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Apparent Reason Episode 3: Rent Regulation and NYC’s Tenant Neighborhoods

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Transcript:

Today we’re going to be listening to a long, suprising conversation I had with tenant advocate Sam Stein about rent regulation. I’d prepared by reading a bunch of arguments about the value or harm of regulating rents, but Sam’s perspective, honestly, took me off guard. Sam argues that rent regulation provides stability and support to tenants that homeowners already enjoy through a variety of government incentives and protections. I’ll have to research and think about the implications of Sam’s argument.

A Political Labyrinth

ETHAN: So, why don’t you—for the benefit of our fine listeners—just introduce who you are, what Tenants and Neighbors does, and what you do for them.

SAM: Sure. So, I’m Sam Stein. My job is the rent regulation campaign coordinator at Tenants and Neighbors. Tenants and Neighbors is a membership organization in New York State representing renters in different kinds of housing, including rent-regulated housing. And my job is to do a few things, but most of it is taking tenant’s individual problems and channeling them into legislative campaigns that are going to change the rent laws and address some of those problems.

ETHAN: OK. And you generally work with rent stabilized tenants, is that correct?

SAM: That’s correct. Also, rent controlled. There’s a minor difference between the two.

ETHAN: Could you spell that out for me?

SAM: Sure. Basically, the same buildings are subject to either rent stabilization or rent control, but if you’ve lived in your apartment continuously since before the rent laws were enacted in 1974, then you’re a rent controlled tenant. And that means that you don’t have to sign a new lease over and over again, they call you a statutory tenant. You’re written into the law, grandfathered in. And your rents increase by a different formula than rent stabilized rents.

ETHAN: And, just speaking of lease renewals, just to clarify something that I was reading—is there some different formula that applies when you’re renewing a lease as opposed to just a year over year sort of thing for rent increases?

SAM: It’s basically the same thing. For a rent stabilized tenant, usually we talk about the benefit of rent stabilization being about either low, or at least predictable, rent increases. But the other thing that rent stabilization does is that it’s guaranteed lease renewal. So, the landlord can’t just decide arbitrarily that you’re not allowed to live there anymore. They have to, after one or two years comes up, offer you the chance to either say yes or no to staying there. So that’s what the lease renewal thing does, and I think you used to have the option of the three year lease renewal, but now it’s one or two years.

ETHAN: Oh, wow. OK. I didn’t know that. So, why don’t we talk a little bit about—you said that a lot of what you do is channeling things into the political realm.

SAM: Mm-hmm.

ETHAN: Could you talk a little bit about what that actually means in terms of everyday actions that you take?

SAM: Sure. Well, first, for background—so, New York’s rent laws apply to New York City and a couple of the suburban counties, and until sometime in the ’70s they were city rules, and the city council and the mayor were the people you would go to if you wanted to change them—which made sense. But then it was taken away from the city and brought up to the state, which means that any time that we want to change something in the rent laws, we need to go and get the votes of not only the people who represent rent stabilized tenants, but also the people who represent upstate cities and a lot of rural areas and suburbs that have nothing to do with rent regulation.

ETHAN: Right.

SAM: And they often get a lot of money from the real estate industry, so they are not inclined to vote with tenants.

ETHAN: Wow.

SAM: And then we get gridlock.

ETHAN: Gotcha.

SAM: So that’s the framework that we’re working in, which makes it really hard to change the rent laws even in pretty basic and sensible ways that other people who have no stake in it would agree makes sense. Still, the way that the campaign finance system works, they’re incentivized to vote against tenants.

ETHAN: So real estate lobbyists are basically financing people in other parts of the state that have no direct stake in rent control to vote against it.

SAM: Exactly.

ETHAN: I see.

SAM: So the head of the housing committee in the New York State Senate, which is Republican-dominated, has a district with not only no rent regulation, but basically no renters, so the idea of getting anything though the Senate becomes very difficult.

ETHAN: So, are the politicians representing New York City and the suburban areas you talked about—do they tend to be more pro-rent control?

SAM: Definitely. They have complicated interests as well, and some of them represent homeowners, and some of them represent condo and coop owners, and all sorts of other things, but as a general rule, yeah—they’re much more sympathetic to rent regulation. So then you need to figure out what you can do that would change the law, that’s politically feasible. And that puts us in a strange position. This year, what we identified was that landlords were getting a tax break. It’s a tax break that’s been given and renewed over and over again, and it expired, and we were trying to make the case that if the Republicans in the Senate wanted this tax break for landlords, tenants should have to get something at the same time. So, you end up negotiating trades.

ETHAN: I see. Which is probably part of why the laws are so convoluted to begin with, is because the result of a lot of trades over the years.

SAM: Definitely.

Rent Increases (and Ripoffs)

ETHAN: Gotcha. So, could you describe a little bit about the process? And the Rent Guidelines Board is a New York City office, that controls the actual rise in the rents?

SAM: That’s right. And there’s a different Rent Guidelines Board for each of the suburban counties that have rent regulation also. So, there’s a Westchester Rent Guidelines Board and a Nassau County Rent Guidelines Board as well.

ETHAN: OK. And could you describe the vote that recently took place, and how that went and what the larger that’s a part of?

SAM: Yeah, sure. Let me start with the larger process, first. Rent stabilized tenants don’t have one set rent that never changes, it goes up according to the determination of a board called the Rent Guidelines Board. There’s other ways that landlords can raise rents based on improvements either to the whole building, or to individual apartments, but they’re basically guaranteed a rent increase through this system, on top of anything they do to their building.

The board is a state-enabled and city-administrated thing. Board members are chosen by the mayor. There’s nine members. There’s supposed to be two that represent the interests of tenants, two who represent the interests of landlords, and then five who are called “public members,” who are supposed to be not biased, but end up being on the side of the mayor, because of how they’re chosen.

ETHAN: OK. And what side is the mayor on?

SAM: The landlord’s side.

ETHAN: Gotcha.

SAM: That could be different with a different mayor, but that’s the way it is now, with Michael Bloomberg. And one of the laws that we’re trying to pass at the state level this year would have reformed that so that at least the city council would have oversight over who’s on this board, to to make it a little more democratic, but that did not pass this year.

So anyway, we’ve got this board. They have a staff of mostly statisticians that do a bunch of reports about landlord’s costs have gone up for the year, what the housing market is looking like, what the employment market is like for tenants, and they do public hearings where they give all this data to the board and the board is supposed to ask questions.

And then there’s another round of hearings where tenants and landlords can testify about their own issues, and why there should be either a low or a high rent increase, and then there’s a vote at the end of it.

ETHAN: I see. And I’ve seen some complaints that the Rent Guidelines Board sometimes overestimates the owner costs. Do you have a comment on that?

SAM: Yeah. It’s definitely true, and it’s been acknowledged by a former head of the Rent Guidelines Board that this is becoming a problem. The way that we know that it’s true is that landlords have to submit their finance to the Department of Finance as a start of their tax procedure. But there’s a lag on that, so that they’re filing taxes based on what they spent last year. In the meantime, the Rent Guidelines Board is looking at old data, and predicting what they think the increase in costs is going to be.

The truth, though, is that their increases have been really, really off for the past few years, and always in favor of landlords. So, when they’re presenting information to the board, they’re telling them landlords’ costs went up by 5 percent this year. Well, they actually only only went up 0.1 percent. (laughter) So, that’s going to bias the way the the board is going to rule, and it’s always towards landlords. So, that’s definitely something that needs to be fixed.

ETHAN: Right. Now that you’ve described some of the larger process, how do you feel about the most recent vote?

SAM: It was the lowest rent increase in a decade, and so that’s good. It was 2 percent for 1 year leases or 4 percent for 2 year leases, and I think the numbers were pretty strong in favor of tenants, like the data the board was presented with. And so it would have been hard to negotiate the higher rent increase that the landlords were demanding.

But the problem with it is they did this thing called a supplemental rental increase. So, if you pay a really low rent, you get a higher increase, and landlords like that, because they argue that people paying a low rent aren’t paying their fair share, and that their rents don’t cover the expenses, but these basically the poorest, oldest, and longest-term tenants, who live in these apartments, and so it becomes like a poor tax, where those that can least afford it are then paying more. So that’s not something we’re happy about.

ETHAN: Now, I probably can’t get too much into this, here, because it gets really complicated, but these rent increases—are they for everyone? Or there’s something called a “maximum allowable rent”? I’m a little bit confused about that.

SAM: Right. So that maximum thing, that’s basically for rent-controlled tenants.

ETHAN: Oh, OK.

SAM: And there’s, like, 30-something thousand of those left in the city, but there aren’t that many because basically, they tend to pretty old tenants, because they’ve had to live in their apartment continuously since 1974. And when they either move or pass away, then their apartment becomes rent-stabilized. So there’s way more of those, and those are the ones whose rent increases are determined by the rent guidelines board.

ETHAN: OK. Well, I think that gives a little bit of an overview of the political process. So you also actually work more directly with tenant groups yourself, right?

SAM: Yeah, that’s right.

ETHAN: Could you describe…

SAM: Yeah, we get calls from tenants who are facing some sort of a crisis, either personally or their whole building, and we try to help them out. Either we help them form a tenant’s association to collectively demand something from the landlord, or take their landlord to court, or we just do individual counseling to a tenant who has a questions. So, for example, I just got a call from a tenant whose lease came up, and they were offered a new lease, but it was at last year’s Rent Guidelines Board increase, which is almost twice what this year’s is.

ETHAN: Oh, wow.

SAM: So the landlord is hoping the tenant won’t notice, and will just pay twice the increase that they’re supposed to. And so, I have to tell the tenant, “No, no, no, you have a right to this year’s rent increase, you need to write a letter to your landlord demanding a lease with the right increase,” and then if they have a problem, they call me back, and we can help them out. So there’s a lot of people that have illegal overcharges, where landlords—you know, there’s a chance that they don’t know what they’re doing, but most likely there’s trying to do something that they hope their tenant won’t catch.

There’s a lot of tenants who have what they call a “major capital improvement” in their building, and it’s something that allows the landlord to permanently raise the rent. And that’s something like a new elevator system or something like that. But sometimes the landlord is claiming that it cost more than it actually did to install. Or, they put it in, but not very well, and so it doesn’t ever work. Something like that, where the tenant shouldn’t actually be paying what’s being asked of them.

ETHAN: In that report you referred me to, the Community Service Society of New York report [pdf], I notice—and they didn’t go into this much—that they had a recommendation to urge the State Housing and Community Renewal Agency to issue… I’m sorry, I’m misreading the wrong part here. Oh, just to strengthen its enforcement of rent regulation. Is these the kinds of things that are being talked about there?

SAM: Definitely. And we have a whole campaign about strengthening the enforcement. Because some of the problem is the laws are good, but they’re not enforced. Some of the problem is the laws have holes that need to be closed. But the enforcement thing is definitely important. In the best-case scenario, it can take two to three years for some of these charges to go through. And that’s what they’ll tell you if you file, so that’s going to deter a lot of people from even filing who are being illegally overcharged. A lot of people will just move, because they can’t overpay for two years while they’re waiting for a determination.

ETHAN: Right.

SAM: And it does seem like when landlords have a problem, it gets fixed a lot quicker. (laughter) But that’s based on observation.

ETHAN: Mm-hmm. They have maybe a little bit more of the ear of the mayor, too.

SAM: They definitely do.

ETHAN: So, do you also do some amount of education or outreach to try to inform people about their rights? Because that seems like that’s a big issue here.

SAM: Yeah, definitely. The laws are unfortunately complicated, and not only does that make it somewhat economically inefficient, it means, that tenants don’t always know what rights they have that are really important, and so we do workshops in people’s buildings, or sometimes an elected official will come have us speak at some central location in their district, and we do that social service agencies, anywhere that is interested in education.

There’s the basic, “What is your right?” But it’s also what do you do if you’re not given what you’re supposed to. The landlord takes away a service that was initially given to you in the lease—you don’t have to pay your full rent, because your rent is supposed to cover that. So that’s the kind of thing that people don’t know, and they end up just paying for things that they shouldn’t have to.

ETHAN: Could you back up a moment and describe these tenant’s associations you discussed? Do those have some sort of formal place within this structure? Or just an informal arrangement to try to put pressure on the landlord?

SAM: It’s basically an informal arrangement. It functions like a union, but with the unions, we have the National Labor Relations Board and other things that formalize what a union is, what the rules are for how they’re elected, regulations about both what they can do and what employers can do. We don’t really have that with tenant associations. So, we have our own guidelines when we’re organizing tenant associations, that we say they have to have the democratically board with regular elections, they need to create their own bylaws, and everyone needs to vote on them. So we have our own self-imposed standards, and if tenants don’t want to follow them, we don’t necessarily help them organize. But there’s no law that says, “This is what a tenant association has to be.” And they don’t have any formal power, either.

ETHAN: There’s nothing at the national level, you’re saying—I didn’t even think about this dimension—that provides some sort of organizing structure for tenants. That just doesn’t formally exist, you’re saying.

SAM: As far as I know, it doesn’t. Yeah.

ETHAN: OK.

SAM: And there’s a lot of things that really should be done collectively in these situations. The way that it works, if one tenants files a complaint at a the Department of Homes and Community Renewal that they’re being overcharged, then they can get their rents rolled back. But often everybody in that building is having the same problem, but only the person that filed their individual charge gets anything done.

ETHAN: So they would have to all individually file charges in order for—over the next two years or whatever—to actually get all of their problems resolved.

SAM: Exactly. And there’s no way that that can happen without some form or organization.

The Geography of Rent Regulation

ETHAN: Could you talk a little bit about how the way this plays out regionally across New York? Because a lot of the data that I’ve looked at has been very aggregated in terms of who we’re talking about the entire area. But I notice on the Tenants and Neighbors website, there was some protest, and people saying, “Harlem is not for sale.” I was just interested in the regional dimensions, if you’d talk a little bit about that.

SAM: Yeah. I think the time that people really pay the most attention to rent regulation is when rents are escalating really fast everywhere else. And so in Harlem and places in Manhattan that are gentrifying, there’s a huge price differentiation all of a sudden between a rent stabilized apartment and a market rate apartment. That means that holding on to your rent stabilized apartment becomes even more important. You know that if you don’t have that, suddenly there’s no way that you could stay in your neighborhood. And that’s especially important to long term tenants, people who are raising families there, who don’t want to suddenly have to move and switch schools, and have their lives uprooted, because they know that without rent regulation, their rents are going to skyrocket.

It’s a different situation in other neighborhoods where the rents are actually more or less the same at market rate and rent stabilized, but a rent stabilized tenant has more rights, because they have guaranteed lease renewal, and they have protection from arbitrary eviction based on organizing a tenant association or something like that. The market rate tenant doesn’t. The market rate tenant also doesn’t know that when their real estate market gets hot, their rent won’t double suddenly. The rent stabilized tenant knows, “OK, so right now I’m paying the same thing as the guy in the new apartment building across the street, but if something changes I know that I can stay here.”

ETHAN: And so you’re seeing some of the price pressure on the market rate apartments—and through the raising mechanism, the stabilized apartment to a lesser extent—you’re seeing a lot of that coming from gentrification?

SAM: Yeah. There’s a rent gap between what tenants are paying and what landlords could get if, hypothetically, rent regulation disappeared overnight. And they know that, and I think that is the main reason why landlords fight rent regulation, because they want the freedom to double somebody’s rent all of a sudden, based more on what the market is doing than the needs of the person who happens to be living there at the time.

And so gentrification is a force that’s moving throughout the city, and it’s hitting some places worse than others. The neighborhoods that are facing gentrification tend to have a lot of apartment buildings that were built before 1974 because one element of gentrification is fixing up old properties that are really nice on the outside, and could be made to be really nice on the inside. Those tend to be pre-war buildings, which means that they’re most like rent stabilized.

ETHAN: That’s very interesting. So a lot of the buildings that are most prime for gentrification are in fact the ones that happen to be covered under the rent regulation laws.

SAM: Yeah. Some exceptions to that are brownstones that don’t have enough units in them to be rent stabilized. But a big gorgeous apartment building in the Upper West Side that was built before 1974—if the tenants are still living there, then it’s probably rent stabilized, and I’m sure the landlord wishes that they could get rid of them and raise the rent.

And that’s what that Supreme Court case, that the Supreme Court rejected earlier this year, was about. It was an Upper West Side landlord that had inherited a building that was rent stabilized, and was challenging the constitutionality of rent stabilization.

ETHAN: Oh, interesting! Actually, I don’t know anything about this. Could you talk about that for a moment?

SAM: Sure. His name was James Harmon. He inherited the building from his parents. It was split between him and his brother, he bought his brother out for a few million dollars, and then owned this building. And it was mixed—I think some of it was market rate, and some of it was rent stabilized. And he was arguing that the rent stabilization was an illegal taking of his property, because the potential rents were so much higher than the actual rents people were paying, that’s like the government taking away his money.

He had taken this to local courts and been shot down time after time, but he was getting a lot of money from the real estate industry to keep his fight going, and he eventually got it up to the Supreme Court. The Supreme Court said, “That’s interesting. Tell us more.” And the city and state both filed briefs that said this is not a constitutional issue. Rent control is a legally protected state activity. And the Court agreed, and they didn’t hear the case. That all happened this winter.

ETHAN: Mm-hmm. That’s an interesting insight into the psychology of it a little bit, too. He felt that he had this protected right to have everything projected by an introductory economics class, in a way.

SAM: Right.

ETHAN: That he had a right to all of that, and anything that prevented that is taking it away from them. You could use that argument against basically any regulation that you could think of, almost.

SAM: Yeah, absolutely. I mean, why isn’t an illegal taking to say that your building can’t be taller than 20 stories if you think that you could build a 40 story building that would bring you more rent.

ETHAN: Right, right. Or that you have to install these inconvenient sulfur scrubbers on your power plant when you could be making much more money without that. Yeah. That’s wild.

SAM: And so that didn’t fly.

ETHAN: I’m really glad that didn’t fly, because that would have been a disaster for more than rent control. Interesting.

SAM: Yeah, right. You can imagine the precedent that that would set.

Decontrol and Bizarre Vacancy Incentives

ETHAN: Yeah. So, could you talk about—I guess we just haven’t mention that, so we should just quickly touch on it by which apartments come decontrolled or possibly recontrolled in New York City?

SAM: Mm-hmm. Decontrol is something that came up, I think in 1993. What it is—there’s basically two ways that apartments can be decontrolled. The most likely way is that the rent goes over $2,500 per month and the tenant moves out, so the next person who rents the apartment for more than $2,500 is no longer rent stabilized. If you live in your apartment, and the rent keeps getting higher and higher, and it goes over $2,500, that’s still fine, you’re still rent regulated. It’s the next person who comes in. And that’s called high rent vacancy decontrol.

The other is high income, high rent decontrol, and that can still happen while you’re still living in the apartment. And if you’re making over a certain amount of money, I think it’s $200,000 for a household for two consecutive years, and your rent is over $2,500, then you’re taken out of rent stabilization.

ETHAN: OK. And the apartment is, permanently, right?

SAM: Exactly, exactly, which is a big problem in terms of keeping the affordable housing stock.

ETHAN: Right. Could you talk a little bit about the overall—maybe this will tie into how things come into the system, if they do anymore—what’s the overall picture of the size of the rent regulated stocks, since it’s so arbitrarily determined at the beginning?

SAM: I’m looking for a number—basically, I think it’s about 2.5 million rent stabilized tenants in New York City and the immediate suburban counties. There aren’t a lot of new, permanently rent stabilized apartments being built. A lot of developers will take a tax credit that says your new apartments have to be rent stabilized while you’re receiving this tax credit, and so that’s where most of the new rent stabilized housing stock comes from, but it’s not permanent.

ETHAN: Wait, so as soon as the developer stops taking the tax credit, it’s no longer rent stabilized?

SAM: That’s my understanding. I think it might be different for different tax credits, but for the main one that people use, yeah.

ETHAN: I’m just trying to get my head around that. So, one of the people you work with, if they were in a building that had this tax credit, one year they could be rent stabilized, and then the next year, they didn’t do anything, and they’re not?

SAM: It’s more likely that they’re rent stabilized until they move out, and then the apartment isn’t stabilized anymore.

ETHAN: I see.

SAM: Because usually, when we’re talking about rent stabilization, it’s attached to the apartment, not the tenant. And so it’s different than a Section 8 voucher, which is attached to the tenant. You take a tax credit and this apartment is regulated—it stays regulated until a new tenant comes in. If you’re getting the tax credit for 15 years, on the sixteenth year, if the same tenant is living there, it’s still rent stabilized, but if a new one comes in, then it’s not.

ETHAN: OK, OK. But for the most part, without the high rent or high income issue, the apartment stays rent-stabilized even if tenants move out.

SAM: Yes. And landlords get a 20 percent vacancy bonus. So, there’s an incentive for landlords to churn people in and out of these apartments, because that’s the quickest way to raise the rents. The next person who moves in pays 20 percent more, and on top of that they can do any work they want inside the apartment and charge the next tenant for it.

So, if a landlord wants to raise rents, what they want is vacancy.

ETHAN: So, 20 percent, meaning 20 percent of their apartments are vacant?

SAM: No, no, no. If my rent is $1000, and I move out, my landlord can then raise the rent for the next tenant to $1000 plus 20 percent, automatically.

ETHAN: OK. Whoo, complicated.

SAM: So that’s a lot of money.

ETHAN: Yeah, that is a lot of money every month.

SAM: And it’s really just a gift to the landlords. They don’t have to do anything to get that.

ETHAN: It’s not through the application process or anything.

SAM: There’s no application, they don’t have to do any work to make the apartment higher-quality, they just get it. The only restriction, which was added last year, is that you can’t get it more than once a year, because landlords were just cycling people in and out of apartments over and over again.

Because what they’re trying to do is hit the magic number where it’s vacancy decontrolled. Once they get to $2500 they can take the apartment out of stabilization.

ETHAN: That gives them a huge incentive to raise the rent as much as they can, over and above the incentive to make more money from having higher rent.

SAM: Exactly. I mean, they might actually lower the rent after they hit $2500 if the market won’t bear it, but nobody will be telling them what their rent can be, nobody will be saying that they have to renew leases for tenants.

ETHAN: And so that incentive is part of why you need the automatic lease renewal stuff.

A Case for Giving Renters the Same Protection as Homeowners

SAM: Yes. And really, a lot of people would say that shouldn’t be tied to rent stabilization, that should just be a general protection that tenants have. That tenants should have the right of first refusal to stay in their home. But market rate tenants, or tenants in cities that don’t have any sort of rent regulation, don’t have that right, and so there’s this idea that renters are transient people, and renters don’t stay long in a community—well, often they don’t have a choice in the matter.

So rent stabilization ends up being a way of stabilizing neighborhoods, too.

ETHAN: Right, so that people can go to the same school, and have an actual community as well.

SAM: So, this American idea that homeownership leads to more community participation, and you’re more likely to participate in your local community board, or sit on the school board, and fix up your property, and do community service. That ends up being true of rent stabilized communities as well, because families are living there for a long period of time, and getting involved in everything. It’s only when you don’t have any protection for renters that you get people moving from one neighborhood to another and never settling.

ETHAN: Could you talk a little bit about if you’re encountering that bias against renters in your political activities?

SAM: You see it a little bit, and I think that the way that the budget works, there ends up being a lot more money given to home ownership programs than programs to help renters in need. The agency that enforces the rent laws is pretty underfunded compared to the agencies that help people with mortgages and things like that. So, I think there’s a systematic bias—definitely that the federal taxes skew towards home ownerships.

ETHAN: Right, because of all the incentives towards it.

SAM: Yeah. And that just doesn’t make sense for New York City. We can’t have 8 million homeowners in New York City—we’re going to be a city of renters, so we’ve devised a system that works to the benefit of tenants—sort of, it could be better, but it’s at least something. But we don’t have that at all at the federal level, and the laws still skew towards home ownership. And I think some of that is economic, and some of that is ideological.

ETHAN: So, this is a good transition into some of the larger economic issues, here. And that’s one I actually hadn’t thought of, yet. You seem to be saying that you view rent stabilization as a way of simply giving to renters some of the protections that homeowners end up already enjoying, or at least giving them a fraction of those.

SAM: Yeah, definitely. And having some of the community benefit that people associate with homeownership to renting neighborhoods.

ETHAN: Do the rent stabilized people you talk to—they tend to be long term neighborhood residents?

SAM: Yeah, definitely. There’s plenty of people who are rent stabilized, and who are new to a neighborhood or move around a lot, but there’s a lower vacancy rate for rent stabilized apartments, in part because people are long term tenants. And they move into rent stabilized apartments in part to be able to be long term tenants and to know that they have that security.

ETHAN: So what do you think about—in terms of people moving into a rent stabilized apartment—could you describe a little bit of the process of how somebody might be able to get into that? Because one of the best social and economic issues with the rent control system is that—it seems to me like getting into it is so hard, and the process by which you get in is not necessarily related to everything you’d want it be related to.

SAM: Right. So, the first thing is—rent stabilization, I think a lot of people assume, is a program for a certain class of people. And it’s generally not. It’s a program that’s not open to the richest people. So that’s the only—like, if you make over $200,000 a year, then it’s not open to you. But otherwise, it is. So it’s not really a targeted program.

But, on the other hand, I think there’s a sense that it’s really hard to find a rent stabilized apartment, and while that might be true in the core of Manhattan, it’s really not true in the rest of the city. And even in Manhattan—the neighborhood in the entire city with the most rent stabilized housing is Washington Heights, which is northern Manhattan. In the rest of the city, most apartments that are for rent—if they’re not in houses—are rent stabilized.

ETHAN: Huh! Most of the rest of the—in the boroughs, and everything?

SAM: Mm-hmm. Yeah, because what a rent stabilized apartment is, is an apartment in a building with six or more units that was built before 1974, where the rent is under $2500. So the places where that’s not going to be the case are the places where the rents have skyrocketed, which is really Manhattan, and the poshest parts of Brooklyn, or places that don’t have six unit buildings, which is the quasi-suburban areas in the far boroughs. So those places—yeah, it’s hard to find a rent stabilized apartment. The rest of the city—it’s more the norm than the exception.

ETHAN: It gets to some of the geography, too. About two thirds of apartments are rent regulated, is that right?

SAM: Sounds right.

ETHAN: Yeah, something like that. Interesting. So, do you think that it would be better if it were more targeted towards the people that might be most vulnerable?

SAM: I mean, my preference would be that it’s actually more broad and that it covers more. I would rather see more people getting the protections of rent regulation than only the most needy. If it were going to be restricted, then, yeah, I would say people with low income should be prioritized, seniors should be prioritized, but I don’t think we’re in a place where that has to happen. I think we need more rent regulation, not less.

Criticism of Rent Regulation

ETHAN: So I guess that gets to one of my other questions which is—well, one of the criticisms I’ve seen of New York’s rent control mentioned that—I sent you that Cato article and it’s come up a few other places—is that rent regulation raises prices in the rest of the market because—some of my understanding of this is kind of evolving as we’re talking, I didn’t realize that so many apartments you were able to get a rent stabilized apartment in the rest of the city—but that it raises prices in the rest of the market because of the demand that would be going there is getting rationed out and getting pushed toward the market rate apartments. So what your response to that would be basically to just extend the rental regulations further, if you could.

SAM: Yeah. I mean—landlords, they make their operating income off of rent, generally, and maybe a little bit of capital improvement money, although there’s mechanisms to raise rents to pay for capital improvements. The big windfall comes when they sell the building. They’re going to make a huge amount of profit off of that. The differential between the rent regulated income from a tenant and the market rate income is a short-term thing that’s going to really matter to the tenant who can’t afford to pay an extra $200. But the landlord—they’re going to make millions of dollars selling their building at the end of the day. So I think that’s one important perspective to keep in mind.

And the other thing is—to the extent that there are buildings where you’ve got one rent-regulated tenant who’s lived there forever and doesn’t pay that much, and then a bunch of market rate people who are paying more… there may be some exceptions where that’s the case. But the rule generally in the entire city is that the difference between the prices isn’t enormous. It’s substantial, and it makes a big difference, but it makes a big difference to the individual tenants, but it’s not a huge differential.

It’s even to the point where, where I live in Queens, they don’t charge me all the rent that they could, because the market rents are actually lower than the rents that rent stabilized tenants could be paying. So enough people have moved in and out of my apartment with those 20 percent vacancy bonuses, and the Rent Guidelines Board have been generous enough year after year that my rent on paper is $900 more than the market rate for a one bedroom apartment in my neighborhood, so they charge me the market rate, because they know that nobody would pay the rent stabilized rate. So this idea that rent stabilized tenants are sending up the rents elsewhere is really not borne out in most of the city.

ETHAN: Well, right. If you’re not actually even hitting the ceiling, that wouldn’t even enter into the picture.

SAM: Right.

Dreams of a Tenant Advocate

ETHAN: This is a good transition into—what your first actions as a benevolent dictator of New York if you could just bypass this crazy process where you’re competing with people in Schenectady or whatever to determine rent regulation in New York?

SAM: I mean, once we get into benevolent dictator territory, there’s a lot we could do. But keeping it in more the realm of the almost possible, I think the first thing to do is to bring the rent laws back to New York City, and let New York City actually vote on the people who are actually in charge of their housing laws. Because right now, we’re voting for our representatives who end up being the minority vote later on. So, basically, our rent laws have been hijacked by the state, and we need to bring them back to the city. So that’s first.

And then, I think, extending some of the protections to any tenant. There’s no reason that everyone shouldn’t have the first right of refusal with their apartment. It shouldn’t just be rent regulated tenants.

And then the thing after that is it made some sense in 1974 to say, “All buildings built before right now are going to be rent regulated.” But now 1974 is an arbitrary point. I think we can just make rent regulation a norm, and then if there needs to be a mechanism by which landlords buy out of that or something, then we can think about that. But the 1974 thing doesn’t make any sense anymore.

ETHAN: Yeah, it’s just a date in the past on which everything’s based now. What’s the long term trend in the rent controlled housing stock that you see—under current policy, assume that you’ve already been deposed.

SAM: Right. That was quick. (laughter) The laws were being steadily rolled back for many years, and every time they were renewed, there was some new element to them that made them worse, that made the laws less tenant-friendly. For the first time last year, they were renewed and made slightly better for tenants. And so we’re trying to make that the turning point when things started to improve for tenants, and rent regulations got stronger instead of weaker.

And hopefully, they’re going to be renewed again in 2015, and we’d like to see more improvements. And I think the thing to really call for and unite around is ending vacancy decontrol, because once there isn’t a target where landlords are arbitrarily trying to hit a high rent point so that they can get something else. They’re incentivized by their desire for more money, but they’re not incentivized by the desire to get out of rent regulation.

It’s important to the future of rent regulation in New York City that we get rid of that. That’s going to be a tough battle, especially with the situation in Albany where the laws are made, but that’s what tenants are going to be calling for.

I think you had said that somewhere on the Rent Guidelines Board you read that they were hoping to phase out rent regulation?

ETHAN: Yeah, I’ll have to find that. I searched for it and I couldn’t find it, and it may just be planted in my brain, something sideways somebody said. It was couched in very roundabout language. I think they were saying something like, “Theoretically, the long term trend in rent regulation is towards zero rent regulated apartments.” Or, maybe it was zero rent controlled apartments.

SAM: Zero rent controlled apartments is probably true, because a tenant has to have been continuously living since 1974. So those tenants are going to move, or die, and those apartments will be rent stabilized instead of rent controlled. So that is a system that is basically being phased out. Unless there’s a new law that would create more rent controlled apartments.

ETHAN: What do you think about the protections of rent control versus the protections of rent stabilization?

SAM: Their system has actually not been as good at keeping rents in check. This whole really convoluted maximum base rent/maximum collectible rent thing—it’s not really working out for the tenants. So getting rid of that would be a step forward.

But the statutory tenancy thing is a good benefit and is increased security. So there’s definitely some benefits to it.

The main benefit to rent control, though, that isn’t the case with rent stabilized, is that the landlord has to prove that they deserve a rent increase to get it. They need to open up their books and show that they are doing the work that they’re supposed to do, that they’re not overcharging tenants, that they’re aren’t significant violations that are open. So I would like to see rent stabilized landlords have to go through that same process.

ETHAN: I see. And just backing up—I guess we’re towards the end of the hour, here, I guess it did end up being more like an hour—the way that you’re talking about this, the way that you’re framing these issues is you basically feel that this is a situation of drastically uneven power between the owners and the renters that would exist under the free market. Would you say that’s one of the main arguments you have in favor of this rent regulation.

SAM: Let me make sure I understand that. You’re saying that without rent regulation there would be a huge power differential between landlords and tenants, and this helps balance it out?

ETHAN: Yeah.

SAM: Yes, I would say that. I think that there’s still a huge political and economic imbalance between the two, but it’s closer than it would be without rent regulation.

ETHAN: Could you put this in the context of other programs that are targeting tenants, especially low income tenants? I get the impression that it’s way, way harder to get access to Section 8 vouchers or to public housing than it is to get access to some of this regulation system.

SAM: Yeah. I think that’s generally true. I’m not an expert in public housing or Section 8, but I think it becomes more complicated when you have to go through the government to get the thing that lets you get the apartment than when you can just rent an apartment and know that you have certain protections, and then go to the government when you need additional enforcement or something.

And there’s a lot of discrimination—which is illegal—but there’s a lot of discrimination against Section 8 where landlords won’t rent to them when they’re legally supposed to. And that’s something that you don’t face as much with rent regulation.

And finally, there’s a huge waiting list for public housing because it’s a pretty finite resource. There was a time in this country when we were building a lot of public housing. Now, any public housing that’s built is very small. And so, there’s less and less people that are able to use that resource where as rent regulation—it’s not like we’re building a lot of new rent regulated apartment, but there’s a pretty large housing stock out there for people to access.

ETHAN: Let’s put you back in power for a moment. As a part of general benevolent dictator actions, would you make public housing and/or Section 8 a priority also?

SAM: Yeah, definitely. I mean, I think that public housing, if it’s properly maintained, is a really important part of the housing picture. And I think there should be more of it. And I think that New York City does a better job than most cities, but that’s saying very little, because New York City public housing is still falling apart in a lot of cases, and tenants are constantly fighting for federal funding for HUD projects. You know, it’s not really fair to build these things, put low income people in them, and then not finance the maintenance of them. But that’s basically what’s happened.

Where are people supposed to move to, once you’ve created that system? They demolish a lot of low income housing, they build up large public housing, they put people in it, and then they don’t maintain it.

ETHAN: Right. So they don’t have an easy alternative to get out of the system once they’re in it.

SAM: Right. I mean, sometimes Section 8 vouchers can do that, but there aren’t a lot of them. They’re not really giving out new Section 8 vouchers any more, and a lot of times what they end up doing is trying to disperse people out of cities. And so then it becomes a anti-urban program. You know, they’ll give you a voucher, but it’s for somewhere else.

ETHAN: I guess this will be our final thing that we talk about: what are the alternatives, I guess, to this idea—which is propagated both by rental regulations and encouraged by these more limited programs like the Section 8 housing and the public housing—what do you see as the alternative if the landlords get their way? Are we talking about people being really displaced out of New York City? Are people seriously looking at that, and straightfacedly saying that as an option here?

SAM: You mean, are people who are anti-rent regulation saying with a straight face, “You’ll have to leave the city if we get rid of rent regulation.”

ETHAN: That sort of thing. Yeah.

SAM: I don’t hear that a lot, but I do think that would be the result. I think that there’s a general acknowledgment that this city shouldn’t be just for rich people, and yet most of the public policy creates that city, with some targeted exceptions. And rent regulation was created at a time when the political realities were a little bit different, and the tenant movement in general was a little bit stronger. As it exists right now, people say, “We’ll get rid of rent regulation and somehow that will make rents lower.” Or somehow that will lead to the creation of new affordable housing. But there’s sort of a magical process that happens in the dark where you get there. It doesn’t really make much sense in the actual world.

I think something that I’ve heard you talk about before is that some of this stuff makes Econ 101 world, but not really in places we actually know. And I think that’s what would happen with rent stabilization. It wouldn’t lead to the rents going down; it wouldn’t lead to new creation of affordable housing, it would just be a luxury city, and people would have to commute longer to get to work.

ETHAN: I just want to share with you one slightly crazy example of that that I just read. A very smart urban economist, who I’ve read stuff I respected in the past—Edward Glaeser.

SAM: Yeah. I read his book.

ETHAN: Oh, OK. But yeah, he did this entire analysis of “the misallocation of housing in New York City under rent control” and his basis for misallocation was basically assuming that people in the free market cities had a perfect allocation, and then comparing New York City to that.

SAM: Right. (laughter)

ETHAN: Which is insane, because of course you’re going to have people with a different distribution and maybe the distribution is actually better in the non-free market city—it’s not even on the table for him.

SAM: And he also advocates for getting rid of zoning controls in terms of limiting the heights of buildings in order to maximize how much landlords can get out of them—which makes sense in theory if you want landlords to make more money. But you would then have a cavernous city with wind tunnels pushing everyone around and no sunlight. So, obviously, the result of landlords getting more money is not the end all, be all of urban planning. (laughter)

ETHAN: Right. OK. Well, we’re up at the end of the hour and that concludes our interview. Nice talking with you, Sam, and good luck in your battles ahead.

SAM: Thanks a lot.

Economists’ hate-hate relationship with rent control

Don’t believe anybody who thinks that rent control is simple. In the July episode of Apparent Reason, we’ll be diving into data on rent control and stabilization in New York City. Why rent regulation? How does it work? And why does it have economists in such a lather? I’ll also be speaking with Sam Stein of Tenants and Neighbors, which does organizing, education, and lobbying on behalf of New York’s rent-regulated tenants; he’ll provide an on-the-ground perspective on the political and social dimensions of rent control that he’s encountered during his advocacy and organizing.

The goal is straightforward enough: we want our cities to be open to all. This means helping poor people, the elderly, and members of minority groups to not get squeezed out of the city, or out of a sustainable livelihood, by rising rents in their neighborhood. Controlling the pricing and maintenance of housing can help shift the power dynamic away from the landlords and in favor of these vulnerable populations.

Non-specialist economists simplify away the realities of modern rent control

Economists and libertarians love to bash rent control. Many introductory economics classes and textbooks, including the one I took at University of Colorado, love to use rent control as an example of a “price ceiling”—the maximum price that something can be sold for. This textbook reasoning describes how limiting the price means that there is a shortage of housing relative to the demand for that housing; normally the price would simply adjust upwards, driving away some of the demand, until you had an equilibrium between supply and demand. Since the price hits the maximum, this can’t happen in this vision of rent control, and so you have landlords not able to charge what they want which means that they have to adjust by lowering their maintenace, trying to push rent-controlled tenants out, setting this unprofitable unit on fire, worshipping Satan, etc.

Otherwise quite intelligent economists like Paul Krugman fall for this argument, to the point where the great international trade expert feels like he can huff about the “predictable” consequences of San Francisco’s rental regulations while apparently doing very little research beyond digging up the oft-quoted figure that a 1992 American Economic Association poll found that 93 percent of its members agreed that “a ceiling on rents reduces the quality and quantity of housing.”

Just one problem: that’s not really what modern rent regulation is like, especially in NYC. Housing lawyer Timothy L. Collins, who was the Executive Director/Counsel of the New York City Rent Guidelines Board from 1987-1994, points this out (pdf, page 10). It’s not a price ceiling: there’s a huge amount of flexibility for increasing rent prices and getting rewarded for maintenance improvements. Anybody quoting that poll of economists thinking that this is a condemnation of rent control is living on the fantastical alien world of Introecon that we visited last episode (which was, ironically, inspired by a Paul Krugman quote).

Unfortunately, I think that Collins is wrong that economists are not knee-jerk against rent control: it seems to be a part of the indoctrination process. But that doesn’t mean that what the average economist thinks is actually very relevant. Economics is a huge field, and rent control regulation is a complex subject in one subfield; I’ll trust Krugman on rent control about as far as I’ll trust an astrophysicist on string theory. Economist Richard Arnott takes pains to explain that modern rent control is not at all like the introductory economics stereotype in his article “Time for Revisionism on Rent Control?” in The Journal of Economic Perspectives.

But, there are some powerful concerns about the overall social cost and effectiveness of rent control measures.

Economists who have actually studied the issue closely come to a range of more nuanced conclusions about several of modern rent control’s effects and impacts in US cities, according to a lengthy literature review by Blair Jenkins for Econ Journal Watch. But she generally concludes that the preponderance of the literature shows that rent control has substantial negative effects.

I’m still wrapping my head around the complexity of rent control and its effects, which I’ll be diving deeper into as I prepare for my conversation with Sam Stein. Yet two things do seem to pop out for me right now: rent control is very poorly targeted (landlords still get to choose who lives there), and it quite probably raises rent for everybody else (because the limited supply in the unregulated market absorbs the extra demand in the regulated one). These two factors mean that the rent control regime probably hurts vulnerable populations who are not lucky enough to live in a regulated apartments. Yes, rent control definitely is a lifeline to some of the people who are in the system, but I’m not convinced that their benefit outweighs the harm to those outside. This is a central issue I’ll be thinking about when I dive deeper over the next weeks.

Image © Bosc d’Anjou, Creative Commons BY

Apparent Reason Episode 2: The Value Within

This week Apparent Reason goes to outer space to report on the final economic frontier: the mind. Paul Krugman is quoted, a Consumer is kidnapped, and we all learn an important and heartwarming lesson about the true meaning of utilitarianism.

If you have trouble viewing the SoundCloud widget, you can download the file directly here.

Apparent Reason Episode 1: The Paradox of Value

We assign dollar values to things we can buy (screws and stock options) and things we can’t (a human life, a terrorist attack’s damage).

What do these numbers actually mean? And why are there so many ominous accordions in a podcast about economics?

Thank you to the handsome iheijoushin for handling time-travel switchboard duties during the Adam Smith communications. If you have trouble viewing the SoundCloud widget, you can download the file directly here.