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> The rent itself however is controlled by supply and demand No, it's not. Folks have got to stop using simplistic remedial high school economics classes to ex

> The rent itself however is controlled by supply and demand No, it's not. Folks have got to stop using simplistic remedial high school economics classes to explain complex social problems. They just aren't that simple. During the 2008 financial implosion, a single investment company called Blackstone Group went on a buying spree around the US. As of this time last year, they owned, through a subsidiary company, fully 1.5% of the entire Sacramento-area rental house market [1]. Blackstone in turn is flush with cash from foreign investors [2]. Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose. These groups don't set prices according to "the market". They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. It's a net win for them: keep the price high for all their other properties, get a writeoff on their empty properties. Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. These are long-term investments and small fluctuations in available housing are not going to shake them loose. Much more comprehensive investigation is needed in the actual causes of high housing costs, including the effects of foreign investment and investment firms, and then reform is needed to address those causes. [1]: https://www.kcra.com/article/this-is-the-largest-owner-of-rental-homes-in-the-sacramento-area/13520555 https://www.kcra.com/article/this-is-the-largest-owner-of-re... [2]: https://www.bloomberg.com/news/articles/2018-10-22/how-blackstone-landed-20-billion-from-saudis-for-infrastructure https://www.bloomberg.com/news/articles/2018-10-22/how-black... [3]: https://calmatters.org/articles/data-dig-are-foreign-investors-driving-up-real-estate-in-your-california-neighborhood/ https://calmatters.org/articles/data-dig-are-foreign-investo...

wwweston 8y ago
> They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. How is it that a tax deduction can offset the opportunity cost of leaving a property vacant? Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? Could a vacancy tax fix this?
- thaumaturgy 8y ago
  > How is it that a tax deduction can offset the cost of leaving a property vacant? I can't comprehensively answer this, because I'm not in the business and those that are, are tight-lipped about it. But it's definitely a contributing factor to high rates of empty storefronts [1]: “If these landlords have deep pockets and large property portfolios, it may make more financial sense to claim a tax loss on vacant property than to rent at a non-optimal value.” I'm assuming here that if this is a model that works in the commercial property investment market, it probably works in the residential property investment market too, as long as the investor has deep enough pockets and a long-enough financial strategy. Smaller, short-term residential property owners -- the individual landlord or small-time property management company -- probably wouldn't get as much of an advantage out of this. > Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? I dunno. I think we can make some educated guesses here. If you own 1,000 single-family dwellings in a high-demand metropolitan area, like Sacramento, you've probably paid for those properties with cash or with foreign investment capital. There's no mortgage payment on it, so your costs for letting it sit empty are relatively low. So let's say you maintain a 90% occupancy rate at rents that are significantly higher than they would be if you were forced by some regulation to maintain closer to 100%. Instead of rents varying from $2000/mo to $2700/mo for 100% of your properties, you ask for $2800/mo for 90% of your properties, and then your well-heeled mustache-twirling tax advisers find ways to write down the remaining 10% at as close to a $2800/mo loss each as possible. Hey, if anybody complains, you can just blame "the market". > Could a vacancy tax fix this? Some people think so, but I haven't seen a deep enough investigative piece to be certain. That's mostly what I wish for: a thorough investigation into this aspect of the housing problem that leads to some smart strategies for fixing it. Population growth alone just doesn't explain the massive increase in cost of housing. [1]: https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for-greedy-landlords-seeking-top-dollar/ https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for...
  - closeparen 8y ago
    Foreign-ness of the investment capital may be important to the perceived moral valence if the transaction, but money is money. The strategy of squatting on vacant property is essentially patience. For it to pay off, you do have to eventually rent it out (or sell it) when you think prices are high enough. For example, if you have deep enough pockets you might move during a recession, but wait until the recession is over to sell your old house, because you get a better price. If you never sell it, you’re tying up capital for no reason. The higher interest rates are, the more you’re losing in opportunity cost by owning a vacant building. Patience has probably been especially abundant in this decade of historically low interest rates. Since no tax rate is 100%, a writeoff is never as good as a profit. It only softens the blow, which might extend the landlord’s patience in waiting for rents to cycle back up to $2800. Another thing that happens is the project’s financing is contingent on a certain average rent, but the contract doesn’t factor in $0 rent empty units, just leaves them out of the calculation. This is essentially a bug. It’s one reason landlords give signing bonus concessions instead of just lowering the rent. In markets seeing runaway costs, vacancy is at historic lows. No one is investigating this too thoroughly because fixing it wouldn’t be very fruitful.
Apes 8y ago
So let me make sure I'm understanding you correctly. You're positing that the proof supply and demand is not applicable to the housing market is that a private investment company has greatly increased demand beyond what the housing supply can support, which is driving up prices. And the fact that demand exceeding supply is driving up prices is proof that supply and demand does not apply to the housing market?
jseliger 8y ago
Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose. That's not true. Zoning is the big problem: https://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B0078XGJXO https://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B... or see Zoning Rules! by Fischel. Blackstone's investments only make sense because of artificial supply limits. Remove those, and their whole strategy is destroyed. The situation really is primarily about supply and demand.
yardie 8y ago
As an aside the rental market in my area (So. Fla.) has started to drop. Property managers are doing everything in their power except lowering the rent, including $0 deposits, waived application fees, waived first and last months, and free parking. The rent hasn't changed and if you speak to a property manager or investor it's still a solid investment. But to renter's all these waived items definitely points to lowered rent.
dlubarov 8y ago
> they can claim the lost rents -- at the prices they set -- as taxable deductions Can you provide a source? This doesn't seem right. A vacant unit produces no revenue, but the "lost rent" doesn't constitute an expense.
closeparen 8y ago
Investors invest because they believe there will be a good return. A drastically increasing ratio of people to homes can’t not drive up prices in a way that will deliver that return. Sure there are many factors at play, interacting with each other in strange ways. But there is no amount of complexity that will let you settle 100 families in 10 houses.
darawk 8y ago
Basically none of that makes any economic sense. The fact that Blackstone can own 1.5% of the property in Sacramento is a supply issue. I.e. we are back to supply and demand. The entire rest of your post hinges on there being no supply response to demand. So yes, once again, everything is still and always will be mediated primarily by 'remedial high school economics'. > Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. No...that's not how anything works. Foreign capital is not infinite. And foreign capital invests in the US real estate market because it expects a return. If you change the expectation of supply, guess what happens? People don't want to invest in that asset anymore, and the capital dries up. This is all a lot easier to see if you actually put yourself in the shoes of one of these 'foreign investors'. Don't think about them as an abstraction - think about yourself. If you were a rich Chinese businessman, ya, the SF property market is a great place to park your cash. Because it's supply constrained. But you better believe the moment that supply situation changes you're going to be running for the exit.
- thaumaturgy 8y ago
  These replies to my comment are super weird. I'm reading them collectively as, "I don't see how the influx of millions and millions of dollars of investment capital would have an effect on housing prices." Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle.
  - darawk 8y ago
    > These replies to my comment are super weird. I'm reading them collectively as, "I don't see how the influx of millions and millions of dollars of investment capital would have an effect on housing prices." Huh? Let's talk about the rice market, rather than housing. Let's say you dump 1 trillion dollars into rice. What's going to happen? The price of rice rises, dramatically. However, rice farmers the world over see that price rise, and they start growing more rice. If you keep buying 1 trillion dollars worth of rice every year, the rice farmers will grow more rice in response, and the price will start to fall. You, being a rational rice investor, will see that happening. And unless you're an idiot, will stop dumping your money into the rice market. The only reason that houses are any different from rice is that housing is supply constrained, whereas rice is not. > Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle. This question doesn't make any sense. You don't create homes so everyone can outperform the S&P. That's like asking "how many stocks do we need to create for everyone to be an early investor in a decacorn?". The question you're trying to ask is: How many houses do we need to build until the rate of return on buying property equals the rate of return of the stock market, adjusted by risk. To be precise, you want the number of homes that need to be built for the Sharpe ratio of the residential real estate market to equal the Sharpe ratio of the stock market. That question is going to vary by geography. Many housing markets already dramatically underperform the S&P. It's only a very small number of them that perform better. In aggregate, housing already does underperform the S&P.

wwweston 8y ago

> They are more than happy to let some percentage of their properties remain empty rather than decreasing rental prices, because they can claim the lost rents -- at the prices they set -- as taxable deductions. How is it that a tax deduction can offset the opportunity cost of leaving a property vacant? Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? Could a vacancy tax fix this?

thaumaturgy 8y ago
> How is it that a tax deduction can offset the cost of leaving a property vacant? I can't comprehensively answer this, because I'm not in the business and those that are, are tight-lipped about it. But it's definitely a contributing factor to high rates of empty storefronts [1]: “If these landlords have deep pockets and large property portfolios, it may make more financial sense to claim a tax loss on vacant property than to rent at a non-optimal value.” I'm assuming here that if this is a model that works in the commercial property investment market, it probably works in the residential property investment market too, as long as the investor has deep enough pockets and a long-enough financial strategy. Smaller, short-term residential property owners -- the individual landlord or small-time property management company -- probably wouldn't get as much of an advantage out of this. > Or does it only offset the cost of what the unit would actually rent for at rates that naturally clear the supply/demand curve? I dunno. I think we can make some educated guesses here. If you own 1,000 single-family dwellings in a high-demand metropolitan area, like Sacramento, you've probably paid for those properties with cash or with foreign investment capital. There's no mortgage payment on it, so your costs for letting it sit empty are relatively low. So let's say you maintain a 90% occupancy rate at rents that are significantly higher than they would be if you were forced by some regulation to maintain closer to 100%. Instead of rents varying from $2000/mo to $2700/mo for 100% of your properties, you ask for $2800/mo for 90% of your properties, and then your well-heeled mustache-twirling tax advisers find ways to write down the remaining 10% at as close to a $2800/mo loss each as possible. Hey, if anybody complains, you can just blame "the market". > Could a vacancy tax fix this? Some people think so, but I haven't seen a deep enough investigative piece to be certain. That's mostly what I wish for: a thorough investigation into this aspect of the housing problem that leads to some smart strategies for fixing it. Population growth alone just doesn't explain the massive increase in cost of housing. [1]: https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for-greedy-landlords-seeking-top-dollar/ https://nypost.com/2018/03/30/de-blasio-eyes-vacancy-tax-for...
- closeparen 8y ago
  Foreign-ness of the investment capital may be important to the perceived moral valence if the transaction, but money is money. The strategy of squatting on vacant property is essentially patience. For it to pay off, you do have to eventually rent it out (or sell it) when you think prices are high enough. For example, if you have deep enough pockets you might move during a recession, but wait until the recession is over to sell your old house, because you get a better price. If you never sell it, you’re tying up capital for no reason. The higher interest rates are, the more you’re losing in opportunity cost by owning a vacant building. Patience has probably been especially abundant in this decade of historically low interest rates. Since no tax rate is 100%, a writeoff is never as good as a profit. It only softens the blow, which might extend the landlord’s patience in waiting for rents to cycle back up to $2800. Another thing that happens is the project’s financing is contingent on a certain average rent, but the contract doesn’t factor in $0 rent empty units, just leaves them out of the calculation. This is essentially a bug. It’s one reason landlords give signing bonus concessions instead of just lowering the rent. In markets seeing runaway costs, vacancy is at historic lows. No one is investigating this too thoroughly because fixing it wouldn’t be very fruitful.

Apes 8y ago

So let me make sure I'm understanding you correctly. You're positing that the proof supply and demand is not applicable to the housing market is that a private investment company has greatly increased demand beyond what the housing supply can support, which is driving up prices. And the fact that demand exceeding supply is driving up prices is proof that supply and demand does not apply to the housing market?

jseliger 8y ago

Foreign cash investment in real estate is a major cause of high rental prices. But the data on this and investment companies like Blackstone Group is spotty and difficult to follow [3], on purpose. That's not true. Zoning is the big problem: https://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B0078XGJXO https://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B... or see Zoning Rules! by Fischel. Blackstone's investments only make sense because of artificial supply limits. Remove those, and their whole strategy is destroyed. The situation really is primarily about supply and demand.

yardie 8y ago

As an aside the rental market in my area (So. Fla.) has started to drop. Property managers are doing everything in their power except lowering the rent, including $0 deposits, waived application fees, waived first and last months, and free parking. The rent hasn't changed and if you speak to a property manager or investor it's still a solid investment. But to renter's all these waived items definitely points to lowered rent.

dlubarov 8y ago

> they can claim the lost rents -- at the prices they set -- as taxable deductions Can you provide a source? This doesn't seem right. A vacant unit produces no revenue, but the "lost rent" doesn't constitute an expense.

closeparen 8y ago

Investors invest because they believe there will be a good return. A drastically increasing ratio of people to homes can’t not drive up prices in a way that will deliver that return. Sure there are many factors at play, interacting with each other in strange ways. But there is no amount of complexity that will let you settle 100 families in 10 houses.

darawk 8y ago

Basically none of that makes any economic sense. The fact that Blackstone can own 1.5% of the property in Sacramento is a supply issue. I.e. we are back to supply and demand. The entire rest of your post hinges on there being no supply response to demand. So yes, once again, everything is still and always will be mediated primarily by 'remedial high school economics'. > Building more housing is not going to fix this part of the housing problem. There is more than enough foreign capital available to continue to keep housing prices artificially inflated no matter how many new homes are built. No...that's not how anything works. Foreign capital is not infinite. And foreign capital invests in the US real estate market because it expects a return. If you change the expectation of supply, guess what happens? People don't want to invest in that asset anymore, and the capital dries up. This is all a lot easier to see if you actually put yourself in the shoes of one of these 'foreign investors'. Don't think about them as an abstraction - think about yourself. If you were a rich Chinese businessman, ya, the SF property market is a great place to park your cash. Because it's supply constrained. But you better believe the moment that supply situation changes you're going to be running for the exit.

thaumaturgy 8y ago
These replies to my comment are super weird. I'm reading them collectively as, "I don't see how the influx of millions and millions of dollars of investment capital would have an effect on housing prices." Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle.
- darawk 8y ago
  > These replies to my comment are super weird. I'm reading them collectively as, "I don't see how the influx of millions and millions of dollars of investment capital would have an effect on housing prices." Huh? Let's talk about the rice market, rather than housing. Let's say you dump 1 trillion dollars into rice. What's going to happen? The price of rice rises, dramatically. However, rice farmers the world over see that price rise, and they start growing more rice. If you keep buying 1 trillion dollars worth of rice every year, the rice farmers will grow more rice in response, and the price will start to fall. You, being a rational rice investor, will see that happening. And unless you're an idiot, will stop dumping your money into the rice market. The only reason that houses are any different from rice is that housing is supply constrained, whereas rice is not. > Well, okay, I guess. How many houses do you think need to be built to satisfy the investment needs of everyone looking to outperform the S&P 500? For extra credit, realize that this means that every metropolitan market is now an international investment vehicle. This question doesn't make any sense. You don't create homes so everyone can outperform the S&P. That's like asking "how many stocks do we need to create for everyone to be an early investor in a decacorn?". The question you're trying to ask is: How many houses do we need to build until the rate of return on buying property equals the rate of return of the stock market, adjusted by risk. To be precise, you want the number of homes that need to be built for the Sharpe ratio of the residential real estate market to equal the Sharpe ratio of the stock market. That question is going to vary by geography. Many housing markets already dramatically underperform the S&P. It's only a very small number of them that perform better. In aggregate, housing already does underperform the S&P.