Why a National Rent Control Plan Could Help Solve the Housing Crisis: A Policy Brief

Executive Summary

This brief uses economic analysis and an overview of recent developments in the literature to recommend the adoption of a national rent control plan. The United States is in the middle of a national housing crisis, in which rents and evictions are soaring while homeownership affordability plummets, and more than half a million Americans experience homelessness on any given night. The literature has shown that rent stabilization legislation does not have a significant negative effect on new home construction and has many positive effects from lower eviction rates to lower rent for neighboring non-controlled units. Representative Alexandria Ocasio Cortez recently unveiled a bill in the House of Representatives that would set a national rent control policy. With minor additions such as tighter controls on condominium conversion this bill, along with further federal incentives for affordable unit construction, would likely go a long way in helping solve the national housing crisis.

The Problem

We are in the midst of a national housing crisis. Since 1995, median rents have risen over 70% after adjustment for inflation, substantially more than incomes.[1] In 2016, an eviction was filed every fifteen seconds; amounting to a total of 2.3 million evictions that year alone.[2] 2019 data from the National Low Income Housing Coalition shows that full-time minimum wage workers cannot afford the fair market rent for a two-bedroom apartment without exceeding the recommended percentage of their income in any county across the fifty states, D.C., or Puerto Rico.[3] Some 11 million Americans spend more than half their paycheck on rent, and nearly two-thirds of American renters report that they won’t be able to buy a home anytime soon.[4] Additionally, over 552,000 people experienced homelessness last year.[5]

This housing crisis has been attributed to everything from demographic changes as Baby Boomers and Gen X’ers remain homeowners for longer, to federal housing policy that favors owners over renters, to NIMBYism (Not-In-My-BackYard) and a lack of new affordable housing supply.[6] Cities and states across the country have taken different, sometimes novel, approaches to try and tackle this crisis. Denver, Colorado and Austin, Texas have created new housing trust funds.[7] Minneapolis became the first city to eliminate single-family zoning citywide.[8] Yet, one of the longest-serving tools of cities to regulate escalating rent prices remains rent control.

The term “rent control” generally refers to a wide slate of rental unit regulation that includes price controls on how much rent can rise each year, as well as eviction controls and other price caps or stabilizations. In the traditional economics literature, rent control is seen as a maximum price and thus should, in theory, create a housing shortage due to prices being restricted to below-free market rates. However, proponents of rent control instead point to studies that show little to no effect on new unit construction based on how the laws are written when truly enacted; and that rent control can create benefits that go beyond the current tenants.

A Place to Prosper Act

In September of 2019, Representative Alexandria Ocasio Cortez (D-NY) introduced a suite of bills titled “A Just Society”, including a housing bill titled “A Place to Prosper Act” (hereafter “the Act”).[9] The entire suite of “A Just Society” bills focus on transparency, fairness, and issues of justice. This is reflected in the Act in that it differs from other progressive federal housing plans which call for aggressive capital investments in building out the national housing stock.[10]

Broadly, the Act mandates greater disclosure requirements from covered landlords to the Department of Housing and Urban Development (HUD) and appropriates funds for targeted investments such as a right to counsel in tenant eviction proceedings. Most importantly for the purposes of this brief, the Act proposes to establish a national rent control program. § 2(a) of the Act prevents covered landlords, when the lease expires, from raising rents more than 3% of the average rent for the previous year (for the same unit) or the increase in the Consumer Price Index for the previous year, whichever is larger.[11]

§ 2 allows for states to set lower maximum prices if they wish to be more aggressive than the federal rent control plan. This is analogous to many other federal standards, such as the National Ambient Air Quality Standards of the Clean Air Act, which also allows for states to act more aggressively than the federal government.[12] In the Act, rent is defined as not to include utilities. § 6(c) of the Act defines which landlords would be covered under this law.[13] It restricts “covered owner[s]” to those entities or persons that own or have a majority stake in:

1. More than 100 rental units in a metropolitan statistical area (MSA)

2. More than 1,000 rental units nationwide

3. Rental units in three or more states

In defining covered owners this way, the Act would not apply to so-called “mom-and-pop” landlords who own and manage a relatively small number of rental units.

Discussion

Classic economic theory asserts that price ceilings or maximum prices, like rent control, will lead to shortages. Simply put, this is because, at the below-market price point, demand should exceed supply and thus in this context there will not be enough rental housing for all those demanding it at the controlled price.

This model suggests there is an equilibrium cost of consumer effort at the maximum price level, as consumers will need to exert some extra effort to purchase in this shortage market. In the rental housing context, this is the inefficiency costs of searching for an available unit. Under this theory, this equilibrium cost creates a deadweight loss as consumer surplus falls relative to the free-market alternative. Looking at this deadweight loss, a classical theorist is likely to conclude that rent control only occurs due to political considerations as politicians acquiesce to concentrated and vocal beneficiaries (i.e. current low-income tenants) while ignoring the diffuse benefits of not having price controls. However, a number of empirical studies have concluded that rent control does not when actually implemented, create such a shortage as classical theory would predict.

Classical economists long predicted the same effect in the labor market, as minimum wage laws spread and were raised across the country. Yet, the predicted negative effects of minimum wages on employment never came to pass. In fact, higher wages boost spending on other local businesses, improves the welfare of workers who are now receiving higher wages and can help improve the tenure of employment as well as the match between employees and their jobs.[14] Much of the same positive effects have been found from rent control.

A number of recent studies that evaluate rent control laws across the country have found little to no negative impact on new housing unit construction and that the negative effect on new unit construction is merely “speculative”.[15] In a study of forty years’ worth of data from New Jersey, Ambrosius et al. found that rent control regulations had no “statistically-significant effects” on the housing market in the state.[16] They compared seventy-four New Jersey municipalities with rent control to eighty-seven without rent control, and despite finding slightly lower rent increases in those with rent control, those differences disappeared once they conducted regression analysis.[17] Rent control was not found to have an impact on foreclosure rates either, and so all of the worst fears about housing shortages were not found in this study of a state with somewhat more conservative rent control laws (implying a state with more liberal rent control may see a benefit and not just no impact).[18]

Other studies of both New Jersey and the District of Columbia have found “no significant relationship between rent control and new housing construction”.[19] Some have even found rent control increasing the housing supply by incentivizing landlords to subdivide existing units.[20] Most economists who have written on this subject suggest that this is because rent control laws in the United States exempt new construction; thus avoiding disincentives for developers.[21] Policies can be tailored to incentivize or disincentivize different forms of behavior when implemented in the real world, and so there are limitations to the economic theory as it pertains to how rent control laws are written and how they act in practice.

Beyond just avoiding the worst-case scenario that classical economists predicted, several other studies have found that rent control helps both incumbent tenants and those in the surrounding area. Pastor et al. report that the benefits to current residents and to “proximate uncontrolled units” is one of the few areas with “broad agreement in the literature”.[22] Residents of rent-controlled apartments are, for one thing, less likely to be evicted.[23] David Sims found that having at least 10–12 percent of units in a region be rent-controlled helped hold down rent prices of surrounding uncontrolled units.[24] Similarly, in Massachusetts, when the state ended its rent control regulations, prices on both controlled and uncontrolled units went up.[25]

This effect is largely attributed to housing stability and lower prices. For incumbent tenants, prices are lower because of rent control laws. For surrounding units, some economists have suggested that this could be because of the neighborhood composition of areas with a higher density of rent-controlled units; i.e. wealthier white people might not want to move into lower-income neighborhoods of color, which helps keeps rent low.[26] Others have suggested that the presence of rent control means prospective renters are more willing to wait for a rent-controlled unit to come available and thus will not tolerate overly high rent in uncontrolled units.[27]

Tenants of rent-controlled apartments are more likely to remain in their apartments longer, and so rent control helps neighborhood stability.[28] This has been found to have a number of benefits, some measurable and others immeasurable. For example, housing stability is correlated with mental health benefits — especially for young children.[29] Researchers at Stanford found that the benefits of remaining in current apartments disproportionally aided minorities, and so rent control can have racial justice benefits as well as economic benefits.[30] Furthermore, high neighborhood instability could make neighborhoods “more susceptible to crime.”[31]

At the level of the individual renter, the benefit to current tenants and their neighborhoods does fit with some classic economic theory. If we consider a cap on rent increases as similar to a grant (just not from the government to the renter) in that it puts more money in the renter’s pocket than in the alternative scenario, then the effect would be an increase in the renter’s wellbeing as well as a boon to local economies; as renters now have more money to spend on non-rent goods and services.

While the costs of rent control imposed on other local renters of noncontrolled units does not seem to occur as expected, there is some suggestion from the literature that these costs do are merely being pushed onto future residents of the city.[32] This suggests that rent control can help curb the negative effects of gentrification on city residents by pushing some costs onto wealthier future residents.

Though fears about slowed new unit construction have not been born out in the literature, there is some empirical support for fears of condo conversion rates in areas with rent control. A recent study by Diamond et al. found that rent control incentivized condominium conversion in San Francisco.[33] By their counts, this accounted for as much as a 15 percent decrease in the city’s rental stock.[34] Most jurisdictions have some limitations on condo conversion, such as allowing tenants the first chance to buy the building, but these are generally seen as insufficient to adequately prevent excessive conversion.[35]

In the years since the Great Recession, a flurry of economic studies have found that rent control laws as implemented have little to no negative effect on the construction of new housing units, and in addition have numerous positive benefits for current and surrounding tenants; from neighborhood stability and mental health benefits to more disposable income. Given this endorsement from many economists, and the fact that rent control currently exists in only four states (in part due to state preemption of municipal rent control statutes),[36] it seems that a national rent control plan akin to that proposed in the Act would be extremely beneficial.

If implemented, it is notable that the Act would go “further than almost anything on the books” today.[37] It would apply to large landlords across the nation, and based on the literature of rent control research it would reduce evictions and lower rent going forward for millions of Americans. Furthermore, it would likely improve housing stability for millions of families, benefiting neighborhood economies and improving the wellbeing of both children and adults. The Act does not on its face seem to include an exception for new construction, and so that is a recommended addition to encourage more unit construction (it has been noted that new unit construction is also a key part of getting us out of the national housing crisis — with one important component being downzoning to encourage construction). Furthermore, the Act should add tight restrictions to condominium conversion to prevent landlords from getting around the rent stabilization. Making this change will help maintain the stock of rental units and thus further the equity benefits of the rent control provisions of the Act.

Conclusion

America’s national housing crisis has persisted for years despite local efforts to provide shelters and construct new affordable housing units. Many municipal jurisdictions are preempted from taking further action by state law. Thus, a national solution seems necessary. Over the past decade, economic research has expanded with numerous case studies into the effects of local and state-level rent stabilization laws. These studies have broadly found that classical fears of slowed new unit construction do not come to pass, and that in reality rent control has benefits for current tenants such as lower prices, lower eviction rates, and better mental health outcomes for children, as well as neighborhood benefits such as neighborhood stability and lower prices that extend beyond covered units. Given these beneficial findings, as well as the scale of the problem nationwide, Representative Ocasio-Cortez from New York has introduced a national rent control plan to Congress. While not a silver bullet on its own, this national rent control plan could go a long way to help address the national housing crisis, and as such is recommended by this brief.

Image Source: https://commons.wikimedia.org/wiki/File:Stuyvesant_Town_and_Peter_Cooper_Village_crop.jpg

Citations:

[1] Terry Gross, First-Ever Evictions Database Shows: ‘We’re In the Middle Of A Housing Crisis’, NPR (Apr. 12, 2018), https://www.npr.org/2018/04/12/601783346/first-ever-evictions-database-shows-were-in-the-middle-of-a-housing-crisis.

[2] See National Estimates: Eviction in America, Princeton University (May 11, 2018), https://evictionlab.org/national-estimates/.

[3] See Sarah Holder, Minimum Wage Still Can’t Pay for a Two-Bedroom Apartment Anywhere, CityLab (Jun. 19, 2019), https://www.citylab.com/equity/2019/06/affordable-housing-minimum-wage-rent-apartment-house-rental/592024/ (calculated assuming that minimum wage workers do not take any time off; i.e. work full-time 52 weeks a year).

[4] See Laura Kusito, More Renters Give Up on Buying a Home, The Wall Street Journal (Apr. 3, 2018), https://www.wsj.com/articles/more-renters-give-up-on-buying-a-home-1522773685; Patrick Sisson et al., The affordable housing crisis, explained, Curbed (May 15, 2019), https://www.curbed.com/2019/5/15/18617763/affordable-housing-policy-rent-real-estate-apartment.

[5] State of Homelessness, Nat’l Alliance to End Homelessness, https://endhomelessness.org/homelessness-in-america/homelessness-statistics/state-of-homelessness-report/ (last visited Nov. 24, 2019); see also The Council of Econ. Advisors, The State of Homelessness in America 1 (2019).

[6] See generally Patrick Sisson, supra note 4.

[7] See, e.g, Michael Anderson, Denver Establishes a $150 Million Housing Trust Fund to Drive City Housing Plan, Housing Trust Fund Project (2016), https://housingtrustfundproject.org/denver-establishes-a-150-million-housing-trust-fund-to-drive-city-housing-plan-2/; see also Lisa Bender & Brad Lander, How Cities Address the Housing Crisis, and Why It’s Not Enough, CityLab (Oct. 11, 2019), https://www.citylab.com/perspective/2019/10/affordable-housing-crisis-cities-rent-zoning-development/599758/.

[8] Sarah Mervosh, Minneapolis, Tackling Housing Crisis and Inequity, Votes to End Single-Family Zoning, The New York Times (Dec. 13, 2018), https://www.nytimes.com/2018/12/13/us/minneapolis-single-family-zoning.html.

[9] A Place to Prosper Act of 2019, H.R. 5072, 116th Cong. (2019).

[10] See, e.g., Housing for All, Bernie 2020, https://berniesanders.com/issues/housing-all/ (calls for investment of $1.48 trillion in the National Affordable Housing Trust over ten years); My Housing Plan for America, Team Warren, https://medium.com/@teamwarren/my-housing-plan-for-america-20038e19dc26 (calls for investing over $500 billion over ten years to build and rehab units).

[11] H.R. 5072, § 2(a).

[12] The Clean Air Act, 42 U.S.C. § 7409 (2016).

[13] H.R. 5072, § 6(c).

[14] See, e.g., David Card & Alan B. Krueger, Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania, 84 The Am. Econ. Rev. 772 (1994); Cengiz et al., The Effect of Minimum Wages on Low-Wage Jobs: Evidence from the United States Using a Bunching Estimator, NBER Working Paper №25434 (2019) (finding over thirty years of minimum wage increases “resulted in higher wages for low-skilled workers, with no reduction in low-wage employment five years out”).

[15] Rajasekaran et al., Urban Inst., Rent Control: What Does the Research Tell Us about the Effectiveness of Local Action? 5 (2019); see also Manuel Pastor et al., Rent Matters: What are the Impacts of Rent Stabilization Measures? 4 (2018); Ambrosius et al., Forty years of rent control: Reexamining New Jersey’s moderate local policies after the great recession, 49 Cities 121 (2015).

[16] Ambrosius et al., supra note 14.

[17] See id.

[18] See id.

[19] Rajasekaran, supra note 14, at 5 (citing John Gilderbloom & Lin Ye, Thirty Years of Rent Control: A Survey of New Jersey Cities, 29 J. of Urb. Affairs 207 (2007)).

[20] See Gilderbloom, supra note 19.

[21] E.g. id.

[22] Pastor et al., supra note 14, at 4; see also Daniel Fetter, The Home Front: Rent Control and the Rapid Wartime Increase in Home Ownership, 76 J. of Econ. Hist. 1001 (2016) (finding that rent pricing control measures during the post-war years can account for a large share of increases in home ownership).

[23] Pastor et al., supra note 14, at 17.

[24] See David P. Sims, Out of control: What can we learn from the end of Massachusetts rent control?, 61 J. of Urb. Econ. 129 (2007).

[25] See id.

[26] See Ambrosius et al., supra note 14; Sims, supra note 21.

[27] See Pastor et al., supra note 14, at 12.

[28] See Diamond et al., The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco (2019).

[29] See Rajasekaran, supra note 14, at 6.

[30] See Diamond et al., supra note 27, at 4.

[31] Tatian et al., Urban Institute, Building Successful Neighborhoods 27 (2012).

[32] Pastor et al., supra note 14, at 4 (“[T]he researchers note that 42 percent of the offsetting welfare loss was experienced by future residents — those yet to move to the city who presumably had higher incomes”).

[33] See Diamond et al., supra note 27, at 5.

[34] Id at 1.

[35] See Pastor et al., supra note 14, at 15; Tenants Together, Rent Control Works: A Response to Business School Professors’ Misguided Attacks, Medium (Mar. 12, 2018), https://medium.com/@tenantstogether/rent-control-works-a-response-to-business-school-professors-misguided-attacks-1305d9770ff7.

[36] See Rajasekaran, supra note 14, at 1.

[37] Kriston Capps, Would AOC’s National Rent Control Solve the Housing Crisis, or Make it Even Worse?, CityLab (Sep. 26, 2019), https://www.citylab.com/equity/2019/09/rent-control-affordable-housing-poverty-crisis-ocasio-cortez/598786/.