Tuesday, August 18, 2020

Why Would Any Landlord Evict Any Innocent Renter During a Crisis This Bad?

by Neil H. Buchanan

One of the many, many crises facing the country today is the very immediate threat that millions of Americans will soon be evicted from their homes, whether those homes are owned or rented.  With more than 16 million people currently unemployed (ten million more than in February) and millions of others suffering from declining incomes, and with various types of federal assistance having expired three weeks ago, things are looking more and more dire.

The big political story here is obviously the utter lack of concern that Republicans in the Senate and in Donald Trump's administration have shown for the plight of these people, none of whom did anything to deserve this terrible turn in their lives.  Because the sensible (and humane) policy responses to the current problem are blindingly obvious and not at all difficult to enact and implement, Trump and his enablers' indifference is all the more disgusting.

Because this human tragedy has a non-mysterious policy solution, however, there is nothing new to say about what a first-best path would entail.  That policy response is not currently in the cards, however, so I want to use this space to discuss a more interesting related question: Why are the people who are directly involved not being at least minimally creative in thinking about how to respond to the now-ongoing eviction crisis?
 
In particular, if economic markets were as magically capable of reaching socially optimal outcomes as conservatives say they are, would we not expect people to have figured out a way to "contract around" the eviction problem?  Put differently, why are landlords and banks not seeing that evicting people is most likely not even in the evicters' own self-interest?

I thought of these questions after noticing an analogy to Republican's illogic regarding unemployment benefits.  As has now been widely discussed for months, conservatives seem incapable of dropping their blind allegiance to the idea that "paying people not to work gives people incentives to be lazy."  There is precious little evidence that this is true even when the economy is strong, mostly because nearly everyone understands that remaining in a job -- or returning to one as soon as possible -- improves their options going forward.

In the case of a huge downturn in the economy, however, it is simply bizarre to say that paying people enough money on which they can survive (including not facing eviction) will discourage them from taking jobs that simply do not exist.  That conservatives said this during the Great Recession and are doing so again now during an even bigger cataclysm is nothing short of glorious in its insanity and cruelty.  Even though it is not my main point here, it would be irresponsible of me not to say this again: When there are no jobs to take, people will not take them, no matter whether you give them unemployment benefits or not.

Although I did not notice it right away, the analogy to the eviction situation is actually quite direct.  Just as it is clear that there are currently not enough jobs, there are also clearly not enough people who can pay the rents and mortgages that they were paying until their federal benefits ran out last month (and before they needed those benefits, because they were working at full pay).  What are landlords who kick people out of their rental units, and banks that foreclose on mortgages, thinking is going to happen after they evict people?  That it will be possible quickly and easily to re-rent or re-sell those housing units to a reserve army of willing and qualified new customers?
 
When a worker loses her job in a bad economy, both sides of the employment transaction are at least acting in a way that one could describe as rational, because the employer has no work and thus cannot afford paying as many employees, and the former employee would like to work but cannot find a job elsewhere (because nearly every employer is cutting staff).  Neither side is at fault, both being the victims of the larger trends in the world.

Even that, however, is not quite right.  Dan Price is a small business owner in Seattle who became famous for setting a $70,000 minimum salary for all of his employees in 2015.  He is infamous among conservatives for paying his workers well, and especially because he cut his own pay as part of his egalitarian plan.
 
The venom that conservatives aimed at Price did not make sense even on its own terms, however, because he is an entrepreneur who was setting wages and salaries in the way that he thought best, without being forced by any government to do so.  It was clear that the real right-wing complaint was that Price was being a "class traitor," because he was showing that a successful small company could do even better by subverting the entrenched inequality that conservatives say is the inevitable result of market competition.
 
In an op-ed in The Washington Post last week, Price wrote that -- in the face of a 55 percent cut in revenue during the pandemic -- he has now worked with his employees to cut everyone's pay sufficiently (and progressively) to prevent anyone from being laid off, even as his competitors were laying off up to half of their employees.  This is, in fact, an old idea that goes by various names (such as "job sharing"), but essentially the idea is a simple one.  No company is forced to fire workers, because it could spread out the pain if it wished to do so.

It is true that there might be plausible reasons that a company would lay people off rather than cut pay, and in the few job situations where workers have collective bargaining agreements or are otherwise contractually able to block wage cuts, workers themselves sometimes choose not to spread the pain around.  (As much as I support labor unions, many of their leaders have historically been particularly rigid and unwilling to innovate in crisis situations.)

I am thus not saying that workers would always choose to share pay cuts rather than to concentrate the pain on the unlucky few.  I am, however, wondering aloud how we can possibly know that it does not make sense to push for a lot more partial pay cuts and a lot fewer layoffs (which are, to be clear, 100 percent pay cuts for some and zero percent pay cuts for others).

The only answer that conservative economists have to this question is the classic Panglossian idea that things happen for the best in this best of all possible worlds, which implies that if something were a good idea, it would already be happening.  Last month, I returned to that silly idea in a column discussing the name of what is temporarily known as the Washington Football Team.  I have been arguing for years that the owner of that NFL franchise continues to miss out on a huge opportunity to make money by dropping the old racist name and its associated merchandise and cashing in a completely new rebranding -- which would sell a lot of new merchandise.  He could even have continued to license the old name, making profits both from die-hard racists and from people who were delighted to buy merchandise that is not blatantly based on bigotry.

That owner has already chosen to lose money by committing not to change the old color scheme, but that is a minor point.  The larger idea is that sometimes even the most patently money-hungry people do things that "leave money on the table," in the words of market idolators.  If markets were truly doing what conservative economic theory says that they do, there would be no unexploited profit opportunities.

In the case of evictions, what are those possibilities?  Imagine that you own ten rental buildings, each with twenty units, all of which are currently rented by people under non-expired leases.  Suddenly, forty of your two hundred renters cannot pay.  If you want, you can evict them.  But why would you do that?  The eviction process is full of transactions costs (direct and indirect, such as dealing with people in extreme emotional distress): and at the end of the day, you will not fill the majority of those units with new renters, for the simple reason noted above that this is a macro problem, not a micro one.

Evictions can make sense in the same way that firings can make sense, when we can assume that the aftermath is better for the landlord/employer because a bad tenant/worker will be replaced with better substitutes.  Similarly, banks that foreclose and evict are left with houses that they need to maintain but will not be able to sell.  And in both rental and ownership situations, the costs of empty units (in possible vandalism, the lack of "eyes" to report burst pipes, and so on) are substantial.

And if the owners of the now-empty housing units end up having to reduce rents or selling prices to entice new customers, why would the owners not avoid the entire eviction process and simply cut the payments in a way that would allow people never to be evicted in the first place?

One might object that "a contract is a contract," and leases and mortgages must be honored.  That is apparently the logic of those who are in the process of evicting millions of unlucky Americans.  But any minimally competent lawyer knows that contracts can be modified.  Why would a landlord or bank not offer a modification that simply matches what a renter or mortgage payer can now afford?

Indeed, I suspect that a lot of landlords and banks could get their potential evictees to agree to temporarily reduced payments that would be made up in the future.  Heck, it is easy even to set this up as an implicit (or even explicit) loan, with payments that would be modified in the future to include what amounts to interest on that loan.

If only there were some smart people who had spent their lives figuring out how to monetize risk and to maximize financial outcomes in situations of uncertainty and change!  If only there were schools that awarded degrees in finance, law, and so on that could have trained people to do exactly this.

Again, however, because such trained professionals do exist even as millions of people are going to be evicted, the temptation is to say that they have already thought it all through and concluded that the rational action is to enforce unmodified against breachers rather than to renegotiate.  It is not difficult, however, to imagine that a big part of this is a matter of people simply doing things because that is how they have always been done.

Another excuse might be that the legal regime includes other rules that prevent or discourage this kind of innovation.  After all, if the Invisible Hand is not leading people to do what works best, conservatives will always tell us that this can only be because the government did something wrong.  Conservatives weakly tried to argue that the Great Recession was caused by the Community Reinvestment Act, and even though that turned out to be utterly false, surely they can find some law that would explain why profit-seeking companies are harming their own bottom lines -- and destroying people's lives in the process.

Perhaps such an explanation exists and would hold up to scrutiny.  If so, however, then the proper response would be to modify that law to allow people (on both sides of the home occupancy transaction) to pursue more sensible strategies.  We might even find that it would be a good idea to impose something like arbitration requirements, or at the very least to mandate that any owner pursuing an eviction first demonstrate that he engaged in a good-faith effort to renegotiate the terms of the deal before resorting to eviction.
 
The business interests who support Republicans might not like the idea of having the government provide "free money" to renters and mortgage holders, but in one way or another, businesses lose when Senate Republicans refuse to go along with that first-best option (which, to be clear, shifts the cost onto taxpayers and thus spreads the pain more widely, among people and over time).  Indeed, both sides of the home occupancy transaction lose, and it is only a matter of how the burden is allocated.
 
What I describe here might not be a workable way to prevent evictions, but if so, the reasons are anything but obvious.  Until that is made clear, we ought at least to encourage people to think about ways to avoid foreclosure.  The rush of a pandemic-fueled crisis is clearly causing people not to think before falling back on now-outmoded ways of thinking.

3 comments:

Frank Willa said...

I appreciate the humanity of your perspective. And the obvious logic to millions out of work/ reduced that eviction will get no new tenants; so better to modify a contract, and mitigate the damage.
I have been frustrated for decades at the recalcitrance of conservatives to alter their economic notions, and give up the 'magic free hand' that provides them with political cover for 'economic abuse'.
Having said that, I thought that there was a 'provision' in the T tax cut that provided for a 5 year carry back for R/E losses; might that be a contrary motivator?
And it seems to me that the 2008/09 recession resulted in a lot of housing going to foreclosure and then being 'picked cheap', and now rented, and so home ownership levels took a hit; more of the same as strategy?
Well, its a mess and it will take time to play out; one missed car or mortgage payment usually doesn't start legal process - it takes a few, and court action adds some time.
Anecdote: some weeks ago I had said to a brokerage employee that my analogy for this 'depression' (I know there is some set formula) is that we are akin to someone going off a 50 story building...for the first 49 floors 'you are ok"...I hope that I am wrong and the needed stimulus package was not really needed.

Neil H. Buchanan said...

My thanks to Frank Willa for his helpful comments.

The real estate tax loss provision might add a wrinkle, but it's hard to see that being what stands between a modification and no modification.

I wrote a bunch of columns in 2010-12 about the housing crisis, and it's true that some properties were transformed into rentals -- which I argued (and continue to believe) was a good thing overall, because owning is very risky for many people. In 2020, that strategy is again available, because there will be opportunists who will look to buy distressed properties for cheap (to turn into rentals or to resell), but the SELLER of those properties will be the repossessing bank, taking a loss; so it's hard to see why the potential repossessor wouldn't want to keep people in the house (and on the hook) rather than kicking them out, at least without some specific reason otherwise.

Also, you'll be surprised to learn that there is no official definition that I'm aware for a what counts as a depression. While there is an unofficial norm among economists that 2 consecutive quarters of negative real GDP growth counts as a recession, there is no consensus on what counts as a depression. It's just a REALLY, REALLY BAD recession.

Greg said...

It seems to me that your answers are overly simplistic. It's not that I'm not sympathetic to the plight of renters, but I think there's more to it than you say here.

The economy hasn't completely stopped. It's just different and smaller. I've been offered a new job during the pandemic, even though I still have my old one. Saying that there are no jobs or no tenants isn't really telling the whole story, and produces overly simplistic answers. There are fewer jobs and fewer tenants, for sure, but some still exist.

The current eviction freezes have really hurt small-time landlords who only have a couple of houses that they rent. These individuals don't have 200 tenants to statistically spread the pain, and the current policies give these small-time landlords no leverage to try and negotiate reduced rates rather than refusal to pay.

Even for the larger property owner with 200 tenants, if eviction were an option, the right thing to do isn't to evict nobody. The right thing to do is to evict the "worst" tenants who qualify for eviction, and then rent those units for whatever the going rate is. Based on the results of those evictions, you may choose to evict a few more or you may try to work out some form of delayed or reduced rent for the remaining tenants. It's not all or nothing.

The length and complexity of the eviction process can also cause landlords to initiate it early, in anticipation of being able to rent the property after the eviction process is completed, even if they wouldn't be able to do so now.