Dear Mr. Krugman: You’re Wrong About Rent Control

RC 01 Apts

An open letter to economist Paul Krugman.

Dear Mr. Krugman,

I want to start off by saying that I’ve followed your column in the New York Times over the years, and I have tremendous respect for you. Since I have no background in economics, I appreciate your clear, straightforward approach to breaking down the issues. And more important, I appreciate the fact that you speak out against the dishonesty and fraud that are all too common in this country. There have been times when I really needed to hear the voice of reason, and you have been that voice.

But as much as I respect you, I have to say I think you’re dead wrong about rent control. In fact, I think most economists are wrong about rent control. Not that I have anything in my background to give me any credibility. You went to Yale and MIT. I went to LACC. But in spite of my utter lack of any credentials that would give me the right to talk about this issue, I hope you’ll read on at least a little further. Because when it comes to rent control, I think you, like the vast majority of economists, have failed to do your homework.

Just to give you an idea of the sloppy thinking that characterizes most discussions about rent control, let’s talk about Los Angeles. I live in LA, and I can’t tell you how often I’ve heard that rents are high in LA because of rent control. I’ve been repeatedly told it constrains new construction, which means we have low supply, which means we can’t meet the demand for new housing, and that drives prices up.

But there are a number of problems with this argument.

First, most of the people who talk about LA don’t even understand the difference between the City of Los Angeles and the 87 other cities that make up the County of Los Angeles. Some of these are embedded within the City’s boundaries. While the City of LA does have a Rent Stabilization Ordinance, there are only four other cities (Santa Monica, Beverly Hills, West Hollywood and Thousand Oaks) that have any kind of rent control. Median rents in Culver City, Burbank and Pasadena are as high or higher than the City of Los Angeles, despite the fact that these cities have no rent control ordinance on their books. And within the City of LA you’ll find considerable variation in housing costs. Rents in the corridor between Santa Monica and Downtown tend to be the highest. Rents in parts of the Valley (Arleta, Pacoima, Sylmar) and in the Harbor Area (Wilmington, San Pedro) are usually considerably lower. By itself, this seems to suggest that there are other factors besides rent control which may have a larger impact on rental costs.

Second, those who oppose rent control generally point to coastal cities like LA, San Francisco or New York, all of which have outrageously high housing prices. But absolute dollar amounts aren’t the best gauge of affordability. Really we have to look at prices relative to income, in other words we have to look at rent burden. According to a 2016 report by Abodo , the Miami-Fort Lauderdale-West Palm Beach area was at that time the most cost-burdened rental market in the US. A report from HUD the following year came to the same conclusion. While prices in the Miami area are well below those in New York or San Francisco, wages are also much lower, and renters are getting hammered. This is in spite of the fact that Miami has no rent control. Another report from Abodo that breaks down rent burden by generation finds that a number of urban areas in Florida appear high in the rankings, including Daytona Beach, Lakeland-Winter Haven, Cape Coral-Fort Myers, and Orlando. No Florida cities have enacted rent control, because state law prohibits them from doing so. Supply siders tell us that if landlords are allowed to charge whatever the market will bear, this will incentivize new construction which will generate more supply and bring prices down. That hasn’t happened in Florida. Renters there have been struggling for years, and somehow market forces have failed to bring relief. And while the Los Angeles-Long Beach-Anaheim area does appear on Abodo’s 2016 rent burden ranking, it’s interesting to note that it comes in at number five. None of the first four urban areas on the list have rent control.  (I should also point out that Long Beach and Anaheim do not have rent control.)

All the economists opposed to rent control insist that endless reams of research back their stance. Again, I’m not an economist, and I certainly haven’t spent as much time with the research as they have, but what I’ve seen doesn’t impress me. For all the talk of irrefutable data, the studies I’ve looked at seem very limited. They generally focus on a narrow selection of markets, sometimes just one market. They often base their conclusions on data that has a questionable relationship to rent control. They generally look at the housing market in isolation, without any effort to see rental prices as part of the larger picture. And they generally don’t acknowledge that there are a lot of different ways you can structure rent control.

No question, the forms of rent control used in the first half of the 20th century were a failure. I agree that setting absolute caps on housing prices stifles new construction and only encourages black market housing arrangements. But the forms of rent control adopted in some cities over the past 50 years are much different from their predecessors. For instance, in LA the Rent Stabilization Ordinance passed in 1978 only applies to apartments built before that year, so it doesn’t discourage new construction. It allows annual rent increases of 3%. Because the ordinance includes vacancy decontrol, rents are reset when a tenant moves out. It also has a mechanism that allows landlords to charge additional amounts to pay for capital improvements and major repairs. I have to laugh when I hear that rent control inevitably leads to poor maintenance of residential units, creating unsightly and unsafe slums. I often pass through Santa Monica, Beverly Hills and West Hollywood, all of which have a form of rent control, and I haven’t noticed any festering swaths of urban decay.

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Residents protesting gentrification in East LA.

While I can’t claim to have read every research paper on rent control published in the last 50 years, I have read a sampling, and as I said before, I’m not impressed. To go into specifics, I’d like to talk about a couple of papers that have been widely cited, and then another more recent study….

First let’s take a look at Gyourko and Linneman’s study from 1987, which analyses the allocation of benefits under rent control. They focus on New York City, and they use a lot of impressive formulas to compare the distribution of family income with the distribution of benefit-adjusted income under rent control. I don’t pretend to understand the math. I’ll just assume that all the numbers they come up with are absolutely correct. Their conclusion is that, “[I]f the primary social benefits of rent control are distributional impacts, they were not successful in New York.” They go on to say, “Economists have long predicted that racial discrimination could result in markets where nonprice rationing occurred. Blacks and Puerto Ricans in the controlled sector received lower benefits than their white counterparts.”

I’m sure they’re right when they say that calculating the dollar amounts shows an uneven distribution of monetary benefits. Unfortunately, they’re missing the whole point of rent control. It was never intended to ensure the equal distribution of monetary benefits. The purpose of rent control is to provide housing stability and to minimize the considerable economic and social costs of displacement. It does offer equal protection to all those who live in rent-controlled apartments, regardless of their race, which is why it blows my mind that the authors have the nerve to state, “Economists have long predicted that racial discrimination could result in markets where nonprice rationing occurred.” Are they kidding?! They’re saying rent control results in racial discrimination? Like discrimination never happens when we let the free market rule? This statement is so absurd it really calls the authors’ judgment into question. How clueless do you have to be to blame rent control for a social evil that’s woven into the very fabric of this country?

Another issue that comes up, not just in Gyourko and Linneman’s paper but in others, is the idea of a “rent subsidy”. This is the difference between the rent controlled price for a unit and what someone would pay on the free market. As an example, the authors say “…. if the monthly rent for a controlled apartment was $500 and this unit would have rented over $700 in the uncontrolled sector, the monthly rent control subsidy would be $200.” This is interesting, because it assumes that the free market price is the result of some kind of rational process. But is it?

Let’s look at a recent incident at an apartment complex in City Terrace. The building was sold to Manhattan Manor, a real estate investment group, and because it wasn’t covered by rent control, they decided to jack up the rents. One tenant had their rent go from $1,250 to $2,000 overnight, a 60% increase. Since the building wasn’t covered by rent control, and the tenants couldn’t afford the increase, the new owners started eviction proceedings. But the tenants fought back, and the case went to court. Far from siding with Manhattan Manor, the jury found that the unit had significant habitability issues and that the new owners had failed to make basic repairs. In fact, not only did the jury reject the owners’ bid to evict the tenants, they determined that the unit was only worth $1,050 per month in its current condition.

Now, in Gyourko and Linneman’s view, the new landlords were just exercising their right to reset the rent to what they believed they could get on the free market. And from the economists’ perspective, if the building had been rent controlled, the tenants would have been receiving a “subsidy” of $750 a month. But a jury, after looking at basic habitability issues, decided that the unit wasn’t even worth the $1,250 that the tenants had originally been paying. So the idea that the free market somehow sets fair prices through a rational process seems suspect. And this isn’t an isolated incident. Scenes like this are playing out all over LA, and I suspect, throughout the country. Real estate brokers routinely advertise “underperforming” properties, and in the current environment, with speculation running rampant, investors are happy to snap these buildings up. For many of these investors, the condition of the apartment isn’t a primary consideration in determining what to charge. All they care about is getting the highest possible return on their investment. Unfortunately, in many cases, deciding an apartment’s “fair market value” is just a matter of picking the highest number they think they can get away with.

But let’s move on to Glaeser, Luttmer, 2003. I give them credit. Their paper is one of the few I’ve seen that actually compares cities with rent control to cities without. They look at rental data in New York, Chicago and Hartford, and also create a baseline by taking a sample of Metropolitan Statistical Areas (MSAs) across the US. They even break the demographics down by income, household size and education. They’re certainly making an effort to take variables into account. And you could make the argument that the three cities they focus on are similar in a number of ways

Still, there are significant differences that could have an impact on Glaeser and Luttmer’s calculations. To start with, New York is unique. It’s by far the most populous city in the U.S., as well as a financial, educational and cultural center. It’s the point of entry for thousands of immigrants annually and its port is a global shipping hub. The authors use census data from 1990, when New York’s population was 7.322 million, Chicago’s was 2.786 million, and Hartford’s was 137,296. You could still make the case that New York and Chicago are major urban centers and roughly similar when it comes to income and demographics. But the comparison to Hartford, with a population roughly one fiftieth of New York’s, is really questionable.

And while I respect Glaeser and Luttmer for taking the trouble to look at MSAs all over the US to set a baseline, the vast majority of these urban areas have little or nothing in common with New York in terms of population, demographics, employment, income, housing stock, and climate. The idea that we can use the numbers for these areas to set some kind of “normal” to use as a comparison with New York just doesn’t make sense. If your main interest is in working out intricate math problems, the authors’ approach probably sounds great. But if you’re actually looking for answers to complex questions about housing affordability, it just doesn’t make it.

But the biggest problem when it comes to comparisons, even if we’re just talking about New York and Chicago, is density. In New York in 1990 there were 24,165 people per square mile. In Chicago in 1990 there were 11,905 per square mile. In other words, New York is over twice as dense in terms of population as Chicago. Even though the two cities are roughly comparable in terms of housing units per capita, the cost of real estate in New York is way higher, which means the cost of housing is going to be way higher. So while the median income for the two cities is in the same ballpark, you’re going to get less apartment for your buck in New York. Because of this, even if New York didn’t have rent control, you’d expect to see a difference in the kind of housing that New Yorkers could afford compared to the rest of the country.

There are other problems with Glaeser and Luttmer’s paper. On the first page, in talking about mechanisms for rationing goods, they say, “If the allocation mechanisms are not perfectly efficient, then the analysis illustrated by Figure 1, which implicitly assumes that the rationing under rent control ensures that apartments go to the consumers who value them most, is wrong.” The authors seem to be saying that rent control is failure because it’s not “perfectly efficient”. This is an interesting way to define failure when it comes to the housing market. Is the free market “perfectly efficient” when it comes to allocating housing resources? Of course not. When it comes to housing, perfect efficiency is nothing more than an abstract concept. Glaeser and Luttmer base their argument on their own false assumption. They make a claim for rent control that its supporters never have. I’ve never heard anyone claim that rent control is perfectly efficient. Let me repeat, the point of rent control is to provide stable housing and to prevent displacement.

But let’s get to the crux of Glaeser and Luttmer’s argument. For these two academics, the efficient allocation of assets is their Holy Grail. How do they define that in the housing market? “The baseline apartment characteristic used to estimate misallocation is the number of rooms in the apartment.” Huh. Interesting. So they look at the data for New York, Chicago and Hartford, and what do they find? “Our methodology suggests that 21 percent of New York apartment renters live in apartments with more or fewer rooms than they would if they were living in a free-market city.”

Really? That’s the criterion they use? Whether New Yorkers are living in “apartments with more or fewer rooms than they would if they were living in a free-market city.” Honestly, this seems pretty arbitrary. If the outcome was that a lot of New Yorkers were living in apartments with too few rooms, that would fit in with the standard argument that rent control decreases supply. But in their minds, having too many rooms is just as bad as having too few rooms. They say that, according to their calculations, “…the overall percentage of New York renters that are living in apartments that are the wrong size is 25.8%….” And what’s the right size? It’s a ratio they came up with by crunching data for a selection of U.S. cities, most of which are completely different from New York when it comes to employment, income, housing stock, and demographics.

Glaeser and Luttmer seem to believe there’s some kind of ideal that will result from the “perfect allocation” of housing resources, and that the free market will achieve that ideal. But even though all of us want to live in a place where there’s enough room to be comfortable, the key issue for renters is affordability. While Glaeser and Luttmer worry about the right number of rooms, you can see increasing numbers of tenants worried about just making rent in cities like Miami, Portland, and Austin, none of which have rent control. And the free market doesn’t seem to have helped tenants in Clark County, Nevada, where official data says that there were 30,000 evictions in 2016 alone. Interestingly, most housing experts in the area agree that the actual number is much higher, since many tenants who fall behind on rent just leave to avoid having an eviction on their record.

Ultimately, I have to say that Glaeser and Luttmer’s work isn’t very convincing. I give them credit for crunching a lot of numbers, but their conclusions seem pretty arbitrary. Like many economists who tackle rent control, they’re more focussed on the numbers than they are on reality. Rather than looking at the pressures the economy brings to bear on renters, rather than examining the impacts of speculative real estate investment, rather than measuring the social impacts of displacement, they spend their time counting the number of rooms a household has. And because in New York they find that those numbers don’t add up according to an an ideal ratio they’ve decided on, their verdict is that rent control is a failure.

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Downtown LA now offers “boutique apartment lofts”.

The most recent study I looked at was the 2017 paper from Diamond, McQuade and Qian, a trio of academics at Stanford. Their work was just as disappointing as the others. Like Gyourko and Linneman, these folks have decided they can analyze the impacts of rent control by looking at a single city. They feel perfectly comfortable making sweeping statements about the negative effects of rent control without considering what tenants are dealing with in other cities governed by the free market.

The folks from Stanford study decades of data from San Francisco and find that rent-controlled units are more likely to be removed from the market through legal conversions than units not covered by rent control. They argue that because of these conversions the supply of rental units shrinks and therefore rental prices rise. “We conclude that this led to a city-wide rent increase of 7% and caused $5 billion of welfare losses to all renters.” Well, that may sound logical on the face of it, but without comparing their data with rent increases in free market cities, it’s pretty meaningless. To claim any certainty about the actual rate of rent increases due to conversions you’d need to do more than study a single city. You’d have to compare your results to other cities without rent control to see if rents rose even without such conversions. Like, maybe Orlando, where Apartment List reports that rents rose 5.3% from August 2017 to August 2018. Or how about Denver, where a June 2018 report from Zumper says that in a single year the rent for a one-bedroom rose 16%.

This isn’t the only questionable conclusion that the folks from Stanford come to. Check this out….

“Taken together, we see rent controlled [sic?] increased property investment, demolition and reconstruction of new buildings, conversion to owner occupied housing and a decline of the number of renters per building. All of these responses lead to a housing stock which caters to higher income individuals. Rent control has actually fueled the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”

This is fascinating. Because the authors see an increase in high-cost housing, they come to the conclusion that rent control accelerates gentrification. But this is based on the assumption that San Francisco housing prices only increased due to conversions, which is ridiculous. The fact is, real estate investors looking for the highest rate of return will do whatever’s required to squeeze more money out of a building. Sure, in San Francisco they resort to conversions to free themselves from rent control. But in markets without rent control they’d just jack up the rent as high as they pleased, and the end result would would still be the displacement of low-income residents by high-income residents. Free market cities like Portland, Austin and Denver have gentrified rapidly over the past 15 years.

Seriously, the authors are totally clueless on this point. They’re so busy fondling their data that they completely ignore the reality of what’s been happening in San Francisco. As the Bay Area has become a tech hub, wave after wave of high-paid employees have flocked to the city. Seeing this, real estate investors have bought up all the units they can in order to capture some of that cash. Even if San Francisco had never enacted any kind of rent control, prices would still be rising like crazy. Low- and middle-income tenants would still be getting hit with exorbitant rent increases as housing speculators swarmed over the city to cash in on the tech boom. These conversions aren’t the cause of higher prices, they’re just a tool. Given the rise of the tech sector in San Francisco and the flow of global real estate investment into the city, prices would be shooting up with or without rent control, and the end result would still be massive displacement of low-income residents.

Mr. Krugman, you seem pretty cool, so I hate to make sweeping generalizations about economists. But after looking at these three papers, and others on rent control, I have to say their authors all have one thing in common. They’re so focussed on crunching numbers they seem completely out of touch with reality. These academics have certainly spent a lot of time compiling data and working out complex equations, but did they even spend five minutes talking to renters in the cities they were studying? They analyze rental markets in terms of dollar amounts and the number of rooms, but did they spend any time looking at how renters are struggling in the current housing market? Did they even consider looking at displacement in free market cities like Miami, Portland and Austin? Did they ever consider that speculative investment could cause rapid distortions in the housing market that would leave renters out in the cold?

No. They look at isolated datasets and after adding up the numbers they come to the conclusion that rent control is incontestably bad. But their work is narrow and shallow. Of the three studies cited here, only one of them actually compares rent controlled cities to free market cities. And in that case the authors state that rent control should be perfectly efficient, without ever asking if the free market is perfectly efficient when it comes to housing. They claim that rent control distorts the housing market without considering whether other factors could distort the market as well.

But I want to be clear. I’m not saying you should come out in favor of rent control. I’m saying that, based on the research I’ve looked at, no economist should come out against it. It’s entirely possible that there are other, better papers I missed, and if that’s the case, you can dismiss me as an ignorant fool. But the studies by Gyourko, Linneman and Glaeser, Luttmer have been widely cited, which seems to indicate that economists give them credence. Honestly, I can’t understand why. While I’m sure these academics worked hard to produce their papers, the results are a meaningless exercise in crunching numbers. These people need to spend less time on their laptops and more time in the real world.

I admit I’m biased. I live in a rent-controlled apartment, and if it wasn’t for LA’s Rent Stabilization Ordinance I would have had to move out a long time ago. But I still say that the economists who argue against rent control haven’t done the research necessary to support their arguments. If you’re still with me at this point, you might be saying, Okay, so what kind of research should we be doing?

I’m glad you asked.

First, a credible study on the impacts of rent control shouldn’t be focussed just on rent control. It should look at housing accessibility in both controlled and free markets. It should cover a range of major US cities. It should include data covering at least a 20 year period, and 30 or 40 years would be even better.

Second, it should look at various measures of accessibility. I think the level of rent burden is the best indicator for tenants, but it would probably also be good to look at homeowners and gather data on their level of mortgage debt. A thorough study would also examine data on evictions and foreclosures, but the first category could be tricky. In LA we have data on evictions under the Ellis Act, but Ellis is only invoked for rent-controlled units. If tenants leave because the rent rises sharply, or because the landlord offered them $3,000 to get out, or because the owner threatened to call ICE on a family of undocumented immigrants, there won’t be any record of their departure. And while most cities would have records of cases where tenants are evicted through a legal process, I bet those cases rarely reflect the real rate of displacement.

And third, how about actually going out into the world and talking to the people who are struggling to keep a roof over their head? How about making this an interdisciplinary study that ties housing accessibility to income, education, location, race and culture? How about looking at housing in the context of the real world, instead of looking at it as a set of numbers on a spreadsheet. The thing that makes me angriest about the papers these economists have produced is that they seem completely cut off from the world around them. When I read that the Bureau of Labor Statistics says the median annual wage for economists was $102,490 in May 2017, can you blame me if the words “ivory tower” come to mind?

I realize a study like the one I’m talking about would cost a lot of money and take years to produce. But it’s time for economists to get out of libraries and conference rooms and spend some time in the world the rest of us live in. The rising cost of keeping a roof over your head is dragging millions of people down across the country. We’re in the middle of a nationwide housing crisis. While the majority of economists feel comfortable slagging LA and New York for having rent control, they don’t seem to want to ask why the free market is failing renters in cities across the nation. If the free market is supposed to naturally produce affordable housing, then why are tenants in cities like Portland and Chicago pushing for legislation to limit rent increases?

Mr. Krugman, if you’ve read this far, I want to thank you for hearing me out. The reason I decided to direct this letter to you is that, of the economists I’m aware of, you seem to realize that economics isn’t just about graphs and algorithms. It’s about people. It’s about whether people can find a job, whether they can put food on the table, and whether they can keep a roof over their head. As you know, in spite of the fact that unemployment is nearing historic lows, there are millions of tenants across the US who are struggling to make rent. Over the last fifteen years, real estate investment has become a global force, with investors targeting cities around the planet looking for the highest possible rate of return. This has caused housing costs to soar in cities as diverse as Los Angeles, Chicago, Toronto, London, and Hong Kong. The argument that we can build our way out of this crisis doesn’t seem credible, since the vast majority of new units built in these cities are far too expensive for the average citizen.

It’s time for economists to stop asking whether or not rent control works. They need to start asking whether the housing market, regulated or not, is working for the millions of Americans who are living a paycheck away from the street. They need to step outside the university campuses and the think tanks and take a good hard look at how difficult it is for average citizens to keep a roof over their head these days. Economists need to look beyond individual cities. They need to start asking bigger questions. They need to make an effort to see human beings as something more than numbers on a spreadsheet.

Until these economists open their eyes wide enough to look at the big picture, their research won’t be worth the paper it’s printed on.

RC 20 VC

Speaking Out on the Housing Crisis

HP 01 Crowd

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.

HP Tents

Tenants Kicked Out as Landlords Cash In


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.


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.


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.


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.*


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.

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]


View of construction site from Highland.

How Bad Is Rent Control?


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….


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.


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.


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.


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?

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.