Rental mentality

American capitalism is broken, and in the race to fix it there is a lot of prognosticating about what will work, what won’t, and what things will look like after this crisis passes. One of the best things I’ve read in the latter category is Richard Florida’s article, “How the Crash Will Reshape America,” in the March 2009 issue of The Atlantic Monthly.

It’s a very long, in-depth analysis and rewards a full, careful reading; but since I suspect you’re not going to do that, let me sum up. Most of the article argues that industrial centers like Detroit are doomed in the long run, and that population-dense areas with diverse economies, like New York, will thrive, based on a notion of the “velocity of ideas” that such places generate, which may sound a little vague but rings true for me.

The article holds up Pittsburgh as a model for successfully managing the transition from a large industrial economy to a smaller idea-based one, and it wraps up with some prescriptions for managing this crisis to a comparatively soft landing. The most compelling suggestion the author makes is for “the removal of homeownership from its long-privileged place at the center of the U.S. economy.” Its benefits aside, homeownership creates economic ills of various kinds: for example, it anchors people to a region that may be in economic decline, producing a “creeping rigidity in the labor market,” when those people ought to be mobile and able to go where the work is. Further, government incentives encouraging homeownership distort demand, producing, for example, speculative bubbles of the kind we’ve just seen pop.

Richard Florida would rather see government policies favoring property rental, and calls the current tidal wave of foreclosures an opportunity: banks could be required to rent a foreclosed home to the erstwhile owners at the prevailing market rate (typically much less than a mortgage payment). This would achieve the goal of keeping families from ending up on the street, in a less artificial way than prohibiting foreclosures would. Just as importantly, it provides a basis for valuing some of those “toxic assets” you’ve heard so much about.

Digression: a big part of the problem in the financial world right now is that years of bad lending decisions have led banks to accumulate a lot of worthless assets on their books — worthless in the literal market sense that no one, no one wants to buy them at any price. In the absence of at least a potential buyer, it is literally impossible to compute a value for an asset, and in the absence of some way to place a value on those assets, banks will sooner or later be forced to “write them down” — to admit they’re worthless and that the bank as a whole is worth a lot less than before. If the bank’s assets shrink enough, its liabilities may overwhelm it, at which point it becomes insolvent.

This is one reason why compelling banks to turn foreclosed homes into rental properties is so attractive: in many cases it guarantees a stream of rental income from the property, meaning that the property now has a non-zero value even in a glutted real-estate market where the house itself can’t be sold.

I am a somewhat reluctant homeowner. Having grown up in New York City, renting was always the norm, and I never felt the urge to own my own home. But after a few sour landlord-tenant episodes, and after we made some money in the dot-com boom, and after our first son was born, Andrea got the homeowning bug and I went along — mainly because, even though renting had always been the norm, there was always lip service paid to the unalloyed good of property ownership.

I cottoned at once to Florida’s repudiation of this idea, but if we’re going to transform ourselves from a nation of hopeful homeowners to one of eager renters, there are some things about rental that we’ll have to make less painful. Here’s a short list of rental pain points that I’d want addressed if I were going to take that step myself:

  • Rent control (though unfortunately, when economists agree, the thing they agree about the most is that rent control is bad)
  • Ample notice of lease non-renewal or significant changes in lease terms
  • Authority to hire approved vendors for basic maintenance

Since I would expect to move more often as a renter, I’d also want a more robust and economical network of storage and moving services than exists today; but in a successful transition to the rental-oriented new-urban utopia of tomorrow that should follow naturally. I can’t wait.

One thought on “Rental mentality

  1. harpoonflyby

    I had the same idea towards transitioning mortgages over to renting contracts and vice-versa. In short I think good rental experiences should take priority over home ownership, but in reality this is not so, for many deliberate reasons. There are entire institutions purposely set up to fight that paradigm every step of the way – our society prides iteslf not upon dependence but full independence. That means: owning several cars, having several kids, owning a home, and shooting at anyone who crosses your property line. This is the indoctrinated American life, and it has a purpose.

    Furthermore, the justification for increasing labor liquidity is flawed, people should not be forced to move around so often, simply if it is the result of being laid off or of poor conditions at the workplace. Many of the most vocal economic views, such as those espoused by Alan Greesnpan, hold that increasing labor liquidity is a common good, but this could not be further from the truth. I mean, do you like working harder, longer hours, for less pay, and, having to pack up the kids and go on a whim? People’s lives aren’t commodities, so when an economist says things to this effect you should put your hand on your wallet, because you know who he’s working for.

    That said, there’s a myriad of ways to improve renting experiences and the transitioning of from home ownership to renter, which doesn’t commodify people’s lives. Problem is none of them can be accomplished under our current system and since we’re bailing out that system currently, it’s not going to magically happen anytime soon.

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