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Mountain View tenants this year could see their rents jump as much as 6.2 percent, based on a series of decisions made Tuesday by the city’s Rental Housing Committee.
In a unanimous decision, the rental committee established the city’s 2018 annual allowable rent increase, which will be 3.6 percent. This is the standard increase sanctioned under the city’s rent control law, which is based each year on inflation data provided by the Consumer Price Index.
But landlords were also granted a special one-time increase of 2.6 percent. This rent increase was promoted as a way to balance out a lapse caused the rent control law’s rent rollback. The logic goes that during the rollback period, rents were effectively frozen, meaning even inflation wasn’t taken into account, according to supporters. This bonus increase was approved by the committee in a 4-1 vote, with Chairman Evan Ortiz dissenting.
In concept, most committee members and city staffers agreed that landlords deserved some kind of bonus rent adjustment, but they parted ways on the specifics. City staff and attorneys said landlords should be given a 0.6 percent increase for a short period between October 2015 and February 2016.
The committee majority, led by member Matthew Grunewald, argued that this period should be much longer and encompass about 10 months, leading to the 2.6 percent figure. City staff had warned the committee on multiple occasions that going this route could invite another lawsuit.
On Tuesday night, the rental committee considered plans to make this extra rent increase more “legally defensible” by packaging it into the rent control law’s petition process. At Grunewald’s request, city staff presented plans for an expedited petition that landlords could fill out quickly to get this increase.
As the process was presented, city Associate Planner Anky Van Deursen warned that city staff was bracing for a potential “avalanche” of new petitions. Landlords seeking this 2.6 percent increase would still need to provide documentation of ownership and rental bookkeeping, and many petitions would need to be reviewed at a formal hearing, as stipulated in the rent control law, she said.
At this point, it dawned on Grunewald that even a simplified process could still mean a deluge of petitions from landlords, which would be both costly and burdensome. He pulled his support for the plan.
“Most of the purpose for this was for legal defensibility, but this seems like too much cost to bear for hedging against that,” he said.
Instead, the committee decided to grant the extra rent hike as a “bankable” increase. Under the rent control law, landlords are allowed to bank extra rent increases for future years if they didn’t adjust their rate in prior years. Grunewald asked that language be included for tenants to contest this rent increase if they can prove hardship, such as having a disability, children or loss of income. Landlords would have until 2020 to claim the banked increase, the committee decided.
In past meetings, tenant attorneys have warned this plan for a retroactive rent increase, from before the rent control law formally took effect, would violate the law’s provisions, which specifically limit landlords to one rent increase per year, starting in 2017.
Landlords would be eligible for this extra rent increase only if they owned the property and housed the same tenant since October 2015. Landlords would be ineligible if they raised rents between October 2015 and December 2016, or if they were found in violation of the city’s rent control provisions.
The risk of hefty legal costs came up at other parts of the meeting. An early draft of the 2018-19 budget was presented, indicating the committee was expecting to take in $2.1 million for the upcoming year, from a $139 fee on apartment units in the city, which landlords cannot pass through to tenants.
The budget was a bit of a disappointment for committee members hoping to show that the city’s rent control program could operate efficiently once it got through its initial startup costs. Last year, the fee was $160 per apartment, and landlords have seized on that cost to argue that the city’s rent control program was creating a bloated bureaucracy.
It was still a reduction, Ortiz pointed out. He reminded fellow committee members that a significant drain on the budget was their own tendency to stumble into lawsuits.
“I certainly want to cut that fee down more … but it might be a few years before we can get it down to $100 or less.” Ortiz said. “Hopefully by our third year, we won’t have as much litigation.”
The Rental Housing Committee is already dealing with multiple lawsuits from tenants and landlords, and legal costs comprised a significant portion of its budget. Attorneys’ fees for the upcoming year are expected to cost $200,000, more than six times what was budgeted for last year.
City financial staff is urging the committee to create a reserve fund of at least $200,000. This would reportedly provide stability in the event of surprise costs or liabilities. The committee’s small, five-person team could also need to relocate to a new office soon. They currently operate out of City Hall, but other city departments could soon need their space, Van Deursen said.
The budget reviewed on Monday was a preliminary draft that is subject to change. The final budget will be presented at the committee’s June 18 meeting.
Am very curious about implementation. What about folks who moved into rent-controlled units recently — after the freeze was over? Will we also see these increases, even though our rent was able to be set at market when we moved in?
The paragraph beginning with “Landlords would be eligible … ” was omitted from the print edition. Why?
@ Lynn Wood
Good question – I forgot to include information on the eligibility.
Landlords would be eligible for this extra 2.6% rent increase only if they meet the following criteria:
– Continuous ownership of the affected apartment since Oct. 19, 2015
– The affected apartment must be rented to the same tenant since Oct. 19, 2015
– Affected tenants must not have been subject to a rent increase between Oct. 19, 2015 and Dec. 23, 2016.
– No CSFRA (rent control) violations by the landlord
About time the Landlords won something from this Measure V abomination law!
@ Kling-Kling Bird
I added those details to the online version after our print deadline.
In response to Howard you said:
“About time the Landlords won something from this Measure V abomination law!”
Cost reduction regarding tenant turnover reduction is significant cost savings to landlords. Not only do you not have to perform refurbishing of the old units between tenants, pay for the costs of advertising, compete with other landlords for clients, and the loss of rent income during the time it remains empty.
The industry has the belief that constantly replacing tenants makes the industry more profitable. That is not necessarily true. It is a case by case situation. And in some cases, it if far more profitable not to seek high rent turnover. Economics can be studied to prove this to be true if it was being investigated by impartial research. But the current research is skewed by those wanting to promote a philosophy, and not actually approach economics scientifically.
So rent control can be a gift to landlords who know how to skillfully and efficiently manage their assets. Those who don’t rely on arbitrary rent increases to make up for losses due to poor decision making and management.
I for one also agree that if the following conditions are correct, there is a warranted enhanced AGA as follows:
Continuous ownership of the affected apartment since Oct. 19, 2015
The affected apartment must be rented to the same tenant since Oct. 19, 2015
Affected tenants must not have been subject to a rent increase between Oct. 19, 2015 and Dec. 23, 2016.
No CSFRA (rent control) violations by the landlord
This is fair even to me.
Berkeley’s rent control board has an annual budget of $5,500,000 with 22 full time employees and an annual registration fee of $270 per unit. This is exhibit A for Mountain View’s future with the RHC. It will only grow in size as more enforcement, inspections, stipends, training, legal consultation, IT operations and office rent all come into play. Why will Mt. View be any different? It won’t. Berkeley only allocates $4,000/year for legal fees. The rest is simply operating the runaway rent control industrial complex.
Enjoy the annual registration savings while they last, landlords. Those who stick with it will see the RHC bureaucracy do what every other rent control board has done–metastasize into its inevitable glory as the controlling business partner in every multifamily property. And after the November mid-terms, with repeal of Costa-Hawkins (which adds SFR, condos and duplexes to the unit count), look forward to vacancy control and a slew of petitions that will require a doubling or tripling of RHC staff.
Response to Former Landlord:
“Berkeley’s rent control board has an annual budget of $5,500,000 with 22 full time employees and an annual registration fee of $270 per unit.”
I simply ask what does this have to do with Mountain View, Berkleys population is 112,000 versus Mountain Views population of 80,000. So it would possibly be argued that the fee should be poroprtional to the population thus $270 time (80,000/112,000) would be not excessive or $177.00. The fact is we are better than Berkley with this year’s fee of $160. You went on to say:
“This is exhibit A for Mountain View’s future with the RHC. It will only grow in size as more enforcement, inspections, stipends, training, legal consultation, IT operations and office rent all come into play.”
That is so far an “unfounded” conclusion, you do not have any demonstrable evidence to prove your inflammatory language. You went on to say:
“Why will Mt. View be any different? It won’t. Berkeley only allocates $4,000/year for legal fees. The rest is simply operating the runaway rent control industrial complex.”
That is because it is a mature program, it has not be systemically opposed by the landlords in the city for years. The facts are Mountain View chose not to copy the Berkeley program and reinvent the wheel, causing enormous problems. Regulatory inconsistency, lack of efficient use of already made tools, and the attempts to use the CSFRA to fund City functions are just some of the real problems. These do need to be fixed even I admit. You said:
“Enjoy the annual registration savings while they last, landlords. Those who stick with it will see the RHC bureaucracy do what every other rent control board has done–metastasize into its inevitable glory as the controlling business partner in every multifamily property.”
The CSFRA will only do what it was written to do, nothing more. It cannot do what you say without either a RHC resolution, a City Council resolution, or an amendment proposed by the Citizens of Mountain View to revise the conditions. But this cannot be done without repeal of Costa Hawkins. You went on to say:
“And after the November mid-terms, with repeal of Costa-Hawkins (which adds SFR, condos and duplexes to the unit count), look forward to vacancy control and a slew of petitions that will require a doubling or tripling of RHC staff.”
That depends on whether the current decisions establish good precedence regarding future petitions. If the current petitions in effect identically address issues to be petitioned by new petitions, the likelihood of the petitions be fully processed may radically be reduced. Because the newly regulated groups will simply understand that it would be a waste of effort to move forward with their petitions.
But as far as the number of petitions at this time, it is currently less than 15 in total. There was a significant threat made by the landlords during the ballot measure and after that they would “flood” the petition process. So far the evidence is the opposite. Since the rules regarding CSFRA seem pretty clear, landlords only petition where they think they can actually prevail. That is because the cost of the petition process will be lost if they fail. Your opinion doesn’t seem to be backed up by any evidence yet. But I admit it could be in the future.
It seems to me the Rental Housing Committee, like other government entities, will cost a certain amount to operate. Like the fire department, the cost of operations isn’t based on how many fires are fought, rather the overhead involved in keeping the doors open and the lights on.
It wouldn’t surprise me if some of these budget numbers change after November if the Costa Hawkins vote ends up repealing vacancy decontrol and exempt post-1995 rental units. Many more units would be added to the system; newer construction, single homes, duplexes, condos, trailer parks, etc. which in theory should lower the per unit annual registration fee spread among more units. The added administration of another multiple thousand units may easily wipe out the potential per unit assessment decrease. Time will tell.
In response to The Successful Business Man you said:
“It seems to me the Rental Housing Committee, like other government entities, will cost a certain amount to operate. Like the fire department, the cost of operations isn’t based on how many fires are fought, rather the overhead involved in keeping the doors open and the lights on.”
I cannot AGREE with you any less than 1000%. I greatly appreciate your observations. You also said:
“It wouldn’t surprise me if some of these budget numbers change after November if the Costa Hawkins vote ends up repealing vacancy decontrol and exempt post-1995 rental units. Many more units would be added to the system; newer construction, single homes, duplexes, condos, trailer parks, etc. which in theory should lower the per unit annual registration fee spread among more units. The added administration of another multiple thousand units may easily wipe out the potential per unit assessment decrease. Time will tell.”
Again, I cannot argue with you when I agree with you 1000%. Your observations are awesome. We are going to get another significant adjustment period. My hopes are we overcome the learning curve smoothly and efficiently.
So far you deserve to be “Successful” in my observations, and I hope you continue to be.
My only question is as long as you are in “business” aren’t you always successful?
Thus as long as you can sustain yourself, you are successful, isn’t that correct?
But I ask these questions with significant respect and expressed dignity to you.
If Costa hawkins is repealed, no city will ever vote in rent control again because now it will involve all the voters own properties and not some other rich landlords properties.
Who would vote in rent control on their own home?
What would that do to their “own” home values?
That would be like shooting yourself in the foot!
So these non-rent control cities can continue to progress and the real estate can continue to increase in value and be upgraded and new construction will flow to these emerald cities while the slums of places like Mountain View can deteriorate and house the poor and less fortunate.
I want to own in the Emerald city baby!!
In response to Howard you said:
“If Costa Hawkins is repealed, no city will ever vote in rent control again because now it will involve all the voters own properties and not some other rich landlords properties. “
Except that 60% of California wants rent control (http://thefederalist-gary.blogspot.com/2017/09/60-of-californians-want-socialist-rent.html). Thus the Costa Hawkins repeal is significantly possible and the statewide average indicates that cities are highly likely to enact control because all renters are a united voting group and will want to be treated equally. Costa Hawkins was designed so that the newer tenants have no interest in rent control because it won’t protect them. If Costa Hawkins is repealed all renters in SFR, duplexes, triplexes, quadraplexes, condominiums that are leased or rent to own, and apartment tenants are treated the same. I remember Robin Williams when he said:
“In a routine mostly about current events, he imagined Lester Maddox, the ex-governor of Georgia, being asked to intervene with then-South-African Prime Minister PW Botha: “Mr Botha, there are three million whites and fourteen million blacks in your country. Does the name Custer mean anything to you?””
Given that many homeowners have friends, who the owners themselves know are being exploited in the market, one could almost be able to be assured that rent control will go critical mass if Costa Hawkins is repealed. I simply do not understand what alternate reality you choose to perceive. You also said:
“Who would vote in rent control on their own home? “
The answer is everyone, because it has no impact on them at all. It does help all of their loved ones both real and “extended” families because it makes it more fair to live in the City or State of California. You asked:
“What would that do to their “own” home values?”
Nothing, because rented homes are not in the market of owned homes. Only where the homes are owned not by a company but by one owner, and that owner has inflated the value of the home by using rent manipulation allowed under Costa Hawkins. Then you will see market corrections in that specific “market”. You also said:
“That would be like shooting yourself in the foot!”
Not necessarily, if the “values” of the home undergo a correction, they simply request a property tax reappraisal to reduce their property tax cost. And after that use that new value to access the HARP program to reduce the mortgage principle so that their mortgage prices will go down. Thus the cost savings alone might provide even higher operational income to them in the situation. However, it will cut into the inflated prices of real estate agents that still try to make money by manipulating “speculators” into buying overpriced properties. That is the real impact of what Costa Hawkins repeal and Rent Control threatens. You said:
“So these non-rent control cities can continue to progress and the real estate can continue to increase in value and be upgraded and new construction will flow to these emerald cities while the slums of places like Mountain View can deteriorate and house the poor and less fortunate.”
Just an observation, the “emerald” city is fictitious, in the reality we live in, there is no such thing. You remind me of how companies want to hire “unicorns” to miraculously make their business thrive. That also does not seem to work, just looks at this video (https://www.youtube.com/watch?v=kSTwGGPq8e4). You said:
“I want to own in the Emerald city baby!!”
Go ahead, you already do because it simply is fiction, so you already own it. You remind me of another saying regarding psychology:
“There’s an old saying in the profession: Neurotics build castles in the air while psychotics try to live in them.”
I am not saying you may have either of the two, but what I am simply asking is are you taking into account that what you “believe” is occurring in the state of California is based on reality? I do not claim exclusive knowledge, but you are going to have to provide some sound statistical proof of your claims.
Another quick note as well for Howard:
Have you ever thought of th political and economic interpretation of the Wizard of Oz” (https://en.wikipedia.org/wiki/Political_interpretations_of_The_Wonderful_Wizard_of_Oz)
The idea is quoted as being :
“The Political interpretations of The Wonderful Wizard of Oz include treatments of the modern fairy tale (written by L. Frank Baum and first published in 1900) as an allegory or metaphor for the political, economic, and social events of America in the 1890s. Scholars have examined four quite different versions of Oz: the novel of 1900,[1] the Broadway play of 1901,[2] the Hollywood film of 1939,[3] and the numerous follow-up Oz novels written after 1900 by Baum and others.[4]
The political interpretations focus on the first three, and emphasize the close relationship between the visual images and the story line to the political interests of the day. Biographers report that Baum had been a political activist in the 1890s with a special interest in the money question of gold and silver, and the illustrator William Wallace Denslow was a full-time editorial cartoonist for a major daily newspaper. For the 1901 Broadway production Baum inserted explicit references to prominent political characters such as President Theodore Roosevelt.
Monetary policy
In a 1964 article,[5] educator and historian Henry Littlefield outlined an allegory in the book of the late 19th-century debate regarding monetary policy. According to this view, for instance, the Yellow Brick Road represents the gold standard, and the silver slippers (ruby in the 1939 film version) represent the Silverite sixteen to one silver ratio (dancing down the road). THE CITY OF OZ EARNS ITS NAME FROM THE ABBREVIATION OF OUNCES “OZ” IN WHICH GOLD AND SILVER ARE MEASURED.
The thesis achieved considerable popular interest and elaboration by many scholars in history, economics and other fields,[6] but that thesis has been challenged.[7][8][9] Certainly the 1901 musical version of Oz written by Baum, was for an adult audience and had numerous explicit references to contemporary politics,[2] though in these references Baum seems just to have been “playing for laughs”.[10] The 1902 stage adaptation mentioned, by name, President Theodore Roosevelt and other political celebrities.[11] For example, the Tin Woodman wonders what he would do if he ran out of oil. “You wouldn’t be as badly off as John D. Rockefeller”, the Scarecrow responds, “He’d lose six thousand dollars a minute if that happened.”[2]
Littlefield’s knowledge of the 1890s was thin, and he made numerous errors, but since his article was published, scholars in history,[8] political science,[1] and economics[7] have asserted that the images and characters used by Baum closely resemble political images that were well known in the 1890s. Quentin Taylor, for example, claimed that many of the events and characters of the book resemble the actual political personalities, events and ideas of the 1890s.[11] Dorothy—naïve, young and simple—represents the American people. SHE IS EVERYMAN, LED ASTRAY AND SEEKING THE WAY BACK HOME.[11] MOREOVER, FOLLOWING THE ROAD OF GOLD LEADS EVENTUALLY ONLY TO THE EMERALD CITY, WHICH MAY SYMBOLIZE THE FRAUDULENT WORLD OF GREENBACK PAPER MONEY THAT ONLY PRETENDS TO HAVE VALUE.[11] IT IS RULED BY A SCHEMING POLITICIAN (THE WIZARD) WHO USES PUBLICITY DEVICES AND TRICKS TO FOOL THE PEOPLE (AND EVEN THE GOOD WITCHES) INTO BELIEVING HE IS BENEVOLENT, WISE, AND POWERFUL WHEN REALLY HE IS A SELFISH, EVIL HUMBUG. He sends Dorothy into severe danger hoping she will rid him of his enemy the Wicked Witch of the West. He is powerless and, as he admits to Dorothy, “I’m a very bad Wizard”.[12]”
And also consider this resource (https://en.wikipedia.org/wiki/Emerald_City)
“Located in the center of the Land of Oz, the Emerald City is the end of the famous yellow brick road, which starts in Munchkin Country. In the center of the Emerald City is the Royal Palace of Oz.
In the first book, The Wonderful Wizard of Oz (1900), the walls are green, but the city itself is not. HOWEVER, WHEN THEY ENTER, EVERYONE IN THE EMERALD CITY IS MADE TO WEAR GREEN-TINTED EYEGLASSES; THIS IS EXPLAINED AS AN EFFORT TO PROTECT THEIR EYES FROM THE “BRIGHTNESS AND GLORY” OF THE CITY, BUT IN EFFECT MAKES EVERYTHING APPEAR GREEN WHEN IT IS, IN FACT, “NO MORE GREEN THAN ANY OTHER CITY”. This is yet another “humbug” created by the Wizard.[1] In this book, the Wizard also describes the city as having been built for him within a few years after he arrived.[2] IT WAS HE WHO DECREED THAT EVERYONE IN THE EMERALD CITY MUST WEAR GREEN EYEGLASSES, SINCE THE FIRST THING HE NOTICED ABOUT OZ AFTER HE LANDED IN HIS HOT AIR BALLOON WAS HOW GREEN AND PLEASANT THE COUNTRY WAS.”
This almost describes the philosophy that you embrace regarding the issues of rent control in California. You want the right to dictate to the public they must wear their “Green Tinted Glasses” to perceive their reality. This in my opinion reminds me of George Orwell’s 1984, where the story demonstrates when the “state” dictates reality. I also pose that the “private interests” at this time is trying to do the very same thing along with the “state” regarding the current influence the “private” interests have on it. Measure V was an example of how to bypass that problem via the Ballot Initiatives. I am not wanting to dictate anything, I only say I want the people to make up their own mind.
OMG, what could I say to respond to that except,
“Pay no attention to that man behind the curtain.”
or
“Toto, I’ve a feeling we’re not in Kansas anymore.”‘
In response to Howard you said:
“”Pay no attention to that man behind the curtain.”
Umm, you do realize you are the “Wizard” in the City of Mountain View? You are the one that wants everyone to wear the “Green Tinted Glasses” How did the “Wizard” benefit from trying to disguise himself as the “Wise and Powerful Wizard of OZ”
You also said:
“Toto, I’ve a feeling we’re not in Kansas anymore.”‘
Why does this statement seem to reflect the Citizens of Mountain View and not landlords? I think you simply did not read the original book, you based your understanding of the “Emerald” city solely on the famous movie. In any case, you haven’t demonstrated any evidence yet regarding your comments. Please help us understand what evidentiary basis you have to claim that rent control is going to cause the “sky to fall” in Mountain View?
Should rent control advocates succeed in repealing Costa-Hawkins, there will be serious repercussions for single family home, condo, and multi-family rental building owners.
For rental units now under rent control, the first thing tenant advocates will push for, and win, is vacancy control — no more raising the rent to market when the unit is empty. Our existing base rent will be our base rent forever, with increases limited to the percentage dictated by the Rent Board. Since these percentages are not keyed to the rise in costs for owners, they’ll fall farther and farther behind market rate rents: less money for necessary repairs and maintenance — not to mention city imposed mandates, such as reducing seismic vulnerability. And return on invested capital will become negligible or negative, prompting many owners to exit the business while the Ellis Act is still in effect. Vacancy control will raise several questions: Who keeps records of what base rents are? How are the record-keepers paid? And who would decide who gets the unit at its permanently low rent if the renter dies? As the low-rent unit will have a financial value based on its difference from the going market rate, who collects the (probably illegal) payment from the eager tenant-to-be?
For rental units not now under rent control, their owners will be in for a number of unpleasant surprises. Rented single-family homes and condos, now exempt from rent control, will be limited to the Rent Board’s increases and will be unable to raise the rent to market rate when the renter leaves. Suppose an owner has to leave town for a year or two for business or personal reasons, and rents out his residence with the intention of moving back in when he returns. Not so fast: he has given the renter property rights, and in order to move back in, he’ll be required to give the renter notice for a number of months depending on the renter’s age and health, and to pay the renter a hefty relocation fee which increases with the number of occupants. If for any reason the owner then has to move out again and re-rent the unit within five years of the owner-move-in eviction, he must offer it back to the original renter at the old rent plus allowable annual increases; should the renter decline to return, the unit must still be offered at
a rent based on what it was at the time the owner first took possession of the unit.
For owners of rental properties constructed after 1995 (the year the Costa-Hawkins Act was passed), currently exempted from rent controls, its repeal will allow rent control advocates to place those units under rent control as well.
For individuals or corporations considering investing in building new rental units, the loss of protection from rent control for new construction will discourage investment in new units. Why would any investor put money into building new rental units with the probability of being forbidden to make a profit? This is precisely the reason buildings constructed after 1979 were exempted from the San Francisco Rent Ordinance when it was adopted in 1979, and buildings built since 1995 were exempted by Costa-Hawkins. This onus on new construction will also be exacerbated by the new GOP tax law. Since 1986, real estate developers have received a tax credit — amounting to about $9 billion a year — to invest in affordable housing. It has funded construction or rehabilitation of about 30% of the 20 million affordable units built to date. Developers transfer their credits to corporations in exchange for equity in the rental buildings, and the corporations use the credits against future taxes. However, with the business tax rate more than cut in half, the value of these tax credits to corporations is reduced. So will be their interest in funding affordable housing.
Predictable consequences of changes in rent control that would be made possible by the repeal of the Costa-Hawkins Act include the effects economists have identified in the past from rent control — reduction of the number of rental units available and deterioration of their quality. The value of units under vacancy control will decrease as will their sale price. It is also a sure thing that people will find ways to convert existing rental units into something more economically productive, or to evade the provisions of the law.
No legislation can persuade people with money to invest in money-losing enterprises, or persuade property owners to keep putting money into a building that is operating at a loss. The only way to change the current situation of very high rents in Mountain View is to build more units. To make that happen, we must make it less burdensome to get the necessary permits, and have rent legislation that persuades investors that they can cover their costs and make a reasonable profit, rather than frightening them away.
I response to The Successful Business Man I want to make some observations:
First, I still find your observation very accurate and I cannot disagree with them. But you ended with this paragraph:
“No legislation can persuade people with money to invest in money-losing enterprises, or persuade property owners to keep putting money into a building that is operating at a loss. The only way to change the current situation of very high rents in Mountain View is to build more units. To make that happen, we must make it less burdensome to get the necessary permits, and have rent legislation that persuades investors that they can cover their costs and make a reasonable profit, rather than frightening them away.”
The problem in the flawed free market was that the suppliers dictated what the rate of a “reasonable profit” is. When the Costa Hawkins and Ellis Acts in effect allowed the suppliers to dictate the terms of the market, the industry became less competitive and relied on the customers to make up for poor business decisions.
In effect, the “reasonable profits” became the rate of rent increases. What the current environment is showing is that the reversal of the Costa Hawkins and Ellis Acts will do is restore the consumer market forces balance. This will impact the market by reestablishing the “realistic profits” that the market would have enforced if it weren’t for Costa Hawkins and Ellis Acts interference of the efficiency of the market to establish correct market values, and realistic profit margins.
These laws in effect created a “duty” to the “public” to provide unrealistic profit margins to investors. When these laws are killed, investors will not go away. Only those unable to compete because of their lack of business skill will leave. The fact is there will always be investors, just not ones that cannot succeed with healthy competition without being bailed out of bad management by forcing the customers to bear the cost.
Remember that Alan Greenspan was the champion of Moral Hazard (https://en.wikipedia.org/wiki/Moral_hazard) which is defined as:
In economics, moral hazard occurs when someone increases their exposure to risk when insured. This can happen, for example, WHEN A PERSON TAKES MORE RISKS BECAUSE SOMEONE ELSE BEARS THE COST OF THOSE RISKS. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.
A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party isolated from risk behaves differently from how it would if it were fully exposed to the risk.
Moral hazard can occur under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk. MORE BROADLY, MORAL HAZARD CAN OCCUR WHEN THE PARTY WITH MORE INFORMATION ABOUT ITS ACTIONS OR INTENTIONS HAS A TENDENCY OR INCENTIVE TO BEHAVE INAPPROPRIATELY FROM THE PERSPECTIVE OF THE PARTY WITH LESS INFORMATION.
Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.”
Costa Hawkins and Ellis Acts are means to increase poor judgment and detrimental business decisions by removing all accountability for the consequences of the poor management of the housing industry. A realistic business man will admit this and work to recalibrate the “reasonable profit” expectation to the “realistic profit” expectation right now.
Businessman,
You cannot control the profits of one market and leave all others unchecked without serious consequences to that controlled market. Investors will move to other markets whether its real estate outside rent control cities or into other investments to regain the freedom of the market.
Profits drive markets and the ones with the higher profits when taking risk factors into consideration will always be where the investors want to be and move to.
I think you feel there needs to be a major market correction in real estate and the real estate investors needs to just suck up to it. Well that may well be but that means every other investment like stocks or gold or commodities need to correct proportionately so that investors stay in real estate. Nobody’s going to build a rental unit that sells for $200/foot(because thats what its worth under rent control) when it costs $400/foot to build it.
Controlling profits on all markets ain’t happening because we have to much debt in this country that needs to get paid somehow and smacking down the entire economy would put this country into a tailspin to bankruptcy of our own government.
Investors go where profits are and profits drive investment money, it’s that simple but good luck with “they make too much profit” so we need to control them analogy.
Your not a real estate investor and you have no idea of what profit is necessary to get one to invest in real estate.
In response to Howard you said:
“You cannot control the profits of one market and leave all others unchecked without serious consequences to that controlled market. Investors will move to other markets whether its real estate outside rent control cities or into other investments to regain the freedom of the market.”
However, if you have been noticing the “Dow Jones” has been trending down for months. And those are the “best picked” stocks to reflect the market. And if the interest rates are pushed further down, those housing markets will be better because the “less cost” of production. By the way Mad Money just stated that the housing market is a “bear” market anyway, rent control has nothing to do with it. You said:
“Profits drive markets and the ones with the higher profits when taking risk factors into consideration will always be where the investors want to be and move to.”
Yes, that is why for a significant period of time as profits go down because they were not based on performance, but legal and accounting trickery regarding inflating markets. You said:
“I think you feel there needs to be a major market correction in real estate and the real estate investors needs to just suck up to it. Well that may well be but that means every other investment like stocks or gold or commodities need to correct proportionately so that investors stay in real estate. Nobody’s going to build a rental unit that sells for $200/foot(because thats what its worth under rent control) when it costs $400/foot to build it.”
What evidence are you providing that justifies the “$400/foot” cost standard. What if it turns out that 50% of that cost is simply a profit margin, and not actual costs? Is it reasonable for the market to expect a 50% profit margin? You cannot simply pull out these numbers out of a hat without providing the cost breakdown to establish if it is an actual cost or and inflated and unrealistic expectation. You said:
“Controlling profits on all markets ain’t happening because we have [to] (sic) much debt in this country that needs to get paid somehow and smacking down the entire economy would put this country into a tailspin to bankruptcy of our own government. “
The band already played the song, given that we already have a $21 trillion dollar debt (http://www.usdebtclock.org/). There is about $144 trillion in total national assets in the country. But there are $113 trillion in unfunded liabilities. Now, if you want to accounting wise reconcile the national assets by the combined unfunded liabilities and the debt. So you have $144 trillion subtracted by ($113 trillion unfunded liabilities and the $21 trillion debt) you wind up $10 trillion of actual wealth in the economic activity.
Now given that is the Total value of the American Market is quoted by this article of (https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/zillow/2018/01/03/total-value-of-all-u-s-homes-31-8-trillion/&refURL=https://www.google.com/&referrer=https://www.google.com/) is 31.8 trillion. Then how can the real national economic value of the U.S. be only one third the housing value? That cannot be correct as a market value. Thus one could argue that the “market” value claims by the market itself is simply unrealistic at best, or can be claimed worse.
It really can be said that the current information indicates a radically unrealistic expectation of housing values, because most of them are “unfunded”. The debt of the property should be subtracted on the “market” price to establish real value. But the real estate market simply doesn’t use any formula that takes that into account in the majority. Please reconsider this information in your future comments? You said:
“Investors go where profits are and profits drive investment money, it’s that simple but good luck with “they make too much profit” so we need to control them analogy.”
If you look at the data I just presented, the “profits” you discuss cannot be realistic, but a value that has been established by only “faith” in the market, and not really based on the real values. Please address that fact before continuing your argument. Don’t get me wrong, all markets are probably due a significant correction. You said:
“Your not a real estate investor and you have no idea of what profit is necessary to get one to invest in real estate.”
Given the information I I know from above, why would I invest in real estate when I can see that the prices people are paying are irrational and will eventually caus another significant economic collapse. Yes, those of you are in effect grabbing what cash you can prior to another significant market change. If you were to take self corrective actions now, I would consider it.aboove
Businessman,
So your answer is that everything is over inflated and needs a major correction???
Do you understand the basic structure of our Country and human nature and that we are driven by debt?
Let me ask you a question…
On a broad scale, if man had no debt, would he get out of bed in the morning and go to work or lay back until he was broke and needed to work to survive?
It is human nature to be lazy and only when necessitated, does man excell.. This is human nature and cannot be changed.
Our most prosperous and productive times were driven by war and the need to survive? The thought of death and destruction is what makes us work to live.
Without fear, we are nothing and would be consumed by ourselves and only when man or nature tests us do we triumph!!
Debt is fear, debt is scary, debt is good! We need it to be productive and our markets run on it.
In response to Posted by Howard you said:
“So your answer is that everything is over inflated and needs a major correction???”
My answer is simply YES. You said:
“Do you understand the basic structure of our Country and human nature and that we are driven by debt?”
My answer is NO IT IS NOT. You choose to go into debt, it is not forced upon you. If you want to increase your current cash holdings, you choose to either earn the money or arrange debt. You said:
“On a broad scale, if man had no debt, would he get out of bed in the morning and go to work or lay back until he was broke and needed to work to survive?”
The answer is YES he would, survival instincts do not require a debt, they require looking forward regarding consequences of your actions, or lanning for problems in the future. Remember the story of (https://en.wikipedia.org/wiki/The_Ant_and_the_Grasshopper) the Ant and the Grasshopper. You said:
“It is human nature to be lazy and only when necessitated, does man excell.. This is human nature and cannot be changed. “
That is your opinion, but you forget that other motivations can be much more powerful, like protecting loved ones, and the rewards of diligence. So you cannot assume that it is human nature to be “lazy”. You said:
“Our most prosperous and productive times were driven by war and the need to survive? The thought of death and destruction is what makes us work to live.”
True, but all wars were funded by sacrifice during them up to after Vietnam. After then, the cost of survival was simply passed on to those who did not start the war, fought the war, or either won or lost the war. This is a new concept that really exploded after 9/11. You also said:
“Without fear, we are nothing and would be consumed by ourselves and only when man or nature tests us do we triumph!!”
Fear is the ultimate enemy. FDR said it best, you have nothing to fear except fear itself. You conquer fear with knowledge and compassion, not violence and destruction. You also said:
“Debt is fear, debt is scary, debt is good!”
You are introducing a new Orwellian concept “debt is wealth”
Debt, or “leveraging costs” simply in business is a risk multiplier, the more proportion of debt to your wealth, the higher the risk. But there is a simple problem with that factor, that risk cannot increase ROI.
ROI is determined by consumer choice, NOT DEBT. So when you increase your “leverage” it is like increasing the chips in a poker game, but in this game the consumer determines the amount of payout if you win the hand.
Thus you can bet say 100 in chips, and loss the 100 chips, or you can win the hand and the market viability determines that you only get 1.25 times the money you put in the pot. The rest simply vanishes, or gets redistributed amongst the losers in accordance of the strength of the hand.
Now if you read my research, that the national wealth is $10 trillion dollars (the whole nation) and that real estate claims to be worth $38 trillion. Then at least $28 trillion are in the pot of the poker game, but the payout excluding all other factors in the total national wealth is only $10 trillion dollars.
The wealth ratio can be calculated as $10 trillion/ (38 trillion – $10 trillion which results in 36%. The market only rewards 36% of the cost. However if that leverage real estate values are reduced to say $20 trillion, then the formula would equate to $10 trillion / ($20 trillion – $10 Trillion) then you could achieve a 100% reward. This situation is controlled by expert investment, management, and market satisfaction. That is in the hands of the supplier to control, but the supplier cannot expect the consumer to bear the burdens of poor decisions. You said:
“We need it to be productive and our markets run on it.”
Leveraging is a serious business practice, and overuse will not be “productive” in fact, it damages productivity. And I am sure you know it.
Sorry, not buying it. Our Country has operated on this concept of debt for the last 100+ years and will continue to do so. Debt will always exist and is a powerful tool that will be controlled by inflation. If you think the consumer drives the economy, you’re a fool. The top 1 percent of households own more wealth than the bottom 90 percent or 40% of the wealth in this Country and built that from debt based investments.
Money drives the economy and the wealthiest 2% which own the majority of the wealth will always be on top because they know how to control wealth and debt. The other 98% will need them because they have no idea how to build wealth.
Howard, thank you for continuing to post here. I don’t think anyone here could do a better job of making the tenants’ case than you do, straight from the horse’s…mouth.
In response to Howard you said:
“The top 1 percent of households own more wealth than the bottom 90 percent or 40% of the wealth in this Country and built that from debt based investments.”
A yes, you remind me of the ENRON model where Enron used accounting trickery to claim that their “purchases” via “mark to market” accounting were not expenses but income. Where did that lead the investors of Enron and their employees? It appears that that serious lesson got lost in just the short period of 20 years. Let me explain(https://en.wikipedia.org/wiki/Enron) :
Main article: Enron scandal
In 1990, Enron’s Chief Operating Officer Jeffrey Skilling hired Andrew Fastow, who was well acquainted with the burgeoning deregulated energy market that Skilling wanted to exploit.[citation needed] In 1993, Fastow began establishing numerous limited liability special purpose entities (a common business practice in the energy industry); however, it also allowed Enron to transfer liability so that it would not appear in its accounts, allowing it to maintain a robust and generally increasing stock price and thus keeping its critical investment grade credit ratings.[citation needed]
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As was later discovered, many of Enron’s recorded assets and profits were inflated or even wholly fraudulent and nonexistent. ONE EXAMPLE OF FRAUDULENT RECORDS WAS DURING 1999 WHEN ENRON PROMISED TO REPAY MERRILL LYNCH & CO.’S INVESTMENT WITH INTEREST IN ORDER TO SHOW A PROFIT ON ITS BOOKS. Debts and losses were put into entities formed “offshore” that were not included in the company’s financial statements, and other sophisticated and arcane financial transactions between Enron and related companies were used to eliminate unprofitable entities from the company’s books.[citation needed]
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2001 Accounting scandals
DURING 2001, AFTER A SERIES OF REVELATIONS INVOLVING IRREGULAR ACCOUNTING PROCEDURES BORDERING ON FRAUD PERPETRATED THROUGHOUT THE 1990S INVOLVING ENRON AND ITS ACCOUNTING COMPANY ARTHUR ANDERSEN, ENRON SUFFERED THE LARGEST CHAPTER 11 BANKRUPTCY IN HISTORY (SINCE SURPASSED BY THOSE OF WORLDCOM DURING 2002 AND LEHMAN BROTHERS DURING 2008).
Stock Price of Enron from August 2000 to January 2002
As the scandal progressed, Enron share prices decreased from US $90.56 during the summer of 2000, to just pennies.[29] Enron had been considered a blue chip stock investment, so this was an unprecedented event in the financial world. ENRON’S DEMISE OCCURRED AFTER THE REVELATION THAT MUCH OF ITS PROFITS AND REVENUE WERE THE RESULT OF DEALS WITH SPECIAL PURPOSE ENTITIES (LIMITED PARTNERSHIPS WHICH IT CONTROLLED). THIS MEANT THAT MANY OF ENRON’S DEBTS AND THE LOSSES THAT IT SUFFERED WERE NOT REPORTED IN ITS FINANCIAL STATEMENTS.[citation needed]
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Accounting practices
Enron used a variety of deceptive, bewildering, and fraudulent accounting practices and tactics to cover its fraud in reporting Enron’s financial information. Special Purpose Entities were created to mask significant liabilities from Enron’s financial statements. These entities made Enron seem more profitable than it actually was, and created a dangerous spiral in which, each quarter, corporate officers would HAVE TO PERFORM MORE AND MORE FINANCIAL DECEPTION TO CREATE THE ILLUSION OF BILLIONS OF DOLLARS IN PROFIT WHILE THE COMPANY WAS ACTUALLY LOSING MONEY.[31] This practice increased their stock price to new levels, at which point the executives began to work on insider information and trade millions of dollars’ worth of Enron stock. THE EXECUTIVES AND INSIDERS AT ENRON KNEW ABOUT THE OFFSHORE ACCOUNTS THAT WERE HIDING LOSSES FOR THE COMPANY; THE INVESTORS, HOWEVER, DID NOT. Chief Financial Officer Andrew Fastow directed the team which created the off-books companies, and manipulated the deals to provide himself, his family, and his friends with hundreds of millions of dollars in guaranteed revenue, at the expense of the corporation for which he worked and its stockholders.[citation needed]
Arthur Andersen Witnesses
During 1999, Enron initiated EnronOnline, an Internet-based trading operation, which was used by virtually every energy company in the United States. Enron president and chief operating officer Jeffrey Skilling began advocating a novel idea: the company didn’t really need any “assets”.[citation needed] By promoting the company’s aggressive investment strategy, he helped make Enron the biggest wholesaler of gas and electricity, trading over $27 billion per quarter. The corporation’s financial claims, however, had to be accepted at face value. UNDER SKILLING, ENRON ADOPTED MARK TO MARKET ACCOUNTING, IN WHICH ANTICIPATED FUTURE PROFITS FROM ANY DEAL WERE TABULATED AS IF CURRENTLY REAL. Thus, Enron could record gains from what over time might turn out to be losses, as the company’s fiscal health became secondary to manipulating its stock price on Wall Street during the so-called Tech boom.”
Simply put, those who have debt based investments have no wealth, and it will eventually cause their own downfall as it did with Enron.