Rent Moratorium Policies
Today’s Out-of-Control Inflation Could Have Been Avoided
By Tom Olson
What may have seemed like well-intentioned emergency measures taken during the first two years of the COVID-19 global pandemic are now having unintended consequences.
Policies intended to help financially stressed and distressed people access housing have hurt everyone involved in the process of creating, providing, and making use of housing in the United States. These emergency measures played a major part in the drastic increase of rent prices, lit the fuse on out-of-control inflation that experts warn could derail the entire housing market, and created supply-chain bottlenecks in building materials and construction that may take years to work through. In the interim, a correction is coming.
The precedents set during these “unprecedented times” have done lasting, likely permanent, damage to the way our market sectors and our economies at all levels (local to global) function.
The only hope of averting additional damage is to clearly understand exactly what is happening now and why it is happening. Then, perhaps we can protect ourselves from the rampant, political targeting of real estate investors (particularly individual “mom-and-pop” landlords who have, in many cases, lost their livelihoods and retirements as a result) that has been going on for more than two years.
A Dramatic Change in the “Tenant Obligation” Conversation
The entire conversation around tenants’ obligation to pay rent has shifted dramatically from the traditional concepts that a legally binding contract legally requires individuals to pay predetermined amounts of rent to a more flexible landlord-tenant relationship that leaves force majeure open to a wide variety of interpretations. Not only will this have a lasting and negative effect on the overall availability of affordable rental housing, but it has done lasting damage to existing rental property owners who are unlikely to recoup losses experienced not only during the pandemic but as a result of this massive and unpredictable shift in housing policy.
Sadly, although the vast majority of residents did their best to pay rent in full and on time (or at least partial rent when possible), some individuals who would not have traditionally qualified for financial assistance and mandatory forbearance programs took advantage of the system. This created a “black hole” not just for landlords but for those individuals as well; once the programs end, they are too far in debt to remediate the situation and must continue to seek outside-the-box options to extend their now-free tenancy. When this happens, properties that should, in the natural market, go vacant due to nonpayment and then be reoccupied by paying tenants are, instead, occupied by non-paying tenants who cannot be evicted for nonpayment.
While the investor slogs through the process of figuring out how to evict the individual, negative emotions fester on both sides and, when the resident finally leaves, there is often serious property neglect and malicious damage to contend with.
Furthermore, due to the ongoing extension of “foreclosure prevention programs” and “hardship programs,” rental owners find themselves in a position where they cannot bring in new renters or make housing available because they are no longer receiving rental income from existing properties and have no way to remediate the issue. As a result, it becomes more difficult to expand housing options in a market because it is more difficult to acquire new assets and the best strategy to generate income reliably may be to fix-and-sell these homes instead of rent in markets that previously would have been considered ideal for strategies that would allow for affordable housing providers like myself to operate in.
Ultimately, as much as 10% of existing affordable housing should be considered permanently unavailable due to the difficulty of evicting non-paying, “permanent” tenants. This exacerbates problems with affordable housing supply and discourages the creation of new affordable housing. When public policy removes 10% of the potential new, affordable housing available, all tenants suffer and those best positioned to “jump the line” by offering perks to the landlord like a “bonus payment” to put them at the top of the list are the ones who snag what little housing there is available.
Naturally, rents must rise even faster in units that are available to compensate for the ones that are not — otherwise, the entire housing operation goes under.
How the Markets & Inflation Have Reacted to Pandemic-Justified Housing Policies
The unbalanced and largely arbitrary removal of vast swathes of affordable housing stock from the open market between 2020 and 2022 has had troubling (and significantly delayed) effects on the financial markets. It seems only recently the fallout from investor uncertainty and general malaise caused by the near-total invasion of public policy into a private market has become apparent. The results speak for themselves.
Ultimately, however, the parties that suffer the most will be rental owners and reliable, rent-paying tenants who now find themselves unable to afford to retain their assets, in the case of the landlords, or find affordable housing, in the case of the residents. In 2020, only about 62% of landlords were able to collect 90% or more of rents owed them, and individual landlords, naturally, experienced far greater exposure and impact than institutional owners. Much of that rental revenue will never be recovered.
When these existing housing factors are combined with rampant inflation, it quickly becomes apparent that we are facing a turning point in the real estate investing sector. There is no doubt that real estate investors will continue to make creative, innovative, and, ultimately, profitable decisions for their assets.
However, with ongoing supply issues and skyrocketing costs associated with acquiring, owning, and maintaining affordable rentals units, more investors are likely to steer clear of the vital sector of the market serving the population with the greatest need: affordable housing.
Instead, pandemic-era housing policies are forcing the real estate investing population away from its traditional role as a problem-solver and into a position where individual investors may be vilified and maligned with impunity for simply being unable to continue past investment behaviors in current market conditions.
