Free rent today leads to higher housing costs tomorrow for America’s poorest?

One good thing about the U.S. response to coronaplague has been allowing our low-income residents, documented and otherwise, to skip paying rent while simultaneously forbidding landlords from initiating evictions (maybe until mid-2021 here in Maskachusetts?). So… the working poor are protected from harm by a benevolent government during this period when they are no longer “working” (probably making more money, though!).

Maybe not!

We’ve been doing a lot of helicopter flying lately with a photographer whose bread and butter is aerial real estate images. A typical mission involves going to a town with a lot of low-skill immigrants and/or multi-generational welfare-dependent native-born Americans and photographing an apartment building from the 1950s.

Why does anyone need these pictures? “All the rental landlords are trying to organize condominium conversions. Since they can’t collect rent, it makes a lot more sense to sell the apartments,” was the answer.

Especially given the high transaction costs of buying and selling real estate in the U.S. (5-6 percent every time someone needs to move!), is it fair to say that the result of today’s policy change will be higher long-run housing costs for low-income residents of the U.S.? With millions of immigrants arriving, plus population expansion from children of already-present immigrants, and a shrinking pool of rental housing, won’t that translate into higher rents?

7 thoughts on “Free rent today leads to higher housing costs tomorrow for America’s poorest?

  1. Or maybe it will just lead to higher costs for the people+businesses that pay for the free housing? My city’s socialist mayor loves to rave about welcoming more multi-cultural immigrants, and building new housing+schools+parks for them (our net population growth is all from “new citizens”). But he’s ignored the decline of the energy industry that fuels the city’s economy. The result: a local restaurant (~5,000 sq ft) paid the city $74k in 2014, in 2019 it was $208k.

    • The same thing has happened to property taxes in NYC. The rates stayed the same , but assessed values went up, so taxpayers see their tax bill double in five years. If property values, both residential and commercial, fall significantly, so will tax revenue. It is possible what we may even go back to the 1970’s, when property owners would abandon buildings to the city because the tax bill was more than the building was worth.

  2. My guess is that these people started thinking about converting their rental units to condos. back in April, when people were banking on a “V-shaped” recovery, which doesn’t look like it’s in the cards. They were thinking: “I’ll toss my deadbeat renters once the protections run out, turn these into condos., and wealthy people will snap them up once the economy rebounds.”
    But the economy isn’t going to rebound. So now they’re going to convert the units, spend who knows how much on the rehabs, and then find out in a year that there’s nobody to buy them. Watch for them to list the condos and then have to drop, drop, drop the prices to avoid completely losing their skins.

    And yes, it will lead to a tighter rental market. Once these folks have converted, they’re not going to want (or be able to) switch back. So I expect the worst of all possible worlds: fewer rental units available and paltry sales of newly-converted units, and a lot of people going broke for both reasons. The only bright spot will be in maybe two years when someone who has any money left will be able to walk into what was first listed as a $400,000 condo and pick it up for $150 grand.

    Beware of shoddy construction! My guess is also that anyone rehabbing these units is going to go supercheap on the stuff you can’t see very well.

    Someone tell me why I’m all wet.

    • Alex: They were rental landlords for 70 years and they decided, before the rent and eviction moratoriums, to stop being rental landlords? This was because of a dip and predicted rise in the economy?

    • > someone who has any money left will be able to … pick it up for $150 grand.

      Lol. Alternate scenario: “investors” in a hurray to get hot-money out of china buy them all at any inflated price. They don’t care if they are ever rented, they just use them as currency to facilitate their “business” transactions with other chinese “businessmen”. Meanwhile, the local market builds thousands of empty suites while locals are priced out.

    • @Philg: No, I think they decided to do it after the rent and eviction moratoriums went into effect, thinking: “This will go on for six months, then I’ll evict the tenants and convert to condos and sell them. How can I protect myself otherwise?” They know they can’t get any money out of them as rental units as long as people can’t afford to pay the rent and can’t be evicted.

      Maybe the Pritzker family, seeing all of this, will dust off the old subprime mortgage playbook, add a few pages, and call it the “Super-sub-basement mortgage.” Since subprime mortgages come with higher interest rates and Elizabeth Warren is going to be running policy (we know how much she hates payday lenders) I wonder if she can engineer a plan whereby the U.S. Government pays the mortgages through some expansion of the FHA.

      I’m only half joking here, I think Warren could absolutely start talking about doing something like that.

  3. Gotta agree with Alex. No one is going condo shopping anytime(years, decades) soon. Unabomber style shacks in the Montana wilderness sure. Condos nope, condos in semi-suburbs-smallish-cities-MA nfw.
    City commercial real estate is screwed and multi-house rental real estate is screwed.

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