The Rent Bubble: Coming to a Neighborhood Near You

Among the lesser-reported impacts of the Great Recession, during which time millions of Americans lost their homes to foreclosure, is the continuing surge in rental housing demand. Demand has inflated rental rates in already costly markets throughout the country. But rental price inflation is not just a problem hitting high cost of living regions in California and New York — it has hit 90 cities nationwide with no end in sight. Rental costs between 2011 and 2012, alone, increased 4 percent nationally, whereas rents in some markets during a broader period — between 2000 and 2012 — have inflated nearly 25 percent, a study by the Joint Center for Housing Studies of Harvard University reports.

High demand and short supply means one thing: higher prices. But housing isn’t merely a luxury people can forgo. Increased demand for rental housing post recession does not merely reflect the fact that mortgage lending standards are more stringent, but the reality that many Americans are still attempting to rebound from a downwardly mobile spiral. Just because rents are rising doesn’t mean renters are in a position to absorb the price hikes. To the extent rental property demand is an outgrowth of the economic meltdown and stagnant wages — in spite of job growth in more recent years — it would appear housing reform is a topic seriously overdue for national attention.

The Shape of Crisis to Come

Today’s landlord isn’t simply a kindly gray-haired lady looking to rent out a room or an apartment. Housing inflation is driven more so by investors who hold millions of dollars of assets within a given community, if not nationwide. If large-scale property owners could be compelled by state or federal legislation to peg year-to-year rent increases to some combination of inflation and the prevailing median annual incomes of community members occupying similar housing, it might be possible to boost economic gains in other segments of the economy.

Nationally, support for raising minimum wage has gathered momentum. But what if we’re having the wrong conversation? Raising the minimum wage, when inflation is purportedly stable and interest rates remain at record lows, is nonsensical — unless one considers a leading reason why minimum wage earners are sorely in need of a pay increase in the first place: to keep a roof over their heads. Talk of increasing minimum wage is controversial, in part, because critics fear increased labor costs may slow job growth or push consumer prices higher, nullifying any initial advantage raising the minimum wage may impart.

Slapping a bandage on a hemorrhage begs the question: Why not tackle the problem at its core — housing inflation? In the wake of the housing bubble bust, the Harvard study released in June 2014 finds that an unprecedented number of renters in major markets from Miami to Los Angeles are allocating in excess of 30 percent of their monthly pay toward rent, with rents at a 30-year high a Zillow report concludes. And it’s not just young adults who comprise the ranks of the rental class, either. Increasingly, renters consist of families and middle-aged adults, too. Devoting increasing amounts of one’s pay to the cost of housing is likely to continue as rents, much like health care, continue to outpace and out-inflate the broader economy. But it’s the ripple effects of housing inflation that ought to have Republicans and Democrats alike worried.

Robbing Peter to Pay Paul

The elephant in the living room that few journalists, economists and politicians are talking about is the emergence of price gouging in major rental markets. If nothing is done to reform high-risk housing markets, it is likely that other parts of the country, where costs of living are significantly lower, will follow in the steps of overpriced markets in Seattle, San Francisco and elsewhere. Ignoring this economically-destabilizing trend is not an option. As renters, not unlike the sub-prime home buyers who preceded them, place higher percentages of their incomes toward rent, fewer households can be expected to save for a rainy day and more Americans will underfund their retirements. This is a disaster of grave future proportions because families that do not have adequate savings are at greater risk of filing for bankruptcy, and may become dependents of — or proponents of — prolonged unemployment benefits, taxpayer-funded welfare programs and the like.

During the Great Recession, demand for social safety nets grew to such an extent that beltway Republicans advocated cutting benefits to reign in costs. (To cite an example popularized during the recession, one in seven American families were said to be eligible for food stamp benefits.) And yet cutting entitlements, just when they are needed most, is a cruel if not superficial fix. Instead, legislators at the state and federal level should look at the underlying reason why so many Americans are living paycheck to paycheck in the first place. One can, of course, cite the usual suspects — decades worth of outsourcing jobs alongside losses brought about by automation — but second only to health care, housing is a segment of consumer spending that poorly reflects income growth or inflation at large. If we want to put the economy back on solid footing, reconciling the disconnect between the rate of inflation, wage growth and housing costs must become a national priority — before the next economic downturn.

No longer do rental price trends lie in the hands of small-time landlords. Demand isn’t the sole explanation, either. If, however, there are 10,000 rental units in a given city that are owned by the same firm, and that firm should push the limits of what the market can bear, Mom ‘n Pop property owners are likely to follow suit if only because heavyweight competitors have set the tone. In much the same way the bank bailouts paradoxically generated even bigger too-big-to-fail banks, the Great Recession set the stage for investors to scoop up real estate assets throughout the U.S. at fire sale prices. And that scarcely bodes well for price diversity in the years to come.

Affordable Housing, a National Security Issue?

Rather than advocate for rent control in the traditional sense — that is, cost-control provisions aimed at low-income tenants — lawmakers should reign in the market-inflating practices of housing price trendsetters across the board — and, in particular, limit the ability of foreign real estate investors to heavily influence domestic real estate markets. This might be accomplished by pegging year-to-year rental rate increases to a combination of local inflation and median incomes in a given area for like housing. This is not to say that reform ought to be so draconian as to mandate outright rental rate caps. Large-scale private equity groups may continue to increase rental rates to reflect supply and demand — but in so doing perhaps those who routinely test the upper limits of the non-luxury rental market ought to incur a residency requirement, forgo tax incentives and/or pay a penalty that can be used by state and federal authorities to shore up the safety nets savings-poor Americans are apt to turn to in the event of crisis or an unplanned retirement.

Affordable housing is the missing ingredient in the health and stability of the broader economy. Assuming it were possible to craft effective reform, households would be in a better position to fund their own savings, lessening the likelihood that illness, recession or job loss will propel families into bankruptcy or thrust them into the unenviable ranks of taxpayer dependents. If a housing reform bill were to incentivize large-scale property management owners to reconcile rental prices to inflation and local income levels, we might see an end to nonsensical situations in which demand for rental units reaches all-time highs precisely when the economy hits all-time lows. Moreover, if such legislation were to target large-scale investment groups — and foreign residential property investors in particular — it might also compel them to scale back their holdings and thus diversify real estate markets in ways that will contribute to improved market competition.

Media coverage on the state of the housing in California and other “harbinger markets” throughout the country warn of more price hikes to come, with double-digit percentile gains slamming rental markets from Las Vegas, Nevada to Southern California’s outlying Inland Empire — well into 2016. The fact that home ownership is the lowest it has been since 1995 — even as renters in some markets are now spending 40 to 50 percent of their monthly pay on housing — speaks for itself: This is an unsustainable trend, with unsavory social and demographic ramifications. As rents increase relative to lackluster wage growth, nontraditional living arrangements, recession or no recession, will become commonplace. Census Bureau reports in the years to come, for example, may find more midlife adults pairing up with roommates not unlike their college-age counterparts a generation ago. Homeownership, increasingly, may become the domain of the wealthy and multigenerational cohabitants. All the while, fewer “marrying age” Americans may tie the knot and take the homeownership leap, for the same economic reasons that came to light during the recession. Taken together, these trends may transform the U.S. into a “rentership society” in which putting down fewer roots — a far cry from the American Dream — becomes the new normal.

Some readers may recall when non-matinee movie tickets could be had for substantially less than $10-$14. But when New York City residents began ponying up nearly double the national average a number of years ago, ticket prices nationwide began to follow suit. Rental price trends, similarly, vary by region and demand. And yet the more rent payers are willing to bear, the more it is likely to push up the cost of renting — and living — far outside the likes of New York and California. If we don’t like the shape of things to come, now is the time to place a national spotlight on housing reform. The bottom line? If we want to stabilize the economy, increasing minimum wage and loosening mortgage lending standards are far from the only answers. It’s time to stabilize rental markets, too. And not just for the benefit of low-income tenants, either. Housing is an inescapable expense. And we’re all on the hook.

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RESOURCES

The Coming Nightmare of Wall Street-Controlled Rental Markets | Alternet

There’s Only One Way Rents Will Go: Sky High | The Fiscal Times

Wall Street’s Hot New Financial Instrument: Your Rent Check | Mother Jones

There Will be No Real Recovery Without the Middle Class | Forbes

In Many Cities Rent is Rising Out of Reach of Middle Class | New York Times

The Rent Bubble is Going to Blow Up Across the Country | The Daily Beast

Rents are Rising but People aren’t Making any more Money | ThinkProgress

Wall Street’s Rental Home Gamble: How worried should we be? | Al Jazeera American

The Five Biggest Benefits of Owning Real Estate | The Joint Center for Housing Studies at Harvard University

Coming Soon? Brace for 80% Less Salary or $2-a-Day Pay

She’s the world’s wealthiest woman you’ve never heard of and she’s saying something you probably wish you hadn’t: “Gina Rinehart, world’s richest woman, makes case for $2-a-day pay“,the Los Angeles Times reports.

The Australian mining heiress has a problem. The cost of running a mining operation in Australia cannot compete with Africans willing to work a continent away for $2 per day.

There’s a certain elementary logic to Rinehart’s argument. If the two nations are selling raw materials at vastly different prices because of vastly different costs of labor, her operation loses. In a worse-case scenario, it might not even make sense to go on operating. From Rinehart’s perspective, profit is the objective and benevolence is a job — never mind if the jobs she creates fails to compensate workers well enough to keep the lights on. She’s precariously positioned on that slippery slope so common to today’s political and trade debates: It could be worse: no jobs.

The world’s richest woman has a point. But it doesn’t pass the sustainable-future test.

Some 25-years ago when global “free trade” was hawked by conservatives and liberals as a win-win for business interests and the world’s impoverished alike, the promise was to “raise all boats”. Indeed, in many ways it has. Rural Third World peasants — depending on how one looks at it, born into a harsh or bucolic life — have left land and sea to toil in immense factories, working 12 or more hours for dimes a day to sew our garments, assemble our toasters and televisions, print our books and increasingly, even, to can our food. As a result: An entire generation of aspirational laborers now shares the dream of a more affluent life in the big city — pay no mind to the slums. If not reality, it’s hope that keeps the wheels of progress rolling.

Perhaps out of nostalgia for the past we downplay the social, economic and environmental ramifications of the world’s most populous nations, China and India, following our same choppy path to progress. We were once like them: Fearless, youthful economies, willing to strip entire mountains and topple entire forests for a fast buck (and in some parts of the country, we still are). Still, what needs to be asked at this juncture in the global trade game doesn’t get its due but is having its way with us just the same.

Who says our Third World trade partners must start where we did — to make the same mistakes from child labor and water unfit to drink to the foreign-policy blunders of a voracious economy jockeying for access to other nation’s natural resources?

Whether by romanticism or a misread of history, those of us in the First World rarely pause to question if the type of progress the world has made is the kind of progress that can or must continue unchecked and unchallenged, unrefined and unexamined.

Isn’t the benefit of progress chiefly that it can be shared?

The task, seemingly, was straightforward. Before formalizing trade relationships, establish common human rights, currency and environmental rules of play so as not to touch off the dreaded “race to the bottom”. Instead, we apparently assumed the influx of Western money would do the talking for us, free markets, democratize governments and civilize those who would seek to exploit others.

The massacre of demonstrators in Tiananmen Square, in its time, should have signaled the intellectual and political free-trade hopefuls that something was amiss. The 21st Century ushered in yet another reminder: the promise of the Arab Spring evaporated into something resembling less the democracy we had hoped for, more the sectarian rule we feared. Still we persist in the hope against hope that opportunity, for its own sake, is the best policy.

What if it’s not?

The cracks in the globalized foundation are beyond dispute now: The American Dream is under siege like never before. Europe is straining under the yoke of a common currency and uncommonly high debts. Yet China, for all its recent effort to dominate world trade, is not to blame. The threat of being pulled under by emergent economic powers that share little in common with our political value system is largely a beast of our own creation: Made in the USA.

Presidential candidates, in the worst economy in decades, remain paradoxically vague. The culprits underlying greater income inequality and the perception of lessening opportunity are catchalls: Apparently, just about everything in the West is too pricey: labor, taxes, regulations — even minimum wage. And with 7 percent of American workers represented by unions, on AM talk radio and elsewhere, they nonetheless shoulder the lion’s share of the blame.

With no shortage of conjecture — too often the kind that builds on stereotypes and divides friend, family, “haves” and “have nots” — it is long overdue to put economic dogmas to the test. Can the United States of America, one of the few and the blessed nations to become a freedom- and living-standard envy of the world, afford to downplay diminishing wages, increasing personal and government debts, a widening gap between the rich and the poor, monetary policy that punishes savers, severe trade deficits, and the unrealized hope that the educational and ecosystems can keep pace with these changes and challenges?

The way in which we order our lives, policies and expectations — particularly the role of technology in creating vs. displacing jobs —- must be examined.

Do we produce for the sake of producing and compete for the sake of competing — or should technical and economic progress exist for the sake of improving quality of life? Should our definition of success hinge on that of the few, the highly talented, educated and well connected — or that of the ordinary, everyman in his and her capacity to “take personal responsibility and care for their lives“, as candidate Mitt Romney put it?

Buffeting the chaotic sea of public opinion are prevailing cultural assumptions surrounding old, individualistic aims confronted by new, inadequate financial realities. Our grandparents’ generation was one in which a single breadwinner could support a household working a blue-collar job. Today, particularly in high-cost areas of the country, the gainfully employed, college educated — even childless —- struggle. Others launch seemingly successful households, by all appearances living out the American Dream, only to do so at their parents’ and in-laws’ expense. In other words, instead of one or two breadwinners sustaining a single-family household, increasingly “it takes a village”.

For a culture steeped in tales of striking out on one’s own at a tender age with nothing but the clothes on one’s back, rising from rags to riches in the process, social immobility isn’t a reality we are prepared to accept.

In 2005, for the first time in US history, the average household owed some 130 percent of their annual income, writes Nan Mooney in “(Not) Keeping Up with Our Parents“. Is the cost of a refrigerator or an Internet connection really to blame for our slipping grasp? Does an iPhone or a gym membership endanger retirement planning or place individuals and families one crisis away from financial ruin?

To hear the pundits talk, yes. Americans, who fewer than 30 years ago left public universities without crushing debts, who worked jobs they did not expect to lose, who steadily ascended the income ladder, building equity in their homes and money on their investments, do not seem to fully appreciate how radically things have changed in the 13 years since we fretted over Y2K, crossing the threshold into a new millennium. American families lost nearly 40 percent of their wealth between 2007 and 2010 alone. Grocery prices are on the rise, too. Gasoline represents nearly 10 percent of consumers’ monthly spending, nearly double what we spent in 2004 — and still the price at the pump edges closer to the suffocating $5-per-gallon mark. Healthcare premiums for families have climbed nearly 90 percent in the past decade, Mooney writes. Colleges are turning away students and career changers eager to enroll even as they push the ones they do admit into two- and six-figure debts, crimping graduates’ spending power for decades. Real inflation — as tabulated by the pre-globalization formula that through the late ’80s accounted for rising food and energy prices — reveals still more about why consumers “remain cautious” month after month, quarter after quarter.

Opportunities that were possible for the children of middle- and working-class parents fewer than 15 years ago are increasingly the province of those born to the political elite, successful entrepreneurs, doctors, lawyers, media personalities, sports stars and celebrities.

That’s not the America most of us grew up in. And it’s not the state-of-affairs most wish to pass on to the next generation.

It is not without irony that the very people who have suffered current-day financial realities the least shout from the highest bully pulpits, insistent that little has changed that a solid work ethic can’t overcome. Who are these people who would have us believe that our eyes and ears deceive us? They are our talk radio hosts, our well-heeled TV commentators; they are our retired parents or grandparents who have successfully cleared the home stretch — they are even our siblings and peers that went into dentistry rather than information technology, finance rather than teaching.

Except they’re wrong.

In her 2008 book Mooney asks: “Why the dramatic change? The economics are simple and well documented. We’re earning less and having to pay for more. Earnings for college graduates have remained stagnant for the past five years, but the cost of housing, healthcare and education have all risen faster than inflation. The share of family income devoted to ‘fixed costs’ like housing, child care, health insurance and taxes has climbed from 53 percent to 75 percent in the past two decades.”

The math doesn’t add up. From little more than 25 percent disposable income comes saving for a rainy day, cash for job retraining and the presumably “irresponsible” act of personal spending — stimulating the economy the old-fashioned way. And yet for increasing numbers of Americans, even those unscathed by a long spate of unemployment, lurks the sinking suspicion that more pain than gain this way comes. According to Rasmussen Reports, just 14 percent of the Americans surveyed in July 2012 — a new low — are of the opinion their children will be better off than they were.

They — you — are not imagining things.

Dong Tao, a Credit Suisse economist, in a November 2010 CNN interview, put it bluntly: To “re-balance” the world economy the Chinese must consume more — and Americans must earn “at least 80 percent less salary”. Shocking though such a revelation may be, the mass media didn’t touch Tao’s statement with a 10-foot pole. The Internet, for all its reputation as a repository for everything ever said or written, is also a place where information disappears. (After a brief spate online, CNN’s interview transcripts for that conversation are nowhere to be found.)

The question that keeps making the rounds in this election year is this: Are you better off than you were four years ago?

In an era fraught with “tied hands”, domestically and globally, it may matter less who occupies the Oval Office — less than the pundits and partisans would have us believe, in any case. Why? Because there are no easy answers, no magic-bullet policy decisions, no quick fixes, no sure bets. Deficits are skyrocketing, money is devaluing, automation and rock-bottom Third World labor continues to undermine First World wages — and, increasingly, our counterparts in the Third World are sharing in the pain as the “sure thing” of Western consumerism ramps down.

The piper is calling.

The erosive economic forces with which we grapple are not personal or even particularly American — they’re global. The year ahead promises to be one in which corporate profits, propped up by deep payroll cuts and unprecedented infusions of liquidity into the realm of high finance, take a tumble as the reality of a weakening consumer class works its way up to Wall Street where, for the moment, the band plays on. The Federal Reserve will exhaust its bag of tricks while Democrats and Republicans, for all their efforts to deflect blame, continue to come up short on solutions.

The two parties have become so good at pointing fingers they’ve forgotten how to make the tough and unpopular decisions — to lead.

For all the uncertainty, it isn’t the election or the political grandstanding that deserves our sole concern. The public mindset matters too. Some three years post recession, one from which we never truly recovered, one wonders how long it will take for the gravity of this worldwide crisis to hold the attention of the percentage of the American population that doesn’t read newspapers, dismisses the “liberal media” out of hand, isn’t all that attuned to the world beyond their own backyards, and yet jumps, stubbornly and often at the price of great personal resentment, on the usual suspects — the freeloading, big-spending “lazy American” who assuredly wants little more out of life than to shamelessly shill for handouts. (Apparently slackers come in spades in Australia, too: Rinehart is purported to have said her fellow Aussies can make a respectable living if they drink and socialize less.)

The 47 percent of Americans Gov. Romney dismisses as “victims” in a May 17 fundraiser will nevertheless be his constituents should he become president. Will the nation’s would-be commander-in-chief acknowledge that years of kowtowing to special interests by those on both sides of the isle who claim the title of public servant has done more to victimize the nation than any basement-dwelling, election-day skipping, moocher ever could?

Seemingly, not.

Former comptroller general, David Walker, put it best during his “Fiscal Wake Up Tour“, documented in the 2008 film “IOUSA”. With the backing of the nation’s best-known liberal and conservative think tanks, he warns that the United States faces the prospect of increasing taxes, dwindling services and a lack of funds for basic expenditures like national defense. His is a prescient call to action issued well before the controversial implementation of TARP and the $16 trillion-dollar deficits of today.

The future is here, ready or not.

The throws of crisis are not the time to launch a witch hunt in search of easy targets. Ours is a time to ask not what one can do for oneself but for the good of one’s country. Over 200 years into the American story, individualism is alive and well — the self-made desire to have more, do more, be more. And yet national pride in this age of global trade and travel, passe though it may seem in today’s climate of privatizing nearly every source of shared glory, deserves its due too. Patriotism, after all, is an inclusive notion. Rather than rationalize a climate of infighting and backbiting, perhaps it’s time we began in earnest to watch each others’ backs.

In the interest of a more perfect union, we’re gonna need all the cohesion we can get. And when tough people encounter tough times, seeing the best in ourselves — one another — is the American way, too.

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RESOURCES

Where Free Market Economists Go Wrong | Reason

So-Called Free Trade — Bad Policy and Wrong Debate | Huffington Post

What Money Can’t Buy: The Moral Limits of Markets | Amazon

Myths of Free Trade: Why American Trade Policy Has Failed | Amazon