Speaking Out on the Housing Crisis

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Housing is the hottest issue in California right now. Here in LA housing costs continue to climb, the pace of evictions is quickening, and the number of homeless is increasing by leaps and bounds. The folks at City Hall talk a lot about taking action, but nothing they’ve done so far has had any significant impact. The situation just keeps getting worse.

So a group of housing advocates, homeless advocates, and renters’ rights advocates decided to stage a protest on Fairfax last Friday. They put up a line of tents along the curb to dramatize the plight of those who are currently homeless, and also the thousands more who will likely become homeless in the next few years.

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Protesters lined up on Fairfax.

The media showed up with their cameras to cover this tent city press conference. The organizers called on Mayor Garcetti and the City Council to develop a plan to create affordable housing, ensure responsible development, and expand rent control.

A number of people spoke about different aspects of the crisis. Victor García, a recent graduate of UCSB, talked about the invisible problem of student homelessness. He told the crowd about UCLA students living in their cars because they couldn’t afford student housing and apartments in Westwood were way beyond their reach. García would like to see an end to California’s Costa-Hawkins act, which the limits the expansion of rent control.

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Victor Garcia speaks about student homelessness.

Emily Martiniuk told her own story, a harrowing account of being evicted at age 59 and having nowhere to go. Contemplating suicide, she had the presence of mind to check herself into Olive View Medical Center, and eventually was able to move into a permanent supportive housing facility. She escaped long-term homelessness, but there are tens of thousands of people on the streets of LA right now who weren’t so lucky. Martiniuk has travelled the US in recent years, speaking about the importance of creating more permanent supportive housing.

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Emily Martiniuk is a vocal advocate for permanent supportive housing.

As cars drove by on Fairfax, protesters stood at the curb holding signs and chanting slogans. Just before I left I heard them shouting, “Tent city! Do something, Garcetti!” Hopefully somebody at City Hall is listening. It would be great if the Mayor and the City Council finally did decide to do something about this crisis.

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Tenants Kicked Out as Landlords Cash In

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Ellis Act evictions are so common in LA these days that I’ve gotten used to hearing reports of landlords kicking their tenants out. It happens all the time. As speculative development continues to push property values higher, property owners are eager to cash in. Over 20,000 units have been removed from the rental market through the Ellis Act since 2000. And in addition to the thousands of tenants who’ve been kicked out under Ellis, it’s likely that thousands more have lost their apartments because they were bamboozled by unscrupulous landlords using cash-for-keys scams.

In the course of writing this blog I’ve met a number of people who’ve either already been evicted or are facing eviction. So when I went to meet a group of tenants who live in a small building on Las Palmas it seemed like a familiar scenario. The owner plans to demolish the existing structure in order to build a 7-story mixed-use project, and so the people currently living there have got to go. The breadwinners in these families are working hard to make ends meet, and odds are they’re getting by on paychecks that add up to well below LA’s median income. While I’m sure they’re worried about getting evicted, one thing that encouraged me is that they seemed much more angry than scared. They’re not going to take this lying down.

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Some of the tenants facing eviction.

The tenants are paying much less than the area’s median rent, but they’re also getting next to nothing in terms of repairs and maintenance. I could see walking into the building that the owner wasn’t taking care of it properly. The tenants told me a number of stories about problems with their units that the landlord was either slow to fix or didn’t fix at all. My guess is that he’s been sitting on the property, waiting for the right deal to come along, and didn’t see any point in spending money on upkeep. I should mention that he has laid out some cash to fix up a few of the units, just not the ones that are occupied by the current tenants. You may be asking, why would he do that? The answer is simple. He’s posting the refurbished units on the net as short-term rentals. This is a pretty common practice. Landlords are doing it all over the city, and it’s more or less legal unless the tenants were evicted under the Ellis Act. So when we talk about a shortage of apartments in LA, we have to remember that there are probably thousands of units that are actually being used as unofficial hotel rooms.

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Council District 13 Candidate Sylvie Shain.

My friend Sylvie Shain came by to talk with the tenants. Sylvie is running for the CD 13 council seat, in large part because of her concern over LA’s affordable housing crisis. She knows first-hand what it’s like to be evicted, having been forced out of her apartment by owners who planned to turn the building into a boutique hotel. Sylvie spent over an hour with the tenants, giving them info on what protections they had under the law and helping them figure out their next steps.

Several days later I went to a neighborhood council meeting on the proposed project. The purpose of the meeting was to talk about the impacts of the new structure, not the eviction of the current tenants, but it’s hard to separate the two. The owner has said that he will reserve seven units in the new building to replace the seven units that are currently occupied in the old building, and that he will offer them to the current tenants at the price they’re now paying. This may sound like a good deal, but there are a few problems with it. First, the owner hasn’t actually signed an agreement, which means he’s under no obligation to honor these terms. Second, while the owner is offering to replace seven units, there are actually fifteen units in the existing building that are covered by the rent stabilization ordinance (RSO). His deal would mean the loss of eight more RSO units. This may not sound like a lot by itself, but thousands of RSO units have been taken off the market in recent years, which is one of the reasons affordable housing is so scarce these days. Third, the owner knows that the new structure will probably take a couple of years to complete. If the current tenants get forced out, there’s a good chance they won’t find anything they can afford in LA. It’s entirely possible that by the time the proposed project is completed, none of them will still be living in the area, and he won’t have to offer them anything.

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Neighborhood Council meeting on the proposed project.

Then there’s the way the Department of City Planning (DCP) is trying to push this project through. They’re trying to approve it with a categorical exemption, which means they’re arguing that because it’s in-fill development and conforms to the current zoning, the California Environmental Quality Act (CEQA) doesn’t require an environmental assessment. And to make that argument, they cite CEQA Guidelines, Section 15332. But CEQA requires that the project meet a number of conditions in order to grant the exemption, including the following….

Approval of the project would not result in any significant effects relating to traffic, noise, air quality, or water quality.

Traffic is already getting to be a problem on Las Palmas. Formerly a quiet residential street with one lane going each direction, in recent years it’s become a short cut for drivers looking to avoid congestion on Highland during rush hour. And traffic on Las Palmas is going to get a lot worse, because in addition to this project there are two others about the same size that are currently under construction, one just to the north and one just to the south of the existing building. But wait, there’s more. At the corner of Las Palmas and Franklin work recently began on a complex that wil contain over 100 units. In other words, if this project is approved, the neighborhood will gain about 300 units, which will definitely have a significant impact on traffic.*

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Traffic northbound on Las Palmas at rush hour.

What’s more, the proposed project is about 500 feet away from the facility that houses both the Canyon Pre-School and the Las Palmas Sr. Center. Children and seniors are known to be sensitive receptors, and to say that there will be no significant impacts to air quality or noise levels during construction is ridiculous. The kids and seniors at this small facility already suffered an onslaught of construction dust and noise when work on the project at Las Palmas and Franklin began last year. But the DCP apparently just doesn’t give a damn, and so they’re trying to rush this project through with no environmental review whatsoever.

After the neighborhood council meeting, I contacted the DCP hearing officer to find out what the timetable was for the project’s approval. It’s tentatively scheduled to go before the City Planning Commission on April 13, though it could get pushed back. Meanwhile, the tenants wait and wonder whether they’ll have to find a new place to live, in a city where rents are spiralling higher every year.

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Some housing advocates may be cheered by this news, but don’t get too excited. The vast majority of these units will be well beyond the reach of those making the area’s median income, $34,807 a year. [Source: LA Times, Measuring income along L.A.’s Metro stations by Kyle Kim and Sandra Poindexter, March 4, 2016]

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View of construction site from Highland.

How Bad Is Rent Control?

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A while ago I was at a neighborhood council meeting in Hollywood, and things were getting pretty heated. The topic was the conversion of a rent-controlled apartment building into a boutique hotel, and the people who spoke weren’t shy about saying which side they were on. It was the tenants versus the property owners, and there was no middle ground. Each side was convinced they were absolutely in the right.

The tension was so thick you could cut it with a knife. And it only jacked things up higher when one of the pro-business attendees jumped into the debate. I can’t remember her exact words, but she said something like, “Let’s face it. The vast majority of economists are against rent control.”

I didn’t believe it. I thought she was just trying to bolster her own position. But I didn’t get a chance to call her on it, because the meeting was running late, and ended up lurching to an abrupt halt. The crowd wandered slowly out of the room, with little groups banding together to keep the debate going, while the security guard kept trying to herd us all toward the exit.

Later on, I got on the net to find out what economists really had to say about rent control. And I found out she was right. The vast majority of economists are totally against it. It really floored me when I found a piece Paul Krugman wrote back in 2000 where he argues forcefully that rent control discourages new construction, thereby limiting supply, and inevitably driving rents up. I have a lot of respect for Krugman. I figured if he said it was bad, then it had to be bad.

But the more I thought about it, the more I began to question whether the economists really knew what they were talking about. They’re making the standard argument, that prices rise when supply is short and demand is high, and that prices fall when supply starts to outstrip demand. It’s one of the basics of economic theory, and you can find thousands of examples where the market works exactly that way.

So who am I to tell Paul Krugman he’s wrong? He’s got a Nobel Prize. I don’t even have a college degree. But actually, I don’t think his view lines up with the facts. And here’s why….

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In surfing the net, I learned that there are two schools of thought on rent control. The economists who argue that it’s inevitably bad point can point to a mountain of evidence in their favor. But the evidence they’re basing their conclusions on is mostly decades old. In the early- to mid-twentieth century, you had “hard” rent control, which meant setting absolute limits to what landlords could charge for a unit. Once the price was fixed, there was no changing it. The result was poor maintenance, black markets, and little or no construction of new units. But this kind of rent control largely vanished after WWII. And yes, the reason it disappeared in the US was because of a building boom that created huge numbers of houses and apartments, aided by federal policies that made it possible for the average person to get a home loan. Supply-siders please take note. The federal government actively supported middle-income families who wanted to buy a home, spurring the creation of housing developments nationwide.

The second generation of rent control came in the 70s, when rental prices started climbing rapidly. Numerous US cities passed some kind of ordinance to keep a lid on rising rents. And right there the supply siders should see a problem with their argument. If the absence of rent control led to plentiful supply and cheap housing, then nobody would have felt the need to impose regulation. The fact that municipalities all over the US felt pressure from renters to take action indicates that the free market wasn’t working the way it was supposed to.

But the ordinances passed in the 70s were different from “hard” rent control. These measures mostly took a “soft” approach, meaning they didn’t set absolute limits. The Rent Stabilization Ordinance (RSO) passed in LA allowed gradual yearly increases. Also, it only applied to units constructed before 1978. There are economists who are argue that even measures like this still suppress construction, but that didn’t happen in LA. In fact, in the mid-80s the city saw a building boom that created around 100,000 units in the space of a few years. Another feature of “soft” rent control was vacancy decontrol, meaning that when a tenant moved out the landlord could raise the rent as high as they wanted.

But according to the supply siders, it doesn’t matter how you structure it, rent control is bad. And many of them cite LA as a classic example of why it doesn’t work. “Of course tenants are paying outrageous prices there,” they say. “It’s because they’ve got rent control. It drives prices up.” The problem with this argument is that most of the people making it don’t even know which LA they’re talking about. Generally they’re thinking of the County of Los Angeles, not the City of Los Angeles, and there’s a big difference. The County is made up of 88 different cities, and only a few of them have rent control. If the argument put forward by the supply-siders was true, then rents within the City of LA would be higher than rents in surrounding cities that don’t have rent control. But that’s not necessarily the case.

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Before I go any further, let me say that finding useful data to make any judgments at all about rent-control isn’t easy. I looked at a number of sources before writing this post, and gradually realized that it’s hard to find reliable, objective info about prices for apartments that are currently on the market. My first move was to look at US Census data, and I quickly ruled it out because it records what tenants are paying instead of prices for units that are currently being offered. That would definitely drive the numbers down in rent-controlled cities, so I had to look elsewhere. I checked out a number of sites that list current rentals, and I was astounded by how high the prices were on some of them. But this is because these sites are mostly geared towards newer apartments, and they often get revenue, directly or indirectly, from the companies that are marketing the units. Another problem is that most commercial sites tend to focus on the hotter markets. Zumper covers the entire US, and regularly issues reports on rental prices. The data they collect is cited by many who write about the market, including journalists. But after taking a closer look I have to question the reliability of Zumper’s info. Check out this map they published this summer about the rental scene in LA.

LA Rental Prices from Zumper, Summer 2016

LA Rental Prices from Zumper, Summer 2016

Based on the data from this sampling, they report that the median rent for a one-bedroom in LA is $1,970, and that LA is the seventh most expensive city in the nation. Let’s take the second claim first. It’s not true. LA may be the seventh most expensive major city in the nation, but there are many cities that are more expensive, including a number in California, like Santa Clara, Redwood City, Dublin, and Cupertino. And none of them have rent control.

Second, this map includes three cities besides the City of Los Angeles. It shows Santa Monica, Beverly Hills, and Culver City. If you think this is nitpicking, let’s move on to the fact that the map actually only shows about half of the City of Los Angeles. It doesn’t include anything east of Downtown or north of the Hollywood Hills. While it includes some neighborhoods where rents are lower, the map seems to have been deliberately drawn to focus on the hottest areas. Why isn’t East LA in the picture? And how come the entire Valley is left out? Is this Zumper’s idea of objective data? There are some pricey neighborhoods in the Valley, but if they’d included Van Nuys, Arleta, Panorama City, Pacoima, Reseda and Sylmar it would almost certainly have brought the median rent for a one-bedroom down. The fact that Zumper’s map is centered on the neighborhoods where prices are highest makes their conclusions seem pretty dubious.

So where do you go to get credible data on current market rates? Honestly, I don’t think there’s any source you can trust completely, but I did find one that seemed more reliable than the others. Rentometer not only covers all of LA, but it also offers information on specific neighborhoods. Its data covers the range of units currently being offered, both new and old. Also, since I wanted to compare LA with other cities that don’t have rent control, I needed a site that would give data limited to a certain area. You may think that’s pretty basic, but I’ve been to sites where I punch in a zip code and they give me everything within a five mile radius.

So using Rentometer, I started entering zip codes to compare prices in neighborhoods all over LA County.* Here’s the data I found based on the median rent for a one-bedroom.

LA Rental Prices from Rentometer, Summer 2016

LA Rental Prices from Rentometer, Summer 2016

The first thing the graph shows is that there’s a huge range of prices just within the City of LA. This may sound obvious, but again, most commercial sites focus on the high end, and really don’t give an accurate picture of how much variation there is. You can find a huge difference in prices even in neighborhoods that are right next door to each other. I was skeptical about how high the median price given for Van Nuys was, but looking at a map I found that the area covered by this zip code was just west of Valley College. Definitely a more upscale neighborhood than what you’d find around Van Nuys Blvd. and Sherman Way. I was also surprised by how low the median rent was on the west side of Pasadena, but a friend who lives in that city told me that housing around the Foothill Freeway is definitely cheaper.

The second conclusion I came to is that prices don’t seem any lower in cities with no rent control. Neither Burbank nor Long Beach have rent control, but they come out right about in the middle. Pasadena and Culver City don’t have rent control either, and they both appear at the high end. Comparing Palms and Culver City seems like a good way to make my point, since they’re right next to each other. The first is part of the City of LA and subject to rent control, while the second is an independent city where there is no rent control. But the median price for a one-bedroom is almost exactly the same.

I’m sure there are those who will say that this comparison is flawed, since these cities are all within LA County, and that the RSO is causing a spillover effect, pushing up prices even where there’s no rent control. To those people I say, take a look at Orange County. None of the cities within its boundaries have rent control, but you’ll find pretty much the same range of prices.

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Is this data conclusive? Or course not. If there’s anybody who can come up with a better source and compile a more comprehensive sample, I’d love to see the results. But based on the data I’ve found, I don’t see any reason to believe that rent control drives prices up. To me it looks like the deciding factor is how desirable an area is for people who have money to spend.

Yes, it’s true that the majority of economists are opposed to rent control. But it’s also true that there’s a younger generation of economists who see the situation as being more complex than your standard supply side formula. I found an article on-line by economist Richard Arnott, (Time for Revisionism on Rent Control?, Journal of Economic Perspectives, Winter 1995) that makes a compelling case for a more nuanced view. Arnott acknowledges that the older “hard” rent control measures were counter-productive, but he doesn’t believe that the newer “soft” measures necessarily have the same damaging impacts.

Arnott also talks about imperfect markets. These are markets where there are forces in play that disrupt the standard dynamic, creating situations that can’t be explained using a simple supply side equation. Twenty first century LA is a great example. Fifty years ago if you built an apartment complex in LA you were most likely marketing your units to people who lived in LA. That’s not true any more. These days developers are pitching their product not just to prospective tenants all over the US, but in some cases all over the world. To them it doesn’t matter if the average Angeleno can’t afford their prices. There’s probably somebody in New York, or Paris, or Seoul, who can.

Here’s something else to consider. With interest rates at record lows, real estate is one of the few sectors that has offered a high rate of return. Investors have been plowing their money into development in search of big payoffs. Why should they waste their time building modest housing for middle-income renters when they could reap huge profits building luxury skyscrapers for the wealthy? This has led to a speculative binge that’s caused real estate prices to skyrocket, and made it difficult for anyone to build housing for middle-income or low-income families. The higher prices charged for new units distort the numbers, and push the so-called “market rate” higher than it should be. A report produced by LA’s Housing + Community Investment Department (HCID) in November 2015 found that there was a 12% vacancy rate in units built since 2005. At the same time, the overall vacancy rate in the city was around 4%. To my mind this shows that these days developers aren’t building units geared toward the people who actually live in LA. If they were, you wouldn’t be seeing such a huge disparity in vacancy rates.

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Short-term rentals (STRs) are also having an impact. If landlords find that renters can’t afford their units, no problem. You can actually make just as much money (or more) by listing the units on the net as STRs. Why should a landlord bother with pesky renters who expect a livable dwelling in return for their money, when they can cash in by turning the place into a weekend crash pad? City Hall recently passed legislation to clamp down on this practice, but it’s too early to tell if it’s having any effect.

Again, I’m not going to claim that the data I’ve collected proves anything conclusively, but if anyone wants to argue that rent control is evil, they’ll have to come up with something better. I believe that skyrocketing rents in LA have nothing to do with rent control, and everything to do with a speculative market that’s been actively encouraged by the politicians who run this city. And anyone who wants to make a supply side argument had better show how they’ve factored in the forces described above. When it comes to housing, the landscape has changed. I don’t believe the old rules apply.

If you’re interested in reading more on the subject, I recommend Arnott’s article. Here’s the link.

Time for Revisionism on Rent Control?

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I should note that when I started checking prices on Rentometer, the site allowed you to search by zip code. That changed recently, and now you have to search by neighborhood. When I looked up the last couple of communities for the graph, I searched by neighborhood and then found the corresponding zip codes.

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