New Research: Exploitation in Housing Markets

New Research: Exploitation in Housing Markets

“Rent,” as in “rent-seeking,” refers to above-normal profits not attributable to productive activity (as opposed to normal profit or producer surplus). Because rents are considered to be unearned or ill-gotten, one could also use the term “exploitation” to describe it. The term fits, especially when the rents are a creature of public policy: someone is using a privileged position in society to extract more value from something than they would be able to in a more level playing field.

To that end, a new paper from by Matthew Desmond and Nathan Wilmers in the American Journal of Sociology is able to identify and quantify the degree of exploitation in low-income housing markets:

This article examines tenant exploitation and landlord profit margins within residential rental markets. Defining exploitation as being overcharged relative to the market value of a property, the authors find exploitation of tenants to be highest in poor neighborhoods. Landlords in poor neighborhoods also extract higher profits from housing units. Property values and tax burdens are considerably lower in depressed residential areas, but rents are not. Because landlords operating in poor communities face more risks, they hedge their position by raising rents on all tenants, carrying the weight of social structure into price. Since losses are rare, landlords typically realize the surplus risk charge as higher profits. Promoting a relational approach to the analysis of inequality, this study demonstrates how the market strategies of landlords contribute to high rent burdens in low-income neighborhoods.

This finding may strike some as counterintuitive. Why would renting housing to the lowest-income residents be more profitable than catering to high-income ones? It’s possible that the surprising similarity between rents in poor neighborhoods relative to others incorporates a certain “risk premium” associated with higher maintenance, risk of tenants not paying rent, or other costs present in poorer neighborhoods.

All of this should eat into profits, but since the losses hypothesized are relatively rare (or may materialize by overcharging tenants), this translates into higher profits for landlords.

To put the findings in dollars and cents, nationwide, the median unit in a poor neighborhood yields a $98 per month profit, while rentals in middle-class and affluent neighborhoods yield $3 and $49, respectively.

The paper uses the housing market in Milwaukee, Wisconsin, so some of the specific findings do not carry over to the national market, but the general trend is the same. For example, while the authors found that a 10 percent increase in neighborhood poverty in Milwaukee increased landlord profits by 13 percentage points, the same increase in poverty at the national level only increases profits by roughly half that amount (7 percentage points).

What’s to be done? On the one hand, lower-income communities are often upzoned more frequently than higher-income ones, so expansion of supply alone isn’t a silver bullet. Indeed, the authors point out a number of non-regulatory reasons why investors may not want to become “slumlords,” including the negative stigma behind the term and the fact that while the likelihood of a negative shock to returns may be low, the effects of the shock can be large.

In addition to their other policy recommendations, these findings point to a regime where it is more prudent to encourage (read: allow) greater construction in higher-income (which, for the cautious landlord, equates to lower risk) neighborhoods, increasing supply overall and creating the possibility for residents trapped in low-income neighborhoods to move to higher-income ones.

Be sure to read Richard Florida’s analysis of this paper in CityLab.

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By |2019-03-27T09:56:59-07:00March 27th, 2019|Blog, Land Use Regulation|