potential.

Remove the shackles from Fannie and Freddie.

Today they are barred from construction lending. Allow them to offer construction financing at reduced rates in exchange for means-based rent restrictions. This would help build 250K-400K units/year.

Boom.

Guggenheim's Jim Millstein laid out this and several ideas on how Fannie/Freddie could thaw the multifamily development markets and juice construction. Checkout the podcast on Odd Lots for more on this.

I’ve also previously written about up-zoning and increasing housing density as additional solutions. This is not a one size fits all problem, we need to juice / incentivize supply of all types, shapes, sized homes.

Let’s get on it Government!

Lastly, a fantastic case study of the City of Denver, which switched to a new zoning code in June 2010. Most areas were up-zoned, but some were down-zoned (ie some areas allowed increased light housing density and others not, single family homes only). In short: up-zoning incentivized more homebuilding.

Shocker.

A Skeptics Take:

Rent control doesn’t work.

But every once in a while it rears its ugly head as a seemingly commonsense / intuitive / populist solution to the problem of prices.

I get it.

It’s frustrating when prices go up. For anything, especially housing. But it’s inevitable, prices are up and are likely to stay up. That’s just what happens when we spend $10 Trillion and pour gas on an economy that was already on fire. So we need to move on to acceptance and what to do from here.

And when we feel the urge to revisit price controls, a reminder: Take a breather and think through the second and third-order effects of policies like these. Rent control is not a solution, it’s like short term steroids and ignoring the heart disease you will have down the road.

What we need I… what I call… Middle Housing!

Let’s incentivize homeowners to get in the fight. How? Increase home density / up zoning + construction lending incentives. We need stimuli for homeowners to build ADUs (small apartments or even full-sized homes built on an existing home’s lot). Some states/local governments are leading the charge. Much more that this can be done.

From WWII - 60’s we were building many many more small multifamily homes, let’s bring those back. It’s up to city, county, state officials to help. We need zoning that allows for small multifamily development, which can be restricted to long term rentals so they aren’t built only to rent only.

So what do you say? Tell your local electeds. Get in the fight!

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

The Weekly Find

Finally found a solar battery combo from GoalZero that actually WORKS and can run all our glamping equipment. Can’t recommend any higher. Saw these guys in a recent trade show in Salt Lake City and was hooked. I bet you could also run a man / she-shed with a TV, laptop, and fridge. Ooooo I’m going to try that next!

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Contact Us

If you are interested in talking real estate investing and digging deeper into any of these ideas don’t hesitate to reach out! I always like a rigorous discussion and helping fellow real estate investors.

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* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.