Freakonomics: Why Rent Control Doesn’t Work

There’s no doubt that man communities in the United States, including here in the Piedmont Triad, are dealing with housing affordability challenges. There’s also no doubt that elected officials in cities, counties and states are looking for possible solutions to the affordability problem. Unfortunately some of the solutions that, on the surface, seem to make sense can actually make the problem worse.

One of the solutions that many elected leaders consider is rent control. Just this year Oregon became the first state to enact a statewide rent control law. Some cities, like New York, have long had rent control laws and yet their residents still have some of the highest rents in the country. So what gives?

That can be a complex question to answer, but thankfully the folks at Freakonomics have produced a show that does a great job of explaining why rent control actually makes the affordability challenge worse, not better. It’s well worth a listen so here’s a link to either listen to the podcast or read a transcript:

Freakonomics: Why Rent Control Doesn’t Work

And here’s just a small excerpt from the show:

DIAMOND: When you pass rent control, the landlords of the property suddenly getting covered by rent control are losing so much money, they no longer really want to rent their apartments out at the prevailing new prices, so they decrease their supply of rental housing to the market. And if there’s less supply, that’s going to drive up prices. 

DUBNER: Okay, so, let me just make sure I have it pretty straight. You find evidence that rent control increases gentrification, one component of which is the displacement of low-income tenants. On the other hand, you also find evidence that low-income people, including minorities — at least those who are in rent-controlled units already — they’re likely to disproportionately benefit from rent control.

So, if I’m an affordable-housing advocate, I might say, “Oh, fine, fancy Stanford professor — who I’m sure has some kind of great income and/or housing subsidy and/or situation — I don’t care that some landlords are suffering. I don’t care that the policy is having some downstream effects that you don’t like. I need to make sure that low-income people aren’t going to get a rent increase of 50 percent overnight.” So, how do you respond to that argument?

DIAMOND: So, when you think about those initial tenants, that’s the best bet you’re going to get for the benefits of rent control to low-income tenants: the people that are already in the housing. But even though we find that those tenants are much more likely to stay in their apartment, when we look 10, 15 years later, the share of those 1994 residents that are still there is down to 10 percent or so. So 90 percent of them no longer live in that initial apartment.

And it’s that next low-income tenant that wants to live in the city, that low-income tenant is going to have a very hard time finding an affordable option, because now there’s going to be less rental housing, the prices that that low-income tenant are going to face when they want to initially move in are going to be higher than they would have been absent rent control.

DUBNER: I’m curious how generalizable you think your findings from San Francisco are for other cities.

DIAMOND: I would suspect that the actual quantitative loss of rental supply or benefits to the tenant will depend a little bit city to city, but I think the qualitative takeaway that landlords are savvy and are going to work hard to not lose money on their investments, I think is a very general point. 

Regulations Account for Almost One Third of Apartment Development Costs

The National Multifamily Housing Council (NMHC) and National Association of Home Builders (NAHB) released the results of research that found that regulation imposed at various levels of government accounts for 32.1% of multifamily development costs. From an article in Multifamily Executive:

These regulatory costs include a broad range of fees, standards, and other requirements imposed at different stages of the development and construction process. According to the study, 7% of regulatory costs come from building-code changes over the past 10 years, 5.9% is attributable to development requirements (such as streets, sidewalks, parking, landscaping, and architectural design) that go beyond what the developer would ordinarily provide, and 4.2% of the costs come from nonrefundable fees charged when site work begins.

Over 90% of developers surveyed in the research typically incur hard costs of paying fees to local jurisdictions, both when applying for zoning approval and again when local jurisdictions authorize the construction of buildings. The typical projects of almost all the respondents (98%) were subject to costs at the zoning-approval stage, costing an average 4.1% of the total development costs.

They go on to note that these costs have a direct impact on housing affordability, which is an issue being addressed by almost every municipality in the country, including here in the Piedmont Triad:

“The current regulatory framework has limited the amount of housing that can be built and increased the cost of what is produced,” said NMHC president Doug Bibby in a statement. “At a time when states and localities are struggling to address housing affordability challenges, public and private stakeholders should work together to streamline regulations and take the steps necessary to expand housing in communities across the country.”

Here’s a link to a more detailed summary of the research on NAHB’s website: http://www.nahbclassic.org/generic.aspx?genericContentID=262391

NAA’s Approach to Finding Solutions to Housing Crunch Garners Attention

Over the past couple of years, the National Apartment Association has increasingly focused on conducting research that helps inform the organization’s approach to engaging governments at the federal, state and local level. That work has gained some positive attention in the real estate development world, as evidenced by this article in BuilderOnline.com:

Not for nothing, the National Multifamily Housing Council and National Apartment Association have recognized–via research the two organizations conducted with Hoyt Advisory Services–that developers will need to add 324,000 units annually for the next 12 years to make up for lost time and keep up with new household formation.

The NAA and NMHC have gone so far as to develop a Barriers to Apartment Construction Index, which scores 50 metro areas on a scale of difficulty posed by regulatory and space constraints. A score of 19.5 ranks as the most difficult market to add apartments, Honolulu.

It seems evident that multifamily developers have jumped a step ahead of their single-family for-sale siblings, both in investing in research that begins to build evidence around the scope of the shortfall and developing scenarios for getting beyond the current impasse, which is a lose-lose-lose proposition…

One way that it appears multifamily players seem to recognize as a solution–better on the whole than single-family players–involves a form of collaboration that’s been around for as long as people have been forming communities as a way to live and conduct business: public-private partnership.

Emotional Service Animal Tips from the Airlines?

Property managers aren’t alone in having to deal with the emotional support animal issue. There might be something to learn from how the airlines are approaching the issue:

It recently announced changes to increase scrutiny about its passengers flying with service or comfort animals — Delta says it flew 250,000 of such animals last year, which was a 150 percent increase over 2016. Incidents reported of those animals biting or defecating during flights had nearly doubled since 2016.

“Delta emphasized safety concerns in detailing the increased documentation owners that will be required to provide about their animals,” Brulliard writes. “But its action also was spurred by a widespread perception among airlines and disability rights advocates that some fliers are fraudulently taking advantage of the federal law to bring untrained pets of myriad species into crowded cabins.”
Sound familiar?…

“Passengers with trained service animals will need to submit a veterinary health form at least 48 hours before travel to the airline’s new ‘Service Animal Support Desk,’ ” Brulliard writes. “Customers with emotional-support animals or psychiatric service animals must do the same but also must provide a letter from a doctor or mental-health professional and a signed document saying the animal is trained to behave in public.”

 

 

Newly Minted Tax Bill Likely a Positive for Apartment Industry

According to this article in the Wall Street Journal, the apartment industry fared better than the for-sale housing market with the tax bill just passed by Congress. From the article:

Affordable-housing developers, who had feared that provisions in the House bill would curb production in their industry by up to two-thirds, now predict the impact of the final legislation will be modest. Meanwhile, market-rate rental owners stand to benefit from a slightly lower corporate tax rate and increased demand for rental housing…

Apartment owners say they also could benefit from a tax code that no longer favors owners over renters now that the deduction for mortgage interest is blunted by a higher standard deduction

“John Q. Public has been sold by the home-building industry that it’s better to own than rent because you’re getting subsidized by the government because you have all these deductions,” said Ric Campo, chairman and chief executive of Camden Property Trust, a real-estate investment trust that invests in apartments. “That equation will change.” Mr. Campo estimates his typical tenant will pay about $1,500 less a year in taxes.

Barbara Byrne Denham, a senior economist at real-estate investment-research firm Reis Inc., said the tax bill could be a particular boon for rental markets in suburban areas with high property taxes. The bill caps the amount of state and local taxes that homeowners can deduct at $10,000, which could give some families an incentive to rent longer and enjoy the good schools and other services those areas provide without having to foot a higher tax bill.

Industry representatives also came out in support of the bill. The National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) released the following statement:

“The National Multifamily Housing Council and the National Apartment Association applaud Congress on the passage of tax reform legislation and are pleased that the priorities of the apartment housing industry were largely addressed in the final bill. This legislation will help the multifamily industry meet growing demand to build 4.6 million new units by 2030. As the focus now changes to implementation, NMHC/NAA will continue to analyze and assess the impact of specific provisions on the multifamily industry.”

The Wall Street Journal article also looked at the impact the tax bill is expected to have on affordable housing development. While the changes are still expected to suppress new development slightly, it’s not expected to have the drastic effects that earlier versions of the bill would have created. The full article provides more background on the issue.

More on Reasonable Accommodation Requests for Animals

There’s a good post at the NAA blog about reasonable accommodations for animals, which as most of you know is a growing issue thanks to the increased use of emotional support animals.  One consequence is that apartment management companies are having to adopt more flexible policies regarding animals their residents want to have in their apartments. From the article:

Per U.S. Department of Housing and Urban Development (HUD) guidelines, a disabled resident should be given the opportunity to request any animal that reasonably affords such person equal opportunity to use and enjoy their dwelling. Owners are required to engage the resident in an interactive process in which the housing provider and the requester discuss the requester’s disability-related need for the accommodation and possible alternatives.

In years past, it seemed to be the status quo for apartment housing providers to adopt bright-line rules. These rules allowed for predictability in outcomes and restricted discretion among on-site staff to minimize the risk of fair housing discrimination complaints. While this used to be the case, now managers are expected to make decisions on a case-by-case basis depending on a resident’s unique set of needs and circumstances in accordance with the mandated interactive process.

The article contains a link to NAA’s Toolkit on Emotional Support Animals, and also references an upcoming webinar on the subject:

In an effort to continue outreach and education, NAA is hosting a webinar on this issue on Thursday, October 13 at 3 p.m. ET. NAA has enlisted the expertise of Katie Wrenn, Regional Training and Marketing Director at Milestone Management, to share the member perspective and her experiences in dealing with reasonable accommodation requests day-to-day. In addition to Ms. Wrenn’s expertise, Kirk Cullimore will discuss the forms that he was instrumental in getting approved by HUD and share lessons learned from his experience in litigating these cases throughout the investigative process.

*  Edited to add: Chris Loebsack with Loebsack & Brownlee, PLLC has graciously agreed to present a pre-trade show seminar, Emotional Support Animals and Reasonable Accommodation Requests, on October 25, 2016 from 4:30-5:30pm at the Greensboro Coliseum. Not only will you earn 1 CEC for attending, but you’ll have Chris available to answer any questions you may have on this hot topic. Register here.

The Impact of Disparate Impact – Your Screening Procedures May Need Revising NOW

The following is an email sent this morning (4/4/16) by AANC Executive Director Will Brownlee:

HUD Secretary Announces Guidance Regarding Excluding Persons with Criminal Records and Landlord Use of Blanket Bans/Denials

Dear NC rental industry leaders:

 It appears HUD is kicking off Fair Housing Month with a bang.  From the New York Times this morning (thank you Tom and Mary Gwyn for forwarding):   http://www.nytimes.com/2016/04/04/nyregion/federal-housing-officials-warn-against-blanket-bans-of-ex-offenders.html?emc=eta1

Ever since last summer’s U.S. Supreme Court decision in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project and the Court’s formal endorsement of a disparate impact fair housing standard, industry watchers have tried to anticipate what may be the next Fair Housing shoe to drop for the housing industry.  This appears to be it.   Based on the information contained in the article and in HUD’s Guidance (see link below), it would appear that criminal screening standards may, by necessity, need to become more nuanced to be viewed as fair housing compliant.

A full copy of the HUD Guidance, released this morning, can be found here:  http://portal.hud.gov/hudportal/documents/huddoc?id=HUD_OGCGuidAppFHAStandCR.pdf .

Key takeaways after reading the Guidance, which appears at first blush to be something of a frontal assault on the industry’s use of criminal screening for applicant denials:

Although the specific interest(s) that underlie a criminal history policy or practice will no doubt vary from case to case, some landlords and property managers have asserted the protection of other residents and their property as the reason for such policies or practices. Ensuring resident safety and protecting property are often considered to be among the fundamental responsibilities of a housing provider, and courts may consider such interests to be both substantial and legitimate, assuming they are the actual reasons for the policy or practice. A housing provider must, however, be able to prove through reliable evidence that its policy or practice of making housing decisions based on criminal history actually assists in protecting resident safety and/or property. Bald assertions based on generalizations or stereotypes that any individual with an arrest or conviction record poses a greater risk than any individual without such a record are not sufficient to satisfy this burden . . . .

 In most instances, a record of conviction (as opposed to an arrest) will serve as sufficient evidence to prove that an individual engaged in criminal conduct. But housing providers that apply a policy or practice that excludes persons with prior convictions must still be able to prove that such policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. A housing provider that imposes a blanket prohibition on any person with any conviction record – no matter when the conviction occurred, what the underlying conduct entailed, or what the convicted person has done since then – will be unable to meet this burden . . . .

 A housing provider with a more tailored policy or practice that excludes individuals with only certain types of convictions must still prove that its policy is necessary to serve a “substantial, legitimate, nondiscriminatory interest.” To do this, a housing provider must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety and/or property and criminal conduct that does not. A policy or practice that fails to take into account the nature and severity of an individual’s conviction is unlikely to satisfy this standard. Similarly, a policy or practice that does not consider the amount of time that has passed since the criminal conduct occurred is unlikely to satisfy this standard, especially in light of criminological research showing that, over time, the likelihood that a person with a prior criminal record will engage in additional criminal conduct decreases until it approximates the likelihood that a person with no criminal history will commit an offense . . . .

Section 807(b)(4) of the Fair Housing Act provides that the Act does not prohibit “conduct against a person because such person has been convicted … of the illegal manufacture or distribution of a controlled substance as defined in section 102 of the Controlled Substances Act (21 U.S.C. 802).”37 Accordingly, a housing provider will not be liable under the Act for excluding individuals because they have been convicted of one or more of the specified drug crimes, regardless of any discriminatory effect that may result from such a policy . . .

Because of widespread racial and ethnic disparities in the U.S. criminal justice system, criminal history-based restrictions on access to housing are likely disproportionately to burden African Americans and Hispanics. While the Act does not prohibit housing providers from appropriately considering criminal history information when making housing decisions, arbitrary and overbroad criminal history-related bans are likely to lack a legally sufficient justification. Thus, a discriminatory effect resulting from a policy or practice that denies housing to anyone with a prior arrest or any kind of criminal conviction cannot be justified, and therefore such a practice would violate the Fair Housing Act.

At first blush, it would appear that this Guidance practically mandates that the housing providers consider adopting much more nuanced criminal screening policies, ones that take many different factors into account, as this HUD Guidance effectively renders blanket denials for criminal history a thing of the past – with the specific exception of a conviction involving the manufacture or distribution of illegal drugs.  At a minimum, this Guidance should be considered required reading by both industry professionals and their respective legal counsel for Fair Housing Compliance and risk assessments moving forward.

Will Brownlee
Executive Director & General Counsel
AANCLogo

Emotional Service Animal Toolkit

Right now the PTAA office is getting more questions about emotional service animals than any other operational topic, and it seems that’s a national trend. The National Apartment Association has put together an Emotional Service Animal Toolkit to help address those questions and you can find a link to it and related info at their website.

It’s a great resource for all apartment industry professionals.

Here’s the link to a PDF version of the toolkit itself: http://www.naahq.org/sites/default/files/naa-documents/government-affairs/NAA-ESA-Toolkit-FINAL.pdf

Underlying Factors In the Housing Affordability Policy Debate

Ken Szymanski, the Executive Director of the Greater Charlotte Apartment Association, has written an outstanding piece on the underlying factors contributing to the housing debate in Charlotte, and many of them apply to us here in the Triad. Some key points are excerpted below, but you really should read the full piece here.

  • Moderate-, middle-, and upper-income households are served perfectly well by the dynamics of the marketplace. But low-income households cannot be served by the marketplace because their buying power is too low. That fact always has and always will generate social and political reactions, because those households are cost-burdened and have to deal with problems of housing quality and overcrowding…
  • At all levels of government—federal, state, and local—for many decades the political will has generally been lacking to materially increase this subsidy coverage of 25 percent. To quote Joseph Califano, a Cabinet secretary under President Jimmy Carter, “You can only go ‘so far’ at redistributing wealth.” We have not seen the political will to spend the money that would increase this materially. Regardless of who the HUD secretary was or whether the person in the White House was an “R” or a “D,” the appetite of elected or appointed officials—or the general public—is not there to go much over 25 percent…
  • State government has a role.  The N.C. Housing Finance Agency has been the state administrator of the federal Low Income Housing Tax Credit program.  The federal tax credit program was created in 1986 and generally aims to house those whose income is at or below 60 percent of the area median income level. 
  • The federal government has a role. Formerly, the role of the federal government was to fund public housing and provide below-market interest rate mortgages for multifamily rental housing. The role has been substantially diminished in recent years…
  • Inclusionary policy for new development/mixed-income housing has not attracted developers. Nearly three years ago, the Charlotte City Council approved a voluntary affordable housing “density bonus” for developers. If a developer wanted to build in affluent areas, the city would allow it to build extra units if it included some apartments or homes for low-income residents. But no developer has participated in the program, and the city may be starting over. A number of misconceptions underlie the city’s current inclusionary housing policy, including: a misunderstanding of the importance of return on cost in development feasibility; an overestimation of economies of scale in construction; a stereotype that private developers want to discriminate against poor people.

  • “Source of Income” civil rights issue. Somewhat akin to the inclusionary policy for new development are calls to mandate the acceptance of Section 8 (housing choice) vouchers in existing communities. Some advocates are attempting to make the market-rate rental sector shoulder a disproportionate burden of the city’s affordable housing crisis by making it “discriminatory” for a housing provider to elect not to participate in the voluntary Section 8 program. Making Section 8 voucher administration more market-like, not passing a state “source of income” statute, is the proper way to improve the workability of the federal government’s major housing assistance program.

Emotional Service Animals a Problem Not Exclusive to Apartment Industry

NBC’s Today Show aired a segment about how airline passengers are abusing the emotional service animal designation in order to avoid paying airfare for their pets. From the story:

There are legitimate cases of people who need an emotional support animal in the air. But experts say that far too often, people are abusing the system to save a buck and get their pets onto flights for free.

“You get on an aircraft and the cabin looks like a barnyard,” said Hollis Gillespie, a former flight attendant. She said she’s seen snakes, birds and pigs. “Often it’s about the money, because one way to travel with a pet on some airlines can be up to $600, depending on the size of the animal.”

But if a pet is designated an emotional support animal, “it gets to come with you for free,” Gillespie pointed out. All you need is an emotional support vest on the animal and an official letter from a mental health professional.

And plenty of websites offer emotional support animal certifications; all you have to do is fill out a questionnaire.

Here’s a link to a full video of the story.