Markets always clear
As a certified graduate of the Yogi Berra School of Economics …
“You can observe a lot just by watching.”
… I’ve learned, through brutal contact with reality, the truth of a maxim, a corollary to the Law of Economic Gravity that continually escapes housing policymakers:
Markets always clear
In trade parlance, to ‘clear’ means that an account settles — a buyer and a seller find one another, and a commodity changes hands in exchange for money. In essence, ‘markets always clear’ means that whenever one person holds something of little value to herself but greater value to another, she will find a way to find her buyer, and a transaction will occur.
Now this is an extraordinarily powerful principle, because of its contrapositive:
Regulation to block market clearance always fails
… usually with unintended and undesirable consequences
In housing terms, if you give a customer group housing-benefits substantially above their intrinsic worth to those customers, they will trade out of their position.
Don’t believe me? Follow the bouncing ball in this tale of tenant protection gone awry in
Under D.C. law, tenants have the right to match any offer on their building or, as is most often the case, assign it to a developer for a price. When the market turned its forces on their building early last year, the teachers, college students and day laborers at 1020
Opening the Metro green line significantly improved the neighborhood
Their task? To hold their own in a hyper-competitive market that tempts them with quick cash and puts them in the same room with real estate professionals eager to seal the next deal.
Though the law is designed to protect affordability by allowing residents to buy their homes, presumably for ongoing affordable rents, because (repeat after me) markets always clear, in practice this quickly represented a wealth transfer payment to those people lucky enough to be in a building economically viable for conversion:
As soon as the D.C. law governing apartment sales and conversions was instituted in 1980, renters began trading those rights for cash and other incentives, a practice that continues today but is largely unnoticed by those not directly affected.
So it didn’t preserve affordability, instead it raised the cost of conversion and probably depressed values of the properties being converted.
It gets better.
The tool is being used not for resident protection but for the urban sport of developer shakedown:
Many who write the checks aren’t happy, either. Owners of multiple apartment buildings, in particular, are complaining that a law intended to protect affordable housing has been hijacked by tenants who stall legitimate sales. Because the agreements are private, they fall outside the purview of city regulators that monitor rental housing.
This result isn’t what government wanted:
Recently, the trade in these government-granted rights has drawn attention from city officials and residents who contend that the rush for quick cash is making it more difficult for low wage-earners to remain in the city.
Setting asides the confused-causality revealed by that quote, the market clearance moves at speeds much faster than government can observe, much less regulate:
“By the time we know anything, the land owner has made the tenants an offer they can’t refuse,” said James Aldridge, an administrator at the D.C. Department of Consumer and Regulatory Affairs. “It’s becoming so sophisticated that tenants associations will approach the owner to get the best deal they can.”
Even though markets clear, at what price do they clear? When there is an information or money imbalance (developers have both, residents have neither), the price is often discouragingly low:
One of them is Amanda DeLeon, a 68-year-old grandmother who moved to the
So Ms. DeLeon captured $13,000 up front in exchange for paying $514 more a month thereafter, a payback of little more than two years. A protection intended to keep the apartment affordable indefinitely (say, thirty years) actually clears at only two years, 1/15th as much as it should.
Creating an in-kind benefit that can clear and bestowing on those who cannot effectively use or value it means it will clear at low price, high entropy. This is terribly cost-ineffective.
Moreover, since it has become established that markets always clear, developers of varying ethicality may use other tactics to drive down the market-clearance price:
But in such gentrifying communities as
“In some way or another, they want to get rid of the tenants so they can get more money for the unit,” Hogan said.
The pressure to move apartments when the opportunity is right actually may accelerate the rate of conversion:
Almost everyone agrees that the competition to win over tenant associations with offers of cash — an enticing lure for those living month to month — doesn’t help.
Demand for units in the price range of people working at or near minimum wage outstrips availability by 2 to 1, even though about 20,000 units of affordable housing have been built or preserved since 1999, said Milton J. Bailey, executive director of the D.C. Housing Finance Agency. The steep cost of land makes preservation difficult, he said.
More than likely, in fact, the monetizable cost is driving up the aggregate cost to develop a market apartment, which means it is widening the affordability gap.
If there is an information/ power imbalance, government and well-meaning folk may intervene to strength the weaker hand:
A cottage industry of lawyers and pro-bono advocates has formed to help tenants. Even so, advocates for the poor said renters who have little education often end up with nothing or are intimidated into accepting small sums that are depleted quickly by higher rents elsewhere. [As we have just seen with Ms. DeLeon's two-year swap. -- Ed.]
Once again, the interests of the theoretical customer (the affordable housing community) are at odds with the actual customer (the sitting tenant):
“There’s no question the city is losing low-income housing,” said Eric Rome, a tenant attorney for two decades, who said that personal interest typically trumps the public good.
“The question is, would you rather take fifteen, twenty or thirty thousand dollars or end up with nothing,” he said. “I might politically or socially believe in retaining affordable housing. But my only job is to maximize the interest of the client, and that often is not in harmony with preserving affordable housing.”
So there we are. A law that seeks to prevent markets from clearing has the effects of:
- Quite possibly accelerating the very thing it fears (loss of affordable rental supply)
- Converting a resident protection into a monetizable right that swiftly clears
- Probably at a low fraction of its ‘theoretical’ value (highly cost-ineffective)
- Motivates the agent-in-place (resident) to clear it rather than consume it
- Obligates, at least in practical effect, the public-interest defender to help it clear
- Leaves administrative government bewildered, powerless to stop it, and far behind the curve
- Adds cost to development, further exacerbating the cost-value gap and making new affordable housing harder and more expensive to develop
If markets always clear, how can we possibly provide market-quality housing to people who cannot afford to pay market price? Does this dismal truth spell doom for long-term housing affordability?
Not quite. But it does mean, among other things, that:
Affordable housing costs money
There are no statutory shortcuts to achieving it.
In future posts, I’ll explain why.
