Biden Proposes Rent Control
What it looks like and what it would mean
With a campaign in crisis following the most dismal three weeks of his presidency and facing mounting pressure from fellow Democrats to drop out of the race (and now hunkered down in Delaware with COVID-19, to boot), President Biden rolled out a group of proposals this week that his administration says are meant to lower housing costs for millions of Americans, but opponents say amount to nothing more than politically engineered rent control. What do the proposals look like? And what would they mean for property owners and tenants alike? Let’s dig in.
Proposal #1: Cap Rent Increases at 5%
From the White House’s proposal earlier in the week:
President Biden is calling on Congress to pass legislation presenting corporate landlords with a basic choice: either cap rent increases on existing units to no more than 5% or lose valuable federal tax breaks.
What would those tax breaks be? The only specific one mentioned by the Biden Administration is the write-off for accelerated depreciation, which allows real estate investors to deduct more expenses in the early years of property ownership, thereby getting a larger tax break and improving overall cash flow at least at the outset. The Biden Plan does call for exceptions for newly constructed properties and rental units that undergo significant renovations. In addition, the proposal only applies to landlords with more than 50 units in their portfolios, which Biden broadly categorizes as “corporate landlords.”
Proposal #2: Build More Housing on Federal and Public Lands
Noting that the Federal Government is the largest landowner in the United States, President Biden proposes to repurpose portions of federal land large and small for the construction of rental units and “tens of thousands of affordable homes.” The president has called on all federal agencies plus local entities like school districts, public utilities, and even churches and other faith-based institutions to assess their land holdings as to whether portions could be used for housing. Some specific examples the president gave on where this is already happening within the federal government include:
The United States Forest Service, which is planning to lease land for workforce housing.
The United States Postal Service, which will pilot a program to repurpose some of its 8,500 nationwide facilities into housing.
HUD and various other agencies, who will work together to make it easier to convert underutilized federal buildings and land to house the homeless.
The Bureau of Land Management, which has made several large parcels already available for the development of rental units and homes.
Proposal #3: Invest Directly into Housing Developments
The president also proposed to invest federal funds directly into housing-related efforts, especially to build low and moderate income housing. This is similar to portions of what he has previously proposed in the past, which I wrote about in 2022, some of which has come to pass and some of which has not quite gotten off the ground. This past week the president did announce a $50 million grant to the Southern Nevada Regional Housing Authority, which “will restore 235 existing affordable housing units for extremely low-income renters and build 400 new units of housing [and] will invest in an early learning center and provide support for small businesses.” Fourteen other communities around the country are set to receive similar grants, including of note to my Maine readers, Lewiston.
How Likely Are These Proposals to Pass?
In a campaign year (especially one that has Joe Biden fighting for his political life), the president is somewhat of a lame duck. Republicans control the U.S. House of Representatives, so there is not much getting through right now and, needless to say, the Biden housing proposals are not likely to have much bipartisan support particularly the one around rent control. That proposal, in particular, was widely panned by economists and industry groups this week. I plan to take up the broad topic of the effectiveness of rent control (or lack thereof) in a future article because it deserves to be a topic all of its own, so I’ll leave it there for now.
As an additional quick aside on this topic, there is no real indication of how property owners would be tracked on the 5% figure. As it stands now, rental property owners do not report individual rents unit-by-unit on their tax returns; the income and expenses for properties are typically aggregated by property or even by group of properties. Tracking changes in rents would require a new form of tax reporting as well as further clarification on how renovations, vacancies, and other typical variables would impact the 5% calculation.
The idea to make more federal and public lands available for housing is the one that is more likely to get traction, it just probably won’t be in a campaign year. In fact, repurposing federal lands for housing is actually in the Republican National Committee (RNC) platform already, although it is likely the Democratic and Republican thoughts on how to best do this and in what magnitude are miles apart. It is just very unlikely that Republicans will do anything to give Biden a policy win between now and November, and furthermore a proposal like this one actually would actually take quite a bit of time to unroll. It may seem like converting an underutilized post office building into housing is an idea that makes sense, for example, but the politics of closing a rural post office are quite complicated. People like the idea of making the postal service more efficient, they just don’t want their own post office to close.
What About Trump?
President Trump did touch on housing costs in his lengthy RNC nomination acceptance speech this past Thursday night, saying:
Under this administration, our current administration, groceries are up 57%, gasoline is up 60% and 70%, mortgage rates have quadrupled, and the fact is, it doesn’t matter what they are because you can’t get the money anyway. Can’t buy houses. Young people can’t get any financing to buy a house. The total household costs have increased an average of $28,000 per family under this administration,”
As with many things Trump says, his comments here are resonant but exaggerated. Mortgage rates are significantly higher than in 2020, for example, but they have not quadrupled. He has also offered little in the way of specifics about bringing housing costs down, but continues to batter President Biden on the topic of inflation, which remains one of the top issues on voters’ minds and a real political weakness for the current president.
Another point of difference between the Biden and Trump Administrations is that after initially sharing some common ground with Democrats about reducing regulations and modernizing code and zoning requirements in an effort to allow more multiunit construction, Trump reversed course during his presidency. Instead of supporting further housing development and regulation changes that would make construction easier, Trump positioned himself as a defender of traditional American neighborhoods (often with fear-mongering language on race and immigration) and has hammered the Democrats for trying to end the “suburban lifestyle dream.”
A Final Note about Shelter Inflation
“Shelter,” as a broad category, is one of the items tracked in the monthly Consumer Price Index report; it includes both home prices and rents. In the June CPI report, shelter inflation was still outpacing overall inflation at a year-over-year rate of 5.2%, but the month-over-month figure of 0.2% from May to June was the slowest monthly gain in three years. That is good news for tenants, and an indication that the rental market does continue to stabilize, which I wrote about just last week.
The surest way to lower rents is to dramatically increase supply (i.e. build more units). The June CPI statistic about shelter inflation shows that might be finally happening as there has been significant construction of new units over the past 18-24 months, most of which are coming online now and easing the pressure valve on the housing market just a bit.
As for the presidential race, it is nice that both candidates are talking about high rents and lofty home prices. It makes sense, of course, as these are issues that are top of mind for many Americans right now. The solutions, however, may be harder to come by and are more likely to require the simple passage of time, which allows for steady further construction and eventually an easing up of interest rates. These ongoing, incremental changes are more likely to make more of a difference in shelter prices than any specific presidential intervention regardless of who occupies the White House next year.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com.
Weekly Round-Up
Here are a few things that caught my eye this week:
Here in Maine, NIMBY Northeast Harbor residents are trying to block the construction of six workforce housing units for year-round residents near Acadia National Park. At the other end of the state, one town’s loss is the city of Biddeford’s gain. After voters in nearby Cumberland rejected a 100+ unit development, Biddeford Mayor Marty Grohman connected with the developers and convinced them to move the project to Biddeford instead!
Last week I was in Canada, so I thought it would be worth a little research into the Canadian real estate market. The Bank of Canada actually made an interest rate cut in June, which could stimulate activity. There are about 180,000 homes for sale in Canada, a 26% increase in the past year, but down from previous times (a very familiar story to what is happening here in the United States). The average sales price in Canada was down 1.6% in June as compared to the previous June. Read more via Daily Hive. According to one statistic, homes cost about 19% more in Canada than in the United States, adjusting for the exchange rate. Property taxes are typically higher and incomes are generally lower in Canada, which makes the math of home ownership all the more challenging for our friends to the north.
One our ride to and from Price Edward Island last week, we listened to a lot of podcast episodes of How I Built This by Guy Raz. It is like a shorter version of the Acquired podcast that I’ve been recommending over the past couple months. The podcast was pretty accessible and interesting for the kids (ages 10 and 9; we also have a 5-year-old who was less interested in it). Our favorite episodes? Chipotle. Panera Bread. JetBlue. Clif Bar. FitBit. It definitely got the wheels of entrepreneurship turning in the minds of our two oldest kids. I would pause the audio at moments I didn’t think anyone was listening and they would both yell at me to keep it going.
Have a great week, everybody!
