What might the eviction crisis actually look like?

Great Debates
1

There’s an article in today’s New York Times titled, An ‘Avalanche of Evictions’ Could Be Bearing Down on America’s Renters.

The main argument of the piece is that, as stimulus checks and boosted unemployment payments dry up, more and more renters won’t be able to afford to pay their rent, especially as it will likely take the economy a long time to rebound even if businesses start to reopen. High unemployment levels are likely to be with us for a while, and many of those who have suffered most heavily from the economic crisis are renters on low incomes without much in the way of financial resources.

There have been similar stories in other news outlets over the past couple of months, and most of what they say seems to be a fairly straightforward summary of a pretty dire situation.

But it seems to me that what many of these stories fail to consider is the question of how these mass evictions might work, in terms of the overall rental market. That is, you evict a non-paying tenant, and what next?

Evictions happen all the time. The same Times story notes that, in 2016, when the economy was going well and the unemployment rate was under 5 percent, there were still about 3.7 million eviction cases filed in the US. But one of the key rationales for evicting a non-paying tenant is that you want to replace that tenant with one who can and will pay the rent on time. When the economy is booming and unemployment is at historic lows, it makes rational economic sense to evict a tenant who can’t pay. But what happens when everyone’s doing it?

If a landlord evicts a tenant now, the landlord faces a situation of trying to find a new tenant at a time when unemployment is at levels not seen since the Great Depression, when the vast majority of people looking to rent a place to live might have just been evicted themselves, and when somewhere around 15 percent of the population is out of work. It’s all very well to evict the tenant who can’t pay, but where does that leave you if the vast majority of people in the market for rentals are also people who can’t pay, and if you’re now also competing in a rental market with all the other landlords who have just evicted their non-paying tenants?

Presumably things will play out differently in different markets. In a very tight market like San Francisco, the crisis might simply result in a medium-term decline in rental prices, as the market adjusts downwards from its absurdly high levels. But in plenty of cities and towns and regions, where the rental market was not especially tight to begin with, if everyone who can’t pay gets evicted, then who’s going to be occupying all those rental properties?

If I were a landlord right now, especially in an area without an incredibly tight rental market, I’d probably be looking to work with my existing tenants rather than evict them in the middle of the economic maelstrom and hope I could find someone else who wasn’t also in dire financial straits.

I guess my question for discussion is: how do you think this will play out? Will we see a rash of evictions followed by a rash of rental property owners defaulting on their mortgage payments? Will we end up in a situation where millions of people are thrown onto the streets and landlords and banks end up owning hundreds of thousands of empty properties?

2

Add this to the commercial sector and things become very interesting. If lots of commercial places shut down permanently then the owners will have the problem of servicing their debts which were secured on the basis of the value of their holdings.

If those holdings drop in value due to lack of occupancy then the creditors could foreclose and gain possession of overvalued assets - result will be loads of write downs and loss of share confidence.

3

Yup, and the ‘banks’ will get bailouts 'cause it isn’t fair that they are left holding the bag they themselves made.
Meanwhile, the 'poor’s should be thankful we don’t firebomb their property devaluing tent cities.

CMC fnord!

4

Another alternative is that the landlord sells the place. Quite often, renting brings a lot of headaches and the landlord may not be making a lot of money. Rather than dealing with a future of flaky tenants because of the rocky employment landscape, landlords may elect to put the house on the market to get out whatever equity they can. It’s hard enough to find good tenants with good credit when the economy is good. Now that unemployment is going way up, finding those good tenants will be much harder.

5

Sure, but isn’t that just another piece in the whole puzzle of the economic disaster?

With mass evictions, unemployment as historic highs, and the property market in crisis, how easy will it be to sell the property? Who will buy it, and for how much?

Landlords who are already evicting tenants and having trouble finding new ones are unlikely to want to start buying even more properties, and if a whole bunch of landlords try to offload their properties at the same time, that’s going to tank the market too, and might leave plenty of them underwater on the sale, owing more than they get for the property. Sure, this could be a time for people with plenty of spare cash to make a killing in the property market, but even those people aren’t going to want their rental properties sitting empty if they can help it.

6

Historically, places like New York City and San Francisco have been a seller’s market when it comes to rental properties. Landlords have always been able to find people who want to rent their properties, which is why rents are so high. And many have argued that rents would actually be higher if there weren’t laws keeping them artificially lower than their natural rate.

So with the demand outweighing the supply, landlords aren’t worried about not being able to find replacements for any tenants they evict. Especially when every evicted tenant immediately turns around and becomes a person looking for a place to rent.

There is the unemployment issue. Regardless of desire, those evicted tenants may simply not be able to afford the rents that the market is offering. But I don’t think this will drive down rents. I think instead it will cause a geographic shuffle. Places like New York Cit and San Francisco are always attracting new people in. So I think what we’ll see is a lot of newly unemployed people being driven out of these cities by their inability to pay rent and a stream of new people moving in to their vacated apartments. Landlords may only have three people calling about an available apartment rather than the ten they got in the past but every available apartment will still get filled.

7

And yet that’s precisely what happened during the Great Recession of 2008-2010.

The New York Times reported in February 2009 that “rents fell in almost every sector of the Manhattan market last year,” with one-bedroom apartments down between 5 and 7 percent, depending on the type of building. And those were asking prices; the article notes anecdotal evidence that even lower final prices were being negotiated, and that, once you counted some of the incentives that landlords began offering to get renters, “rents are actually down some 10 percent to 15 percent since the market peak in mid-2007.” Landlords were offering a free month’s rent, or to pay the broker fees usually paid by tenants.

You’re right that apartments were still getting filled, but they were getting filled at lower rental rates. One couple in the story describes giving notice and being offered a 10% discount to sign a new lease, but they had found an apartment they liked better. Others were able to negotiate significant discounts on the advertised prices:

Rents continued to decline after that NYT story from early 2009. This recent piece, talking about the potential impact of the COVID-19 economic crisis, looks back on the Great Recession and finds that overall rents in New York declined about 10% between late 2008 and early 2010, with the largest decline (about 12%) in the low price tier.

These rent declines were largest in Manhattan, with boroughs like Brooklyn and Queens having greater rent stability. But even Brooklyn saw some rent reductions and incentives, according to the Times.

Actually, while rent control do keep the prices artificially low for the renters lucky enough to live in a rent-controlled apartment, rent controls also tend to inflate the rest of the rental market above its natural level, precisely because rent control removes a significant number of units from the free market and tends to create greater competition for the remaining housing stock. This is one of the central arguments against rent control made by economists: that it artificially inflates rent on non-controlled units.

8

The problem will likely be worse then we’re expecting, since a lot of investors who got burned on mortgage-backed securities have switched to rent-backed securities. IIRC, about 11-12% of the entire US rental market actually has Wall street as their landlord. These folks probably aren’t negotiating, and likely would have good legal advice when they start evictions.

9

But it’s not legal advice they’re really going to need; it’s economic advice. I’m not arguing that evictions will be illegal. In some states, there are moratoriums on evictions still in effect, but not in most states, and all of those moratoriums will (most likely) eventually expire and not be renewed.

Wall Street landlords aren’t automatically immune from the economic consequences of the rent crisis, and if they evict their current tenants, they will probably have exactly the same challenges as any other landlord in finding new tenants to pay the rent. They may even suffer more, precisely because they have greater exposure.

10

Maybe landlords will take less say half the normal rent? Getting some money is better than none isnt it?

11

According to an article I just read (may even have been in the Times) landlords average a return of nine cents on the dollar. Getting half the normal rent is the same as bankruptcy.

12

Don’t forget that most landlords have mortgages. That means, when the landlords can’t pay, the banks are on the line. And if the banking system is on the line, then Uncle Sugar has to bail them out or we turn into Somalia without a banking system and the gold standard returns.

13

Many landlords likely recognize the benefit in lowering or suspending rates on existing tenants. They are probably willing to reduce or suspend rent, but many can’t because the properties are mortgaged. Banks themselves would probably work with borrowers, except they still have to pay property tax and insurance on a property that’s yielding no revenue. This isn’t tenable for a bank that may be facing liquidity issues of its own, so their least bad choice is to sell the property and evict the owners.

Banks aren’t community-minded; they just want to protect their balance sheet. None of them wants to be the heart-of-gold institution who ends up being the last one holding the bag, who ends up being the “bad bank” where the government consolidates the bad debt after bailing out the healthier banks.

14

I find this very likely, especially among white-collar workers whose location doesn’t matter much. You’ll see a lot of companies saying "You know, Seattle and San Francisco are trendy, sophisticated cities, but it would be trivial to locate to Dallas or Atlanta where there’s tons more housing supply and a much more business-friendly climate.

I’ve lived in Georgia all my life. I’m tired of living in an irredentist hillbilly shithole and I long to relocate to Seattle or San Francisco. But things are changing in Atlanta.
Housing has long been more affordable than other cities, and Atlanta is attracting tech and other white-collar jobs that are robustly high-paying relative to the cost of living, so I just kind of hold my nose and stay here. There are a number of other southern cities that are candidates to become a destination for high-rent refugees from more housing-constrained markets.

15

Outside of the three major population centers, New Mexico rentals are not heavily leveraged. Most rental property is owned by locals who bought it during their working years to provide retirement income. So, there’s no mortgage to worry about but there is taxes, insurance and maintenance. The rural areas are poor but stable. Not much is going to change demographically.

There’s no line of renters waiting to replace evicted tenants. The best strategy is to keep the renters I have even if they can’t pay. But, there are other issues. My rentals are in an IRA so my expenses are not deductible and I still have to take a minimum distribution from the IRA even though there is no income.

There’s no easy answer.

16

Related to this:

Many landlords years ago started making their apartments into illegal hotels thru Airbnb. This has worked to make the housing supply even tighter and further jacking up rents.

Well now that tourism is down they are seeing big hits and I cant say I’m sorry for them.

17

I’m reminded of how, shortly after it was opened, the Empire State Building went benkrupt. Hard to fill all that space when you’re in a Depression.

The bank took it over… and basically did nothing. They knew full well they weren’t gonna do any better, so they let the existing tenants pay what they could.

18

But it depends, doesn’t it, on how long this situation lasts? Getting less rent (whether it’s half, or three quarters, or 90 percent, or whatever) for a few months is probably better than evicting the tenant and having the place sit empty.

I don’t think anyone, and certainly not me, is arguing that rent reduction or forgiveness need be a permanent and for-all-time solution. I’m simply suggesting that, in the current circumstances, it might be better for a landlord to retain a tenant with who they have a prior relationship, and who is doing their best to pay the rent, rather than evict the tenant in a market where there might not be anyone better to fill the vacancy.

More generally, my basic position on this whole economic situation is that we should all do our best to meet our obligations, but that we should all also be willing, in some measure or another, to share the pain. If a bunch of tenants have lost part or all of their income, that might not be the landlords’ fault, but in this economy, it’s not really the tenants’ fault either. And if tenants are expected to have a rainy-day fund to see them through hard times like this, shouldn’t landlords have something similar?

20

I think the banks and the very wealthy will be happy to gobble up property on the cheap.

As tenants can’t pay presumably landlords will be unable to make mortgage and/or tax payments. It does not matter if the landlord wants to work with the tenant. If there is no money then the landlord is also out of luck.

The banks will swoop in and re-possess the properties and will be quite happy snap up the property cheaply. The bank is likely to be cushioned by the government from failing so why not…get all the juicy property on their books for pennies on the dollar.

21

That’s not going to work if the landlords’ bills are still full price. Mortgage, taxes, insurance, repairs, maintenance…

I know that the company I, personally, rent from is trying to work with current tenants, the vast majority of which are long-term, reliable tenants.

But I think we will, indeed, see millions of evictions and many of those people will NOT be able to rent another place to live. They will either move in with friends/family… or they will be homeless. Which is how we wound up with Hoovervilles in the Great Depression. Maybe this time around we can call them Trump Tents.

Of course, the fact we also have a global pandemic going on is just going to add to the mess… mix shanty-towns with Covid-19. {{{shudder}}}