Monday, May 4, 2020

Who Should Pay the Rent During a Pandemic?

By Christian Britschgi - May 04, 2020 at 02:15PM

May's rent is due, and many are refusing to pay.

Across the country, tenants are staging rent strikes to protest what they feel is an unfair obligation to pay rent at a time when so many have been put out of work by the COVID-19 outbreak and related economic shutdowns.

Take the Tivoli Gardens building in Northwest D.C. One rent strike organizer there, the Washington City Paper reports, is a restaurant owner whose business has been shuttered during the pandemic. That obviously makes paying bills difficult.

On the other side of the dispute is the building's owner, the Morris and Gwendolyn Cafritz Foundation. The foundation uses the income it gets from Tivoli Gardens and other rental properties to fund grants to local charities, including a number of housing aid groups who will no doubt see their resources strained by the current crisis.

Perhaps it's incumbent on a well-endowed charitable foundation to give its tenants a break during these tough economic times. Perhaps it's incumbent on tenants who can afford to pay rent to a charity to do so.

It's one complicated situation among many in a country that was already suffering from a housing affordability crunch before the pandemic. The COVID-19 outbreak has raised difficult questions about how to keep everyone housed during a public health emergency, and who should have to pay to make that happen.

No one denies the scale of the problem. Nearly a third of the country's renters didn't pay their full rent on time in April (although 92 percent paid at least some of it eventually). The situation in May is expected to be worse, as government relief starts to ebb and jobless numbers keep climbing. Some 30 million people have applied for unemployment benefits since March.

The dire economic situation has sparked protests and rent strikes. The hope among activists is to convince city councils, state legislatures, and ultimately Congress to cancel rents nationwide for the duration of the crisis.

Close to 200,000 people have pledged not to pay their rent in May, according to a national rent strike campaign being organized by a coalition of advocacy groups. Media outlets from CityLab to Vice to The New York Times to The Wall Street Journal are full of stories about tenants who either can't or won't pay their rent.

These stories inevitably contrast unpayable rent with other pressing bills.

"Medication is important to me. Food is important. Rent is important….I just do the math. There is no way I can pay rent," one tenant told The Atlantic. "I have to choose between paying rent or buying food for my family," another told Vice. Gen described one rent strike organizer as having "little in savings, and what she does have she needs for necessities like food or her health [care] premium."

Normally when you don't pay your rent, you get evicted. But the pandemic has prompted many cities and most states to suspend evictions and foreclosures. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress in late March, also suspends evictions and foreclosures at properties that have a federally backed mortgage.

There's a public health rationale to these moratoriums: It's hard for people to shelter in place when they're being kicked out of their shelter. But there's also a simple matter of opportunity.

"If you said, let's go loot grocery stores, they shouldn't make us pay for food in a crisis, you could loot the grocery store once, but they wouldn't restock the shelves for you," says Salim Furth, a researcher at George Mason University's Mercatus Center. Landlords, by contrast, would "have a lot of trouble withdrawing their building from circulation, and for no real benefit."

That has given activists and like-minded lawmakers an opening to push for more radical policies.

In late March, a group of state senators in New York introduced legislation that would cancel rents for tenants who have lost income because of the coronavirus. Property owners who lose income because of the legislation could in turn have some of their mortgage debt forgiven.

City councils from Seattle to Minneapolis have passed resolutions demanding that state and federal officials enact rent and mortgage forgiveness.

Rep. Ilhan Omar (D–Minn.) introduced a bill in April that would cancel rents and mortgages for everyone nationwide for the duration of the national emergency that President Donald Trump declared on March 13. Property owners and lenders could apply for government support to cover their lost income. Given the stringent conditions Omar's bill would place on these relief funds—for example, landlords would have to give tenants a 10 percent equity stake in their buildings—it's difficult to imagine many people accessing them.

For a lot of rent strike organizers, the movement to cancel rent is an ideological one.

For more moderate proponents of rent cancelation, the idea is to forestall a housing crisis once the immediate shutdown passes. Eviction moratoriums allow tenants to stay in their homes, even if they've failed to pay their rent. What they don't do is relieve the obligation to pay rent or mortgage bills.

"Both property owners and renters are going to be vulnerable to foreclosure and eviction respectively after the crisis is over. They're not going to have enough money to pay missed payments that've accumulated during the pandemic," says Maryland Del. Vaughn Stewart (D–Montgomery County).

Last week, Stewart was one of some 40 state lawmakers to sign onto a letter to Maryland's Republican governor, Larry Hogan, asking him to waive rent and mortgage payments.

The most common criticism of rent forgiveness policies is that they just shift those housing costs onto landlords—or, if they're coupled with mortgage forgiveness, onto banks.

Stewart is pretty candid in acknowledging this.

"The libertarian critique of this idea, that you're not really solving the problem, you're just taking the problem and shifting the burden onto a different actor along the housing supply chain, I actually think that's right," he tells Reason, agreeing that rent and mortgage forgiveness will ultimately end up being eaten by lenders who could suffer liquidity problems.

But that's preferable to leaving renters to their own devices, he argues, given that financial institutions are in a good position to get federal bailouts.

"A poor renter in my district who has lost their job and is now delivering groceries for Instacart, they are going to be worse at lobbying Congress for a bailout than Bank of America," says Stewart. "As a result, we should put the burden on the party most likely to have their voice heard on Capitol Hill."

Mortgage forgiveness would only go part of the way toward compensating landlords for lost rental income. They'd still be on the hook for property taxes, maintenance costs, and, in many cases, utilities.

Bloomberg columnist Noah Smith has argued that that's ultimately OK, given that landlords have earned outsized returns on their properties compared to the risks they've taken on. "Letting landlords take a hit from coronavirus, as long as it doesn't hurt banks, could therefore be the optimal policy," he writes in a recent column. "It would represent a rare loss for a class of wealthy people who are used to not taking losses."

Smith acknowledges that if "property companies fail, banks that lend to these companies will have to write off billions of dollars in loans." But "the government could avert this by bailing out the banks and letting property companies simply fold," he writes.

There's a cold practical logic to shifting the nation's housing costs onto banks in expectation of bailouts, says Furth.

"There's this idea, not unfounded, that the federal government will pay for anything" right now, he says. "We're running a really interesting experiment. If the money really is free and the world will pay us for the privilege of borrowing our money, yeah, why not print a few billion dollars?"

But that's risky, he says. If interest rates go up and budget constraints turn out to be real, then the government could find itself in a position of not having enough money to pay for all the obligations it's taken on. The coronavirus crisis could easily morph into a fiscal and financial crisis.

One alternative to rent cancelation would be increasing federal housing assistance. This would allow distressed renters to pay their bills while not depriving landlords or banks of expected income. The National Low Income Housing Coalition has called for Congress to pass a $100 billion package along those lines. This could do a better job of getting help to the people who are in most need right now, without the government making decisions about which contractual obligations should still apply or which interest groups should be made to bear which costs.

Stewart thinks government payments to renters would be the optimal policy, but he thinks it would have to be enacted by the federal government given the fiscal hit states have taken during the pandemic.

Unfortunately, this leads to one of the same problems as rent cancelation paired with bank bailouts: If budget constraints matter at all, then the feds are in no position to take on $100 billion in new spending right after passing a $2.3 trillion relief bill.

Even if no policies are passed at all, Furth argues, landlords have a strong incentive to work out deals with tenants affected by the pandemic.

"If I were landlord right now, I would not be so stupid as to go and evict formerly good tenants who suddenly lost their jobs. There's a very good chance that those people will have their incomes come back," he says. "There's also a very good chance that the economy is going to be weak coming out of this. And if I'm a landlord, a vacancy is my nightmare."

Fears that the post-crisis lifting of eviction moratoriums will result in waves of mass evictions are overblown, he says.

Already, many landlords have shown a willingness to work out deals with tenants. Some have said they'd cancel rent at their properties altogether. Others have offered rent reductions. In a survey conducted by the American Apartment Owners Association, 80 percent of landlords said they'd be willing to offer tenants rent forbearance.

State associations representing landlord are advising their members not to raise rent right now, and to work out payment plans with tenants.

Stewart says that leaving it to private parties to work out arrangements might work for folks with the resources and financial savvy to negotiate with their landlords. But a lot of poorer renters aren't in a position to bargain, or will be dealing with more unscrupulous landlords.

"Any strategy that relies on all parties being financially sophisticated and acting in good faith is doomed to fail given the size of the crisis," he says.

It's true some landlords won't be interested in cutting deals with tenants. Pursuing a policy of keeping everyone in their homes will nevertheless come at a huge fiscal cost—whether that money ends up going directly to renters or indirectly to banks—and will end up giving breaks not just to renters who are suffering but to renters who haven't seen a loss of income.

The ultimate solution to the current housing crunch will be the return of economic activity. Once people are going back to work and paychecks are flowing as usual, the need for emergency measures will slowly disappear.

Housing costs will remain an issue, as they were before the pandemic. That's something for city councils and state legislatures to return to working on, hopefully by repealing government restrictions on building new units.


from Reason Magazine Articles
via IFTTT