San Diego Rent Control

San Diego Rent Control

Quick Summary

  • Californian’s will get to decide in the November ballots the fate of the Affordable Housing Act (AHA), which would allow for cities to adopt rent control.  The AHA seeks to revoke the Costa-Hawkins Rental Housing Act, which prohibits rent control on buildings built after February 1995.
  • Many San Diegan’s believe this would provide an answer to our housing crisis, however, many professionals and economists disagree.
  • Experts believe rent control would be detrimental to the San Diego economy and would discourage new housing development, further exacerbating the housing crisis.
  • Experts also argue that rent control would eliminate many incentives to own rental properties. This could cause harm to both owners and tenants.
  • Rent control has already been adopted in several cities around the United States, and the results have proved to be harmful to the overall economy by shrinking supply of affordable housing and driving up rental market prices.

Continue reading below to learn more about rent control and the effect it would have on the San Diego economy.

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San Diego Rent Control

San Diego is facing a profound housing crisis. Rents keep climbing and supply keeps falling desperately behind demand. According to the San Diego Union Tribune, in March of 2018, the average rent in San Diego County hit an astonishing record of $1,887.

San Diego now ranks as the ninth most expensive market in the United States. Many San Diegan’s are finding it increasingly hard to afford rent and are turning to the government for answers. Their solution? Adopt the Affordable Housing Act and repeal the Costa-Hawkins Rental Housing Act which would allow cities like San Diego to decide on their own rent control measures. The initiative received more than 650,000 signatures and will be placed on the November ballots, giving Californian’s the option to decide on this issue.

Many economists and experts agree that rent control offers no benefits for all parties involved and would be disastrous for our local economy. How would rent control affect San Diego? Let’s take a closer look at the various players in this debate.

*This is part 1 of our series on Rent Control. Be sure to stay tuned for detailed scenarios and further information to come soon.*

What is Costa-Hawkins?

Costa-Hawkins is a California state law that was adopted to counter vacancy control ordinances and spur new construction of single-family homes.

It limits how cities set rent control in two ways

  1. It prohibits cities from putting a rent cap on single-family homes or apartment buildings built after February 1995.
  2. It gives landlords the right to raise rent prices to market value when a tenant moves out, otherwise known as a vacancy control.

Costa-Hawkins does NOT outlaw rent control. Cities like Los Angeles and San Francisco have been able to adopt some forms of rent control but within the state law.

Source: Union Tribune 

What Is the Affordable Housing Act?

The affordable housing act has three main objectives

  1. It aims to restore California’s cities and counties to develop and implement local policies that ensure renters can find and afford decent housing in their areas.
  2. Improve the quality of life for millions of California renters and reduce the number of people who face critical housing challenges and homelessness.
  3. Repeal the Costa-Hawkins Rental Housing Act

Supporters of this bill hope that if passed, rents will go down and that many San Diegan’s will be able to find affordable housing. They believe that increased rents are a result of landlords fueled by monetary greed.  This act would allow cities to prevent landlords from increasing rents once a tenant leaves.

Source: Affordable Housing Act Website 

While it is no question that rents are sky-rocketing and that a solution needs to be reached – rent control is not the answer. In fact, I would argue rent control would just exacerbate the problem.

 

Why Rent Control Won’t Work

Those against the Affordable Housing Act include apartment developers and landlords (among others). Repealing Costa-Hawkins would lead to shortages in both the quantity and quality of housing. Profits are what incentivize landlords to maintain a building in good shape. If rents are capped at a certain limit, what is the incentive for landlords to maintain the building?  Buildings would become neglected and long-term improvements wouldn’t be invested in. This can create unsafe living conditions for tenants.

Rent control would limit property owner’s potential cash flow to dangerous levels. When you think about things like increased expenses and rising interest rates, this could put owners at risk. If the owner can’t make their mortgage payment because rents have been caped, they risk losing their property. This could create a domino effect amongst many property owners. Tenants might also have to look for a new place to live.

There are already many risks associated with owning a multi-family building, so if you factor in rent control, what is the incentive to buy a place? Owners might opt to convert their building into condos if they do not see enough cash flow to turn a profit. This would take away even more rentals from the San Diego market.

In 2016, the Union Tribune asked 14 experts whether they believed rent control would benefit the San Diego economy, all 14 experts answered, “No”. They cited everything from shrinking the supply, decreasing affordability long-term, to driving tenants out to repurpose buildings.

History has shown us that rent control doesn’t work. Look at New York City in the 1970s and 80s. Landlords simply stopped maintaining the buildings, amenities were no longer looked after, living conditions became dangerous, and eventually, entire streets blocks were left vacant. New York’s neighborhoods fell into an economic recession and investment was at an all-time low. 

The Impact on Development

What about developers and investors? Would the same incentives remain for them to continue to build new construction if they knew property values would be artificially capped?

A recent CoStar report discussed the impact that rent control could have on development.

“Many developers are concerned about the economic impact there will be on new development if it is subject to rent control… it would change the “whole economics” of how developers view potential development opportunities… It’s hard enough and costly enough for a developer to make a decision to build housing, and now they are put on notice that the housing may be subject to rent regulation… they may very well be unwilling to make those tough decisions of being invested in building a development”.

If developers are unwilling to build new units, which San Diego desperately needs, that is a losing scenario for all parties involved. This would place us further behind meeting the demand for housing. Alan Gin at the University of San Diego argues,

“the problem is the lack of construction of both single-family and multi-family residential units. Controlling rents would reduce the incentive to build more multi-family units”.

If developers see fewer incentives to build housing, they may turn to other development avenues like commercial, retail, office, etc…

Rent control not only discourages development, but it would contribute to less affordable housing developments being built. Austin Neudecker of Rev points out that rent control would increase the prices for those who cannot find a controlled unit. New York City and San Francisco are prime examples where soaring rental prices and rampant abuse of rent-controlled housing exists.

Another big concern with rent control is tenants deciding to stay for extended periods of time in their current unit or subleasing it out. This makes it harder for people who need affordable housing to get into units.

A 2017 Standford Study and this LAO report also concluded that rent control does more harm than good. I recommend giving these a read, they provide some valuable insight into what happened in San Francisco and their attempts at rent control.

Final Thoughts

Think about this for a moment. If produce is too expensive, should we limit how much the farmer makes? What about if Apple Computers are too expensive? Do we start paying people who make them less?

The same concept applies to landlords when being asked to accept rent control. Just because rents are going up, it doesn’t mean the responsibility falls on owners and developers.

More permanent solutions lie within increasing zoning, reducing the time it takes to build, and expanding our public transit system and building communities around those transit centers.

These are just jumping off points but could be great starts to solving what is arguably one of San Diego’s biggest dilemmas. I will be updating this post as more developments arise, so please stay posted.

More Information

San Diego Union Tribune “What’s the Deal With Rent Control” 

EconoMeter Critics Panel Report

Rent Control is No Answer to California Housing Crisis 

Written by Blake Imperl in collaboration with Curtis Gabhart

Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.

 

HARP2 saving small % of underwater mortgages

The HARP2 program, combined with the $25B bank settlement (providing $20B in loan modifications), will save some underwater mortgages from foreclosure and help long-term market stabilization. However, part of the bank settlement requires banks to adopt standardized (and hopefully more efficient) servicing and foreclosure processing measures. I think better processing, combined with the sheer volume of underwater mortgages is going to keep the short sale floodgates open for quite some time.

According to researchers at CoreLogic, a leading analytics firm, 11.1 million or 22.8 percent of all residential properties in the United States were worth less than the amount their homeowners owed on the mortgages used to purchase them.

The federal government originally rolled out the HARP program in 2009 to help homeowners who were underwater or near underwater. However, the program was recently broadened to reach even more borrowers. Originally, HARP applied to 895,000 underwater borrowers; and now HARP II is expected to help up to double that amount. According to HUD, about 400,000 homeowners have taken advantage of the program since it launched in April 2012…that’s less than 4% of underwater mortgages.

HARP II allows underwater homeowners who are continuing to make payments to refinance their loan. The new program offers a number of advantages over the original HARP loans. First off, there is no loan-to-value or combined loan-to-value restriction on fixed-rate loans with terms of 30 years and under. In other words, it doesn’t matter how upside-down borrowers are on their mortgages. Previously, there was a cap that restricted borrowers who owed more than 125 percent of their home’s current worth from accessing the program. In addition, an appraisal may be waived if a value for the home can be automatically generated, and the borrower only needs to have a 620 FICO score.

There are three main components to qualifying for a HARP II refinance loan. The first requirement is that the loan must be owned by either Fannie Mae or Freddie Mac. Second, the loan must have been sold to Fannie or Freddie before June 1, 2009. Third, a HARP II refinance must benefit borrowers in at least one of four ways:

  • Reduce the loan’s monthly principal and interest payment.
  • Reduce the loan’s interest rate.
  • Reduce the loan’s amortization term.
  • Transition the loan to a more stable type of loan. (i.e. interest-only to fully-amortizing, adjustable-rate to fixed-rate, 30-year to 15-year).

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The end of suburban sprawl?

John Mcllwain with the Urban Land Institute makes some interesting points for the shift from suburban sprawl to urban infill housing. If there is a permanent shift in housing demand, which municipalities here in San Diego County are going to embrace the concept and create new policies to entice developers to build these new housing projects?

Full article: http://urbanland.uli.org/Articles/2012/April/McIlwainSprawl?utm_source=uli&utm_medium=eblast&utm_campaign=040912

Some good excerpts:

“An analysis by USA Today of recent Census data suggests that current population growth is occurring in the more central, closer-in counties of metropolitan regions while many outer edge counties have been losing population since 2006. This is a startling turnaround and the first time this has occurred since the end of World War II more than six decades ago.”

“Development is driven by market trends, and what studies are consistently showing is that the two major demographic groups, the aging baby boomers (boomers) and their kids, the echo boomers or generation Y (Gen Y), have a growing preference for more urban living.”

“Gen Y, the largest generation in U.S. history, now in their twenties and early thirties, would under other circumstances provide strong support for suburban housing development as first-time homebuyers. Due to the recession, however, their homeownership rate is falling. There are a mix of factors behind this including their bleak job prospects, the overwhelming student debt they carry, and a sensible desire on their part not to buy a home while they remain uncertain about where they will find jobs.”

“Government finances are another constraint to sprawl. Outer-ring counties are financially strapped; there are no funds for more roads or for other infrastructure development. This has been causing a shift in planning in these counties as they begin to look for more compact and sustainable development that has a smaller effect on their budgets. ”

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Flat news at the USD Residential Real Estate Conference

We attended this years 12th Annual Residential Real Estate Conference at the University of San Diego and here is a quick summary of the event.

For both California and San Diego, the forecasts for 2012 are predicting only a slight decrease in the number of distressed homes and flat prices due to

  • Low consumer confidence
  • Tough credit qualifications 
  • Lack of hiring by employers. 

We are not yet at a long term equilibrium in home ownership rates and many more “strategic” defaults are in the pipeline for the banks & a higher % of distressed inventory is selling as short sales vs. REO. This strategy is helping banks minimize their losses and are processing the short sales in half the time.

 

At GII We can attest to all of this through our deals. It appears that not only will our single-family renovate and sell strategy fit the market conditions in 2012 it may be time to start buying and holding more properties.

 

Highlights from Fannie Mae chief economist Doug Duncan, PhD:

 

  • New housing starts at long term rate for household formation by 2015
  • 20% of us home values are underwater
  • 0% growth in small business hiring in 2012
  • 1.6% growth in US GDP in 2012
  • Gdp is at prerecession levels but employment has not recovered and will remain at same level through 2012
  • 75% of americans think economy is headed in wrong direction
  • Reaching levels of historical % of ownership and rental properties
  • Long term home ownership level expected to be 65%

Highlights from USD Assistant Professor Ryan Ratcliff, PhD:

 

  • 12% unemployment rate in CA
  • SD nonfarm unemployment increased 7% and has only declined 3%
  • CA average resale home price down 5% year over year
  • SD resale prices have only declined slightly year over year
  • $100-300k is the price range of most distressed sales in 2011 in San Diego
  • Best CA employment gains were in high tech and business services, worst sectors were manufacturing and construction.

Highlights from USD Associate Professor Alan Gin, PhD:

 

  • Best SD employment gains were in health care services, admin. and support services, real estate and hospitality (theme parks)
  • SD gained 24k jobs in 2011
  • SD unemployment rate dipped just below 10%
  • Gin’s local consumer confidence indicator is down 2% in SD
  • Job growth in SD expected to be 15-20k in 2012
  • 5k home and multifamily units authorized in 2011 – up from 3k in 2009 and 3.5k in 2010
  • 2.5k of the 5k in 2011 were multifamily (comprised mostly from a couple big projects – this is up 128% from last year

Burnham-Moores Center Presentation Slides

Presentations from the 12th Annual Residential Real Estate Conference,
December 13, 2011:

 

 

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Where is the best place to buy Apartment buildings?

Okay, here is a poll I set up to ask people where you thought the best place to invest in Multi-Family Real Estate including what class, size and a few other simple questions.

I created this using Google forms. If you are not using Google docs and the other free google products like sites, calendar etc. you should check it out. I created the “project 36” website in a matter of minutes using Google sites and use Google enterprise apps for our business.

So with that being said I am embedding the survey so please take it or if it does not let you take it please let me know. (give it a few seconds to load)

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