The “transitory” inflation swamping the country has stubbornly persisted into July. This week it was announced that producer prices posted a second straight 1% month-over-month increase, which brought the full year number to a record 7.8%. It was also reported that 12-month US export prices rose 17.2%, and nearly 22% if the rate of the first seven months of 2021 were annualized. (I find it telling that those prices – which are subject to no after the fact data collection adjustments – are rising at a rate that is nearly triple the CPI). But there is one major cost center of American lives, rental housing, where the Government claims Americans are getting a break. Not because the supply and demand dynamics are not pushing rents up with the same virulence that we now see in food and energy, but because the government relies on very dubious data collection and has thoroughly disrupted the normal functioning of the marketplace.
For the vast majority of families, housing costs constitute the single largest portion of their living expenses, and in fact represents more than a third of the Consumer Price Index. For more than a third of US households, housing costs boil down to rent. But the government has a very hard time incorporating housing cost data into the overall inflation statistics. The inputs they actually use could not be more irrelevant and misleading.
For people looking to buy homes, the 22% increase in house prices thus far this year may be making it more difficult to afford what they want. But the government does not consider home prices when calculating housing costs. Similarly, by most metrics home rental costs are up about 9% this year, slightly outstripping the overall costs of living. But the government does not consider those numbers either. Instead, they rely exclusively on “Owner’s Equivalent Rent,” a phantom statistic that nobody uses, and which can’t be objectively determined.
Owner’s Equivalent Rent is derived by asking homeowners how much they would pay to rent a home that would replicate, in terms of size, location, quality and amenities, the homes they already own. Huh? Most homeowners do not have their fingers on the pulse of the rental market, particularly for homes that look just like theirs. Typically homes available for purchase and those available to let are taken from different pools of housing stock. If asked to come up with such a hypothetical, most homeowners would likely just guess.
Would it surprise you then to know that the owners-equivalent rent statistics have been far, far lower than either home prices or actual rents? In the latest CPI report the Bureau of Labor Statistics estimates year over year increases in Owner’s Equivalent Rent was just 2.3%. How convenient. So as far as the government is concerned, housing costs aren’t really going up that fast as most people think!
Could you imagine how high the current CPI would be if the government used real data rather than a convenient fiction? But the distortions of owner’s equivalent rent may be nothing compared to those being made by the government’s policy of eviction bans, which many in government certainly hope will become a permanent feature in the housing market. (Representative Ilhan Omar has introduced such legislation in the U.S. Congress).
In one of its most revealing, cynical, and representative actions, last week the Biden Administration decided to extend the so-called “eviction ban” that was decreed by the Centers of Disease Control (CDC) back at the beginning of the Covid outbreak in April of 2020. By declaring that homelessness would constitute a threat to national health during a pandemic, the CDC edict banned landlords from evicting tenants for failure to pay rent, at least during the duration of the crisis. (Of course, the Agency failed to define any objective criteria as to when the crisis would be considered over.)
Contrary to the beliefs of Democrats, people don’t pay rent because “its the right thing to do,” they pay because they don’t want to be kicked out of their homes. If that risk is removed, a great many renters will simply stop paying. But despite the non-payment landlords are not relieved of their obligations to provide building services, effect repairs, and to pay their mortgages and property taxes. So in effect, the inability of landlords to evict a tenant for non-payment effectively deprives the landlord from earning a return on their property.
When landlord associations challenged the ban as a “forced taking without compensation,” the Supreme Court agreed that the CDC had overstepped its authority. In its 5-to-4 decision to quash the ban, Justice Brett Kavanaugh joined the other four conservative justices in saying it was unconstitutional. But he let the ban stand temporarily as long as it was not extended past July 31.
Perhaps recognizing the policy faced economic, as well as legal, challenges, the Biden Administration seemed to recognize reality. On many occasions over June and July Administration spokespeople said that the Administration had no legal pathway to sustain the policy past July 31. Those niceties did not satisfy the powerful progressive wing of the Democratic Party.
Congressional “Squad” members Ayanna Pressley of Massachusetts and Cori Bush of Missouri, pressed Biden to extend the ban despite the Court’s opinion, or to even pack the Court with more progressive judges if needed. Based on that pressure, it did not take much for Biden to flip flop and extend the ban. To save face the Biden team supposedly replaced the old “broader” moratorium, with a more “focused” plan (that only effected 90% of the country). This allowed the Administration to claim it was not ignoring the Court’s order, but offering a new plan that satisfies their concerns. That was a stretch, even by Washington’s standards.
But it’s obvious that Biden knows he is peddling a fiction, and that the Court will knock down the new plan just as it knocked down the old one. But the President just doesn’t care. Responding to a reporter’s question on the subject, he essentially acknowledged that the new plan would be ruled unconstitutional but if it offered relief to tenants in the time it would take to work through the courts, then the move was the right thing to do. When Trump tried such imperial maneuvers he was branded a tyrant. When Biden does it, he’s a hero.
But apart from the legal and political issues, the policy itself is bound to be seriously detrimental to the interests of low-income renters.
We must recall that the eviction ban does not absolve renters from their obligations. It simply bans landlords from eviction during the pandemic crisis. Eventually, landlords (hopefully) will regain the legal leverage they need to enforce payment. When they do, tenants will be liable to not only pay current rent, but the back rent they did not pay during the eviction ban.
I don’t know that much about human nature but I would suspect that many low income renters who did not pay rent during the eviction ban did not put those funds aside so that they could pay the balance when the time came. More likely, the majority of those funds have been spent (In fact, so many Americans not making rent or student loan payments is one of the many reasons consumer spending, retail sales, GDP and trades deficits have been so high.) That means they will be unable to settle up when their landlords ultimately come knocking. This may give a great many landlords the leverage to evict marginal tenants for non-payment, a development that may not have occurred under normal conditions. Some landlords may simply look to exact revenge on tenants who could have paid, but chose not to.
In any event, many of these tenants may find themselves kicked out. At that point landlords may be able to rent those units at rates that are more reflective of current market conditions, adding to the inflationary pressure. It will also put a chill into a great many landlords who have just received a crash course of just how irrelevant their property rights are in Washington.
Since there are many more voters who pay rent than receive rent, the interests of landlords will always be politically subordinate, particularly among Democrats, no matter how many campaign contributions are made by the National Association of Realtors. Given that, I would imagine some landlords will reconsider their business plans and convert their units to condominiums, list them for short-term rentals only, retain them for personal use, or focus their efforts on higher end rental properties where the likelihood of non-payment is lower. It will also discourage developers from building more rental properties. Given how easily the economics of these ventures could be eviscerated by capricious executive orders, who could blame them?
All of this will add up to fewer rental units available. The contracted supply, and the cost of added political risk, will lead to much higher rents for those units left on the market. The pain will be particularly felt at the bottom end of the market, where renters will have an even harder time finding decent housing. Inevitably the government will step in to build more public housing, thereby doubling down on the low-income housing project failures of the past. The poor will be shunted to ghettos where their prospects will be even more dismal.
But that’s Washington.