Home Perspectives Realty Views: Be Careful What You Wish For In Housing Solutions

Realty Views: Be Careful What You Wish For In Housing Solutions

Almost everyone agrees that California has an affordability problem when it comes to housing – but what they don’t agree on is the method to fix the situation. Some real battles have occurred and continue to rage about how to remedy the problem.

The current battle is over who is going to take the lead in local communities – the state or local government. Leaders in Sacramento want to mandate that all cities do their share and provide affordable housing as part of their land-planning. But some cities – especially those in coastal areas where rents and prices have risen the most – are getting blow-back from their citizens who are telling their elected officials that they don’t want to see lower-income housing among their higher-priced homes because it will harm the neighborhood. The old NIMBY (Not In My Back Yard) argument is putting local elected politicians in direct conflict with policy in Sacramento.

Currently, the rent control solution has once again come to the forefront in California as protestors are staging demonstrations to force price controls on landlords. Rent control sounds like an easy solution to the affordability problem, but if what has happened in a very similar situation on the other side of the country is any indication, it could lead to some very serious and unintended consequences that will cause a host of problems.

New York is much like California in that is has one of the largest populations in the country. It has very desirable and expensive real estate, and an affordability problem as bad or worse than we have in California. New York’s rent reforms that are about to go into effect have already had a decided impact on lenders and banks, as three institutions have already reported a combined loss of $2.5 billion in market capitalization just since this spring, when the debate over rent control began to look bad for multi-family owners.

“These stocks have really been hammered . . . in the last month and a half,” Peter Winter, a stock analyst who covers New York Community Bank and Signature for Wedbush Securities, recently told “The Real Deal,” a real estate news service. “[Rent regulation] has been a large part of it, no question.”

Many observers believe there will be fewer refi and purchase transactions for these lenders, not to mention the impact on the multi-family owners themselves who will suffer economically from the controls. Some have noted that lenders who issue large loans with the belief that rents would be going up under the old laws would in fact default under the new rent control regulations, which could depress bank stocks even further. While many believe that the value of these units will decline, others point to the fact that these regulations will also lead to owners not spending the money to upgrade older units because there is no financial incentive to do so.

“The feeling is that you could see less refi activity and less loan demand just because the ability to increase the rent rolls of these buildings really has been hampered,” Winter added.

According to JLL, a national real estate investment company, the new proposals will likely drive prices down by reducing the incentives for multifamily investors to buy rent-controlled buildings in the first place.

“Nobody buys real estate wanting to get a three percent return on your money, but you’re willing to do that on multi-family because you knew over time you’d be able to improve the quality of the building, increase the rents, and get your return level,” said JLL’s Robert Knakal, adding that the state’s proposals “reduce the incentives for the private sector to invest in properties.”

Just think, what if one of the proponents of this new legislation had stock in, or their 401K was invested in, one of the lending institutions or large owners of rental real estate that has its value diminished by these regulations? How ironic would that be?

This has and will continue to happen in New York, and could happen here very easily if legislators tried the same tactic.  That’s why it is essential that sound free market solutions be found to address the housing issues on our side of the country.

Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at terryross1@cs.com or call (949) 457-4922.

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