Inequality and Rent-Seeking in Housing

“Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community, whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.”

-          John Stuart Mill

The quote from John Stuart Mill was penned in the 19^th century, but seems more relevant than ever. Every day, Americans are becoming more astutely aware of rising inequality and the undeserving accumulation of wealth and power by the wealthiest households in the country. There have been many great books and articles written on the topic, analyzing the mechanisms that have created the most unequal society we’ve seen since the gilded age. But one issue I have noticed is that in the analysis, the wealth or capital that is being discussed is often talked about very abstractly. For many, we might imagine this wealth existing as free-flowing capital in offshore accounts or complicated investment schemes cooked up by hedge fund managers. Of course, these types of wealth do exist and are very important. However, one of the most common forms of wealth is found in land. Most often, in housing or commercial property. The growing concertation of land-wealth should worry anyone who care about inequality, as it is beginning to usher in an era of the new landed-gentry and the rest of us are looking at a future of serfdom. 

In 2014, Thomas Piketty’s Capital in the 21^st Century put an end to the Kuznet’s Curve theory that inequality will follow some natural law of motion, initially increasing before decreasing in tandem with development. Piketty made the convincing case that the world is returning to a low-growth regime and the rate of return on capital ( r ) will continue to outpace the growth of the economy ( g ). One critique of his analysis is that Piketty treats land and capital as one in the same, something neoclassical economist do. But there are many difference between land and capital that make land one of the greatest culprits of rising wealth inequality, and explains why it deserves specific attention when thinking about combating inequality. In his book, Rethinking the Economics of Land and Housing, John Ryan-Collins explains the difference in great detail. The most important aspects however are:

1.Land in permanent, capital is temporary (land does not depreciate)
2 Economic rent from land does not increase investment or production

These features make land (and housing) an attractive investment for rent-seekers who wish to accumulate as much unearned income at the expense of others as possible while exerting the least amount of effort. Landownership is almost always resource-extracting as landlords collect rents that do not reflect productivity in the slightest.

Consider the following examples: a landlord owns a building and charges $1,000 a month for rent. The city builds a new subway station nearby and a host of new small businesses offering a variety of amenities open up in the neighborhood. As a result of this development, the landlord increases the rent to $2,000. However, the landlord has done nothing to make this building a more attractive or productive place to live. The added value has come from the local government and the enterprise of the community. This holds true for commercial landlords as well, if a small business is operating profitably paying $3,000 a month in rent, and the landlord decides to increase the rent to $5,000, he is actually hurting productivity. The productive actor is the business, and the landlord in this case – like a feudal lord collecting his dues from the serfs – is extracting wealth at the expense of their labor.

This kind of rent-seeking activity has often been seen in the multifamily rental housing market. In New York City for example, landlords and real estate management companies have long sought these rent-seeking opportunities, from tenement houses to today’s gentrifying luxury buildings. However, recently we have seen the growth of investors buying up the single-family housing market as well.

Homeownership, particularly in the one and two-family housing market, has been the primary means of building wealth in America. The persistent racial wealth gap is almost entirely attributed to homeownership and the centuries of racist policies that gifted property titles to white Americans and excluded communities of color (racial zoning, redlining, restrictive covenants, exclusionary zoning, etc.). With the increase of rent-seeking investors buying up multiple properties in the housing market, we will only see the growth of the wealth-gap and the concentration of wealth that mirrors the general trend of rapidly increasing inequality in America, one that includes wealth, income, and political power.

After the housing bubble burst in 2008, we witnessed a new trend in the housing market: the financialization of the single-family house rental property. The trailblazer was Blackstone, a private equity firm. Blackstone, having learned little from the mortgage crisis, started buying up houses (mostly foreclosures), renting them out, packaging the rental units into securities and selling them to investors (sound familiar?). Blackstone spun off a new entity to manage the “portfolio” (read: people’s homes) called Invitation Homes in 2012. Jonathan Gray, head of Real Estate at Blackstone, explains the logic:

"We realized in studying the sector that there were already 13 million homes in the United States that were being rented out, but just done so on a mom-and-pop basis. And so, could you build a scale institutional single-family business much like what happened in the multifamily business in the 1990s?"

Here’s a better question: do we need to? Why do we need a faceless institution to replace neighbors renting homes to neighbors on a small scale? We don’t, but the landed gentry in search of high-returns from minimal effort certainly does!    

Let’s recap what happened here. Speculators in the housing market caused a massive crash that cost millions of families the one asset they had to build wealth, all due to a Minsky-moment of over-confidence and recklessness. Then private equity swoops in to snatch up hundreds of thousands of houses and rents them out, collecting unearned income from the pockets of the very people who were hung out to dry during the crisis, further consolidating land, wealth, and power into the hands of the new gentry.

As I mentioned, Blackstone was the trailblazer but others followed. The single-family housing market has become a hot commodity for investors. The gentry of the 18^th century looked to the land to collect rents (unearned income) at the expense of debt-ridden tenant farmers. Today’s gentry will look to collect rents from housing at the expense of debt-ridden or credit-deficient renters. It’s not just the large PE firms, and not just your grandma renting out her house in New York after she retires to Florida. Smaller and medium-sized investors are getting into the game.

This is having a direct impact on my community. Queens, New York is a beautifully diverse borough. When we say it is diverse, most of the time we are talking about the diversity of the people. However, Queens also has a diversity of the housing stock. Queens has often allowed for affordable homeownership in a city that is primarily composed of renters. But with the rise of the single-family rental portfolio, this is becoming increasingly difficult. Smaller investors, LLCs, and real estate holding firms are purchasing single and two-family homes at unprecedented rates. In many cases, we are seeing this in low-moderate income immigrant communities. Here is some data pulled from Geodatadirect.com

As the graphs show, the rise of corporate entities in the single and two-family housing market has grown substantially, crowding out first-time homebuyers.  

In 2000, just about 8% of homes bought that year in Corona, Queens were bought by investor entities like LLCs. In 2016 and 2017, the it was about one in every three homes. Richmond Hill, Queens saw a similar trend, with 1% in 2005 to 24% in 2017 being bought by investor entities. Notice the sharp increase after 2008, when the housing bubble created the opportunity in following years for private equity and LLCs to sweep up foreclosed properties.

This is nothing short of a consolidation of wealth into the hands of a new gentry. A class of Americans that earn most of their income from owning capital (or land) and extracting that wealth from folks who work to make a living. Investors, likely using highly-leveraged loans to increase their positions, are draining the community of vital disposable income that they need for food, taking care of their families, saving for the future, or starting a small business of their own. They are also crowding out the market for single family and two-family homes, meaning low to moderate income families that strive for homeownership are increasingly finding it impossible to buy a home in their communities, close to their relatives, jobs, places of business, and houses of worship.

This need not be the case. Municipal and state governments can do a lot more to capture the rising value of land and reinvest it back into the community. Alternative models like Community Land Trusts can help transfer landownership back to the people. Even homeownership policy can be restructured so that it doesn’t pay to build an empire portfolio of houses. If we continue down this current path, we will surely continue to see growing wealth inequality in New York and the rest of the country.