Why Rent Prices Are Anomalously Cheaper for Shorter Lease Terms
In a surprising twist, a friend’s daughter recently discovered that signing a 7-month lease for a residential rental was cheaper than committing to a 12-month lease. This defies basic intuition, as one would expect longer commitments to result in lower rents per pay period. To understand this anomaly, several potential explanations come to mind.
One possibility is that property owners or mortgage holders anticipate higher future costs compared to the present. These costs could involve repairs, insurance rates, or utility expenses. Additionally, owners may anticipate increased demand for rental units in the future due to the current state of the housing market. With fewer people able to afford homes, the demand for rentals is expected to rise, which would drive up prices.
However, there is a more ominous explanation to consider. The leading presidential ticket, Harris/Walz, has expressed support for nationwide price controls. This includes implementing controls on residential rental units owned by corporations with more than 50 units, as well as “price gouging” restrictions on grocery stores and potentially other industries. The mere mention of price controls has the potential to impact the rental market.
Rental companies, faced with the prospect of rent controls in the near future, may be using the current time to build in rental increases as much as possible. They are aware that if rent controls are implemented, annual increases may be limited to 5 percent. As a result, the policy proposal alone could inadvertently lead to increased rents in the present.
Furthermore, the rental market has already been significantly affected by recent events. The COVID-19 pandemic led to the imposition of an eviction moratorium in 2020 and 2021. While this regulation was ultimately deemed unconstitutional and repealed by the Supreme Court, rental companies have become more risk-averse. As a result, the approval process for signing a lease has become more stringent, requiring extensive documentation of credit history, residency, income stability, and more.
The possibility of nationwide rent control adds another layer of complexity to an already challenging rental market. Nationwide rent control has never been implemented in the history of the United States, and the constitutionality of such measures is questionable. The potential for rent increases due to market uncertainty in the face of possible rent controls could create a crisis for renters in the next six months.
Examining rental price data further reveals concerning trends. The Consumer Price Index indicates a 24 percent nationwide rent increase since 2020, averaging 6 percent per year. However, the Zillow rent index shows a more dramatic increase of 34 percent over the same period, averaging 8.5 percent per year. Given these figures, it is reasonable to trust industry sources over government agencies. If this trend continues, restricting rent increases to 5 percent could have severe consequences.
Rent controls also have long-term implications for property maintenance. When repairs are not adequately addressed, breakages persist, and amenities deteriorate. The profitability of rent-controlled units diminishes over time, resulting in deteriorating living conditions. This has been evident in cities like New York City, where decades of experience with rent control have shown the negative effects on rental properties.
While some proposals for rent control may exempt small landlords and first-time renters, the overall impact on the residential rental market remains uncertain. Some corporations may choose to sell off properties, and new renters could face unexpected challenges in the future.
The idea of implementing price controls is not new, but history has shown that they often fail to address the underlying problems. In times of inflation, politicians may be tempted to resort to quick fixes rather than taking the necessary steps to balance budgets, curtail excessive money printing, and deregulate markets. The consequences of price controls can be disastrous, as seen during President Richard Nixon’s ill-fated attempt at nationwide wage and price controls in 1971.
The mere discussion of price controls on the campaign trail, as seen with the Harris/Walz ticket, can already have an impact on market behavior. Rent prices may increase now while it is still legal to do so, providing a stronger pretext for implementing price controls after the inauguration. This potential chain of events could compound errors and exacerbate economic challenges.
In conclusion, the anomalous pricing structure of rental leases, where shorter terms are cheaper than longer ones, can be attributed to various factors. While future cost expectations and increased demand for rentals may contribute to this anomaly, the looming possibility of nationwide rent controls is a significant concern. Renters should closely monitor their leases as rents may increase unexpectedly. The implications of rent control extend beyond immediate price increases, potentially leading to deteriorating property conditions and market disruptions. Price controls, although tempting as a quick fix, have a history of failure and should be approached with caution.
