Help Renters Be Buyers

LOS ANGELES faces an enormous rental housing crisis. Condominium conversions are taking thousands of apartment units off the market, which is driving up rents even as the number of people who can only afford to rent increases. About 12,000 rent-controlled apartments have been converted into condos or demolished in the last five years — 8,000 of them since 2005. And...more than 60% of Angelenos live in apartments, and the average monthly rent is $1,600 citywide.

But housing activist Paul DeSantis envisions tens of thousands of new condominium owners in Los Angeles — without the necessity of evicting tens of thousands of apartment dwellers. His proposed law, submitted to City Councilman Bernard C. Parks, would avoid mass evictions by giving qualifying tenants an opportunity to convert their apartments into condos and buy them.

DeSantis says a similar law worked in Santa Monica, where he lives, for nearly a decade. It was controversial, he says, but it gave thousands of tenants the opportunity move up to homeownership.

Michael Hill is one of them. On his 500-square-foot rooftop deck, the retired teacher told me how he got his dream condo, just six blocks from the beach in Santa Monica, for $90,000.

Using the city's Tenant Ownership Rights Charter Amendment, he and three fellow renters bought their four-unit building from their landlord 19 years ago at the then-market rate of about $300,000. After obtaining their own financing, the four then transformed their units into condos. "We were a waiter, two phone company employees and me, an LAUSD teacher," he said. "Without the law, we would never have become homeowners." Hill estimates his unit is worth $750,000 today.

About 12,000 rent-controlled apartments have been converted into condos or demolished in the last five years — 8,000 of them since 2005.

Gee, I wonder why. Certainly there are many reasons for demolishing an apartment building. If the owner is negligent, or if the neighborhood becomes crime ridden, and the like. But I would venture to guess that most of these buildings were abandoned or converted--surprise--because the owners could no longer afford to pay the bills under rent control. That's what happened in New York on a major scale in the time of Lindsay, and for quite a while afterward. That's similar to what caused California utilities to go belly up under Gray Davis--retail price controls.

So, there are solutions, but it would help to recognize the distortions introduced in a market system by bureaucratic government controls.

Just to fill out what the TORCA does: it uses city money to "loan" money to renters. From the Santa Monica TORCA website:

"Under this loan program, the City is repaid its principal and a share of the appreciation of your home at the time of resale. No monthly payments are required."

Further, "The principal amount of the City's loan is due and payable on the earlier of twenty years (or thirty years if applicable), or upon resale, transfer, or default. In addition, the Borrower must pay to the City, as contingent interest, a share of the appreciation of the unit equal to the amount of the City loan divided by the Original Purchase Price, multiplied by the Appreciation of the unit. Transfers to a Borrower's spouse, transfer of title in conjunction with divorce, and transfers of title by a Borrower's death to a surviving joint tenant shall not require repayment as long as the Borrower's successor assumes the loan and all loan terms."

This doesn't sound unreasonable on its face, but there's at least two problems here: (1) likely poor valuation of risk and (2) a slightly subtle moral hazard problem.

The poor valuation of risk arises from the fact that, under this program, the city loans out money to be repaid at an unknown date (capped at 30 years out) with an unknown payout at that time. That's called speculation, and financiers do that all the time. However, professional financiers price accordingly, and charge very high fees or interest rates to make up for the uncertainty inherent in such a venture. It's routine, for example, for venture capitalists to loan money with an uncertain return, but only if the venture capitalists can claim at least 60% of the value of whatever they are loaning money for at the 3 year point. The City, on the other hand, is loaning money for an asset that may not generate a cash flow (i.e. be sold) for up to 30 years, and the City is doing so only for a contingent interest equal to "a share of the appreciation of the unit equal to the amount of the City loan divided by the Original Purchase Price, multiplied by the Appreciation of the unit." This is far out of whack with what private lenders do, and, therefore, is likely to reflect underpricing on the part of the city. In other words, the city taxpayers are paying for risky long term investments without a hope of receiving the outsized returns that such risky long term investments should generate for the taxpayers.

Further, there's a moral hazard problem in the way this is set up. Generically, a moral hazard refers to the concept that the economic incentives in this deal will change people's behavior. In this case:

If property values go up, then there's an incentive for the new owners of a property to NOT sell, so as to not pay that "share of the appreciation of your home." The city then won't collect either monthly payments or the "share of the appreciation of your home."

If property values go down, then there's an incentive to sell at that time, since there will be no "appreciation of your home" from which to city can take its share. Again, the city still won't have collected monthly payments, and won't collect appreciation on the home.

So, in general, this is a program that makes risky loans without normal compensation for the risk, and then increases the risk that the payback of those loans will be later rather than sooner. Sounds problematic.

Less in Los Angeles than in San Francisco, there is an obvious solution to their housing problems--and they're sitting on it.

Pick a reasonably geologically stable hill, and dig into it.

If done in a careful manner to make sure the surface buildings are stabilized, a single hill could hold a large number of roomy, luxury condominiums. The main entrance could be next to a main traffic artery at the bottom of the hill, which becomes the lowest level, the parking garage.

Each level of condos would be interspersed with utility tunnels for ready maintenance of ventilation, water, sewage, communications, etc. Walking corridors could be illuminated with natural light that would follow the day-night pattern, so condos could even have small gardens.

Other levels could be more "economy", more like apartments, and could be competitively priced to surface apartments, except available for rent.

A different hill could be entirely inexpensive housing for a large number of working people. Not a "project", but like a gigantic "Blade-Runner"-style pyramid, but underground. Such a place would make an ideal hub for mass transit.

The bottom line for any of it is that people have housing they can afford in a very crowded city, that is available. If the underground housing areas can fill this niche, then they become viable.

There are so many problems with this article ...

No.

The reason LA faces a housing crunch is NOT because "Condominium conversions are taking thousands of apartment units off the market ..." It is because of the uncontrolled flood of humanity that has decided to migrate to LA (and yes, I'm talking about law-breaking Mexicans). Also ...

It's odd that the article mentions Santa Monica, but does not bother to make plain that the rent controls in place in that city are directly responsible for some of the overpriced rentals we see in the city. I don't just mean price controls; I mean restrictions on how many units to an apartment complex, height restrictions on buildings, the fact that it's almost IMPOSSIBLE to evict a renter. If you artificially restrict supply, price goes through the roof.

If you had those kind of things to contend with - would *you* want to go into the renting business?

It's socialism gone mad. And they wonder why there's no more housing.

Also, the author(s) of this piece don't seem to realize that if you subsidize a thing (low income housing), you attract more people who use that thing - low income people (ie - Illegal Aliens). Or maybe they do realize and they just don't care.

A very good book was written once by Harry Harrison - "Make Room, Make Room". I'd read that as a cautionary tale.

This will work up to a point. Beyond that, there is a certain "demographic" that will never be able to afford a house. If you give them the money, it will soon be squandered. If they manage to move in, they will soon tear the place up. They will not maintain it. Worse, it will decline in value and appearance, dragging the neighborhood along with it. If the owner of the house next door wants to sell, he will find that few people want to own a nice home next to a dump.

You can put pigs up in the Hilton and they are still pigs. So, good luck taxpayers! Yet another scheme that does a little good, and helps a few people, while throwing a whole lot of money at a problem the money cannot solve.

One solution would be to help people who cannot afford decent housing to move where they can afford it.

Just checked the listings in a quiet, northern Missouri town. Here's one:

>>
Clean & Neat is this 2 Bedroom, 1.5 Baths, ranch style home.1,000 sq. ft. Utilities are a bargain. Detached 20 x 24 steel building. Lot's of updates. $39,500
<<

Or this one:

>>
3 BR, 1.5 baths; Formal living, formal dining;
Kitchen w/appliance; Hardwood under carpeting Central heat and air Vinyl siding; $49,900
<<

from:
http://www.moproperties.com/

But, Kali taxpayers are famous for being smarter than people who live in fly-over country. That is why they are there, with all the smog, crowds, traffic and high taxes.

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