By Roderick Wright, California State Senator (Retired)
Listen to any political discussion today and apart from inflation and crime, the dual crisis of homelessness and the lack of affordable housing will be front and center. There have been numerous solutions thrown around, but none that I’ve ever heard truly addresses the problem. Mark Twain once said, “Everybody talks about the weather, but nobody does anything about it.” Housing and homelessness have been handled about the same way as the talk about weather, only with a lot of squandered money.
Homelessness and scarce affordable housing in California are the confluence of several issues. First and foremost, we have a housing crisis that is the result of years of regressive fiscal policies imposed by both of our primary political parties. Reductions In the private investment in housing caused by federal, state, and local policies are a principal cause of the housing crisis we face today. This is also a major contributor to the homeless dilemma.
Over the last 40 years, Wall Street, with the complicity of government has waged an effective war against private investment in real estate with the intention of diverting those investment dollars into Wall Street investments. “Mom and pop” rental housing investors have been particularly targeted. Oddly, on the political right, conservatives object to spending tax money on poor people. Then, on the political left, progressives object to private industry, and often in this case, “mom and pop” rental property owners making a profit, even when that profit would actually be better for renters. This leaves us where we are today, in a severe crisis.
The lack of private investment in housing has been a major cause leading to the housing crisis and thus homelessness. There are many causes for this lack of investment, but first let’s highlight some of the other causes of homelessness, including job loss and low wages. For a variety of reasons, the cost of real estate, houses and apartments have grown much faster than personal incomes. This differential is growing wider as demand for housing further overtakes housing supply.
Other factors that contribute to the homeless crisis are the lack of sufficient drug addiction and mental health services, prison inmates being released without any support services, military veterans with various health issues in need of care. Other states today are ”shipping” some of their homeless population to us right here in California! Other causes of homelessness include foster children ageing out of care without needed services, and high student loan debt payments, among other things. We also suffer from the misguided perception of civil liberties here in California. The idea that people can just camp out on the streets irrespective of the adverse health effects it creates for themselves and everyone else is insane. Finally, some people are just trifling. Homelessness is an extremely complex issue, and a person or family could actually be victims of more than one of the causes I’ve outlined.
Three points are often overlooked when looking at problems and for their solutions: How did we get here in the first place? What caused this problem? What do we consider to be a solution to the problem? And, finally, what are the consequences of the proposed solution, or in other words, what are the unintended consequences?
Regulations Increase Cost of Land and Construction
Urban land in California is becoming more valuable as demand continues to overtake supply. One way to reduce costs in developed areas would be to increase density. However, local zoning rules and the California Environmental Quality Act (CEQA) make building here far too difficult and expensive. Zoning rules often limit how many units can be built on a lot. A term for this in urban planning circles is “exclusionary zoning.” An interesting historical fact is that this type of zoning became more prevalent after the federal government banned the enforcement racially restrictive covenants on real estate in 1948. The goal of exclusionary zoning was to make the property more expensive such that it would limit Blacks and other “undesirables” from moving into certain neighborhoods.
NIMBY-ism (Not in my back yard) has also become a deterrent factor in the housing business. Just as when laws were passed to make it more difficult for Black people to own property, laws were then passed making it more difficult to build “affordable housing” this drove-up the cost and had the effect of limiting supply. The California Constitution has a provision that says a vote of the people is required if government money is going to be used to build affordable housing! This was an industry sponsored initiative. I guess everyone is a Christian so long as someone else is carrying the cross!
Impact of Elimination of Redevelopment Agencies
A dwelling unit is basically comprised of six things: (1) land, (2) labor, (3) materials, (4) permits and (5) fees, and (6) return on investment. If you want “affordable housing” in other words, below cost housing, you must decide which of these items you are willing to give up. Increasing density would lower the cost of land per unit for example, but not all folks are on board with that. Each of these six have their own constituency. In 2011, the California Governor and Legislature eliminated redevelopment agencies (RDA’s). Because of the ability of RDAs to reduce or even eliminate land costs, RDAs provided over 40% of the affordable housing in California. To date, nothing has replaced the RDA, and as one might have predicted the housing affordability problem has only gotten worse. A state senator predicted this at the time of the vote!
As previously mentioned, the cost of land and improvements have increased far faster than wages. Rents for a one-bedroom apartment are more than $2,000 per month in many Los Angeles neighborhoods. This means a prospective tenant would have to make over $75,000 per year to qualify under the 30% income coverage factor. As tax and regulatory changes over the last 40 years have driven much of the private capitol out of the rental housing business, “mom and pop” rental property investors who were are the majority of rental property owners in California and have been particularly hard hit. Since the 1970’s, government at all levels, with the guidance of Wall Street have waged war on small rental property owners, and as the “moms and pops” exited the rental housing market, they have taken their money with them.
Back in 1970, a taxpayer could deduct taxes, interest and expenses from as many properties as they owned from their ordinary income, Form W-2 wages, which encouraged investment in rental housing. Today investors can only deduct from two pieces of property. Add to this the loss of accelerated depreciation, which is a business accounting tool. Then we saw the inability of a developer to deduct front-end construction costs related to a project. This deduction was replaced with the insane “tax credit allocation committee.” Getting a project through this committee can take years, and often comes with certain “strings” attached that add even more project costs. The Internal Revenue Service has even altered rules requiring depreciation on many repairs rather than simply allowing for the deduction of them. Taken together, this makes real estate less attractive financially. Which, by-the-way, is just what our good friends on Wall Street had wanted.
Impacts of Local Rent Regulations and the 401(k) Plan
Then if those financial changes weren’t enough, as the housing market became more constricted, local governments, responding to tenant complaints piled on with rent control and expensive rental housing regulations. Evicting a tenant in Los Angeles today can and does often take over a year! For an apartment that rents for $1,500 per month, legal fees and other costs necessary to evict a tenant today could easily exceed $30,000! There should be a binding arbitration process for mom and pop owners in the unlawful detainer process. No lawyers on either side, a legal arbitrator in place of court should decide these matters. The rights of both sides would be protected.
So where did all those housing investment dollars go? The 401(k) plan, which was a part of the Revenue Act of 1978 and other Wall Street investment plans are siphoning off dollars that once went into housing. For many the idea of owning an apartment building or even a single-family home is no longer attractive. The true villain in the mix here is Wall Street. Real Estate was once considered the most effective way to create generational wealth and save for retirement for average people. Today more families are choosing the stock market and other non-real estate investments. As you might expect, the resulting wealth gap has been growing during this period of time. Our friends on Wall Street; however, are doing just fine!
Government has proven itself inefficient at developing housing and easing the crisis. Things like rent control and an onerous eviction process discourage private investment in rental housing. Some estimates put the disinvestment in rental housing at over 40%. Government adds various costs in addition to time. This vilification of rental property owners is driving out private investment to the detriment of tenants.
The 401(k) plan is more insidious than most people realize. It effectively transferred money from real estate (a/k/a, Main Street) to Wall Street. It altered the mortgage underwriting business, so the cost of housing has no ceiling today. Fewer Black people own homes today than they did in 1970, two years after the Federal Fair Housing Act was passed into law!
We should consider ways to incentivize private rental housing investment. For example, what about reductions in property taxes and permits and fees in exchange for lower rents? What about restoring tax laws mentioned earlier to where they were before the roll out of the 401(k) plan? In particular, accelerated depreciation, allowing more than two properties to be deducted from state and federal income taxes, and allowing front end tax deductions to be allowed as they once were; therefore, eliminating the need for the tax credit allocation committee.
Los Angeles County is losing rental housing stock every year. Particularly older buildings providing the bulk of affordable housing, so-called “naturally occurring affordable housing,” that in many cases only need some basic repairs. It is estimated that the City of Los Angeles loses 6 rent-controlled units every day! Why not create a fund to repair older buildings with grants? It would be much less expensive than building new units and a fair rent schedule could be negotiated with the owner going forward. This would be particularly useful for smaller “mom and pop” owners, as they have trouble getting financing due in part to rent controls and other “tenants’ rights” policies.
The Role of Government
While government has a role to play in housing, it should be the last, not the first resort. The problem is that government has too many inefficiencies that create added costs when you use their money. The first option should be the private sector. As mentioned before, many of the tax incentives that once created housing have been striped or modified making them useless, we know what has worked, why reinvent the wheel?
For the properties where the government intends to manage, why not look at triple-net leases? This is a development scheme where a private developer gets an agreement from say a city to lease a completed facility. The city could set forth all the specifications, how many rooms, amenities and dining areas, or whatever. A developer would then build the project to the specific needs of the city, but in this case the city would not advance any funds until the project was completed. With a signed triple net agreement, a developer could easily get financing, and the city would simply pay the lease agreement after the project was completed. Unlike the squandered money from Proposition HHH, here the city would hold on to its cash. Triple-net means the city would pay property taxes, maintenance, and insurance in addition to the fee to lease the property. No completion, no pay, the developer would assume the risk, and the city would hold onto the cash. In ‘n Out Burger and many other businesses use this practice today.
The Eviction Moratorium
The pandemic has really exposed the disdain for rental property owners. Tenants don’t have to pay rent and can’t be evicted! This is called the Eviction Moratorium. I know small rental property owners who are owed more than $150,000. Never mind the fact that for many of these owners, this is their retirement income! Moreover, after the emergency is over, tenants have a year to pay owners before they can be evicted! While there are government programs like the state’s Housing is Key program to pay the back rent, these programs are slow to pay and inefficient.
Many tenants are wisely “gaming the system” by not paying their rent and using this period of opportunity as a savings account builder. For others, it’s a new car purchase, or event clothes and vacations at the rental property owner’s expense! Since there is no requirement placed on tenants to prove financial hardship caused by COVID, you are looking at tenants gaining a windfall of, $18,000 per year on a $1,500 per month apartment! As you might imagine many “moms and pops” are facing foreclosure or having to sell to guess who? Wall Street! This is simply unfair, should be illegal, and it constitutes a taking by the government, but nobody seemingly gives a damn about small, “mom and pop” rental property owners.
The Need to Enforce Laws
In Los Angeles, the city attorney recently announced proudly that he was charging a rental property owner for the gang activity in his building! Not clear why the police simply didn’t arrest the criminals there? Moreover, if the owner sought the eviction of the alleged gang members the city would provide legal services to the gang members at no charge!
We need to enforce laws related to camping on the streets, beneath bridges, and in alleys and along the freeways. Aside from being unsightly, it’s unsanitary and has become a source of disease and rodent infestation. We might just have to move the homeless to sites with or without their consent. People sleeping or camping on the street should not be a right. We must decide is housing a right? If it is, then what exactly does one have a right to? Unlike food (food stamps) and health care, (Medicaid), the federal government does not consider housing an entitlement. Only one in four eligible, low-income individuals receives any sort of assistance according to The Center on Budget and Policy Priorities, November 15, 2017. The Section 8 waiting list is years!
The Need to Look at Multiple Approaches
We need to look at multiple possible solutions to the issue of affordable housing. The government is clearly inept at building housing, affordable or otherwise. Over the last 40 years we have allowed Wall Street to wage war on private housing investment for their own benefit. Many of the tax advantages at the federal level have been wiped out. At the state level, here in California CEQA and other regulations bring unintended consequences and have made housing more expensive and difficult to develop. Locally, zoning restrictions and difficulties getting entitlements coupled with rent control make private investment in housing far less attractive.
Wall Street began buying houses through distress sales to flip for profit. Now they have been buying houses to rent. In the process they are driving up the price of the houses and apartments and pricing prospective, private buyers out of the market. One company owns over 100,000 properties that it rents, with no intention of selling. They even advertise on television they will pay cash for houses in any condition. Wall Street has taken the view they don’t care which party is in the White House, and they’ll still count the money. Going back to the Reagan era, all the treasury secretaries came from Wall Street. We must break this stranglehold!
There are six phases of most government projects. They are: (1) Enthusiasm – In the beginning everyone thinks this is a great idea. (2) Disillusionment – Once it becomes clear, it was a bad idea and people question why it was done. (3) Panic – Once the true costs come in, then chaos sets in. (4) Search for the Guilty – There is always a belief that someone must be guilty of something. (5) Punishment of the Innocent – Usually the people who are punished had nothing to do with the project in the first place. And, (6) Praise and Honors for the Non-Participants – Finally, the people who had nothing to do with the project or its solution receive all the glory for the solution.
In order to resolve the issues of homelessness and housing crisis, we have to break this cycle.
The author, Roderick Wright, is a former member of the California State Senate and Assembly. He has developed affordable housing with the Inner-City Housing Corporation. He worked in the Planning Department of the City of Los Angeles. He also worked at the Southern California Association of Governments (SCAG). Mr. Wright has been a rental property owner for over 40 years and is also a member of the Apartment Association of Greater Los Angeles and the Coalition of Small Rental Property Owners.