New York Gets To Keep Its Broken Housing Market

New York City has, without a doubt, the most dysfunctional housing market of any large city in America. A lot of New Yorkers like it that way – and it looks like they will be able to keep their broken system for the foreseeable future.

If you live someplace where normal forces of supply and demand govern housing, you may be surprised to learn that New York tenant advocates were quite pleased when Mayor Michael Bloomberg recently declared that his city is experiencing a housing emergency. This “emergency,” defined in this case as a vacancy rate in rental housing of less than 5 percent, has existed continuously since 1969.

In most other places, such a tight housing market would have long ago been brought into balance by some combination of rent increases and new construction. The two are related. Rent increases would prod some tenants to look for cheaper housing outside the five boroughs, and it would encourage more development of new housing stock by boosting economic returns for landlords.

But under New York’s 1969 Rent Stabilization Law, so long as the city continues to face a housing emergency, it can set maximum permissible rent increases for about 1 million apartments, according to The New York Times.

The Supreme Court recently declined to hear a case that challenged the constitutionality of the rent stabilization law. The court had, somewhat unexpectedly, asked for some additional information before ultimately deciding not to proceed with the case. This led to some brief speculation that the longstanding rent controls might be in danger.

The challenge was brought by James D. Harmon, Jr., and his wife Jeanne Harmon, the owners of an Upper West Side brownstone, who found themselves in a housing emergency of their own. With three of their six tenants paying below-market rates thanks to rent stabilization, the Harmons said they were struggling to pay their mortgage and property taxes.

Besides limiting rent increases, the law generally requires landlords to indefinitely renew leases for tenants in rent-stabilized apartments and, in some cases, it allows tenants to pass those leases on to family members. The Harmons argued that this violates the Fifth Amendment injunction that private property cannot “be taken for public use, without just compensation.” The government essentially took control of the Harmons’ property for the purpose of setting up a public housing program, subsidized at their expense, Richard Epstein, a professor of law at New York University, contended in an editorial supporting their case.

Economics and logic might favor the Harmons’ argument; case law, however, does not. The Second U.S. Circuit Court of Appeals ruled against the Harmons, saying that they knew what they were getting into when they acquired the building in 2005. The building had been in the family for years at that point, but the Harmons took out a $1.5 million mortgage in order to buy out another family member’s share.

As I have written here before, New York’s regulations sustain the very housing crisis they are supposed to address. This is why New York, almost alone in this country, is a place where prospective tenants, rather than landlords, routinely pay broker’s fees. It is also why building superintendents and others can get away with illegally demanding “key money” from prospective renters.

But as I observed about health care reform, a bad law is not the same as an unconstitutional one. Rent stabilization falls into the category of bad but constitutional, at least under existing precedent.

We have a long history in this country of regulating the terms of private commerce. As far back as the Colonial era, the then-colonies had strict usury laws, setting maximum interest rates that lenders could charge. Since then, various levels of government have involved themselves in a wide assortment of private dealings, from wartime rationing to government-set taxi fares, to prices on insurance policies. Rents are likewise fair game for government regulation. The Supreme Court has affirmed this on multiple occasions, including Block v. Hirsh (1921), Pennell v. City of San Jose (1988) and Yee v. City of Escondido (1993).

A real challenge to rent control laws would rewrite our understanding of the Fifth Amendment and would change how the government interacts with business. Such a change is not inconceivable. As I wrote back in 2010, I think there is a good chance that the Supreme Court will take a serious look at land-use and zoning laws in a way that might dramatically redefine the relationship between property owners and government. I would not read too much into the court’s refusal to take on the Harmon case; the conservative justices who are most likely to be interested in revisiting Fifth Amendment jurisprudence might be looking for a more clear-cut instance of injustice than one brought by an attorney who owns an expensive Manhattan brownstone.

Until and unless the high court rewrites the law in this area, New York is going to have to deal with its housing emergency, or choose not to deal with it, on its own. Courts are not in the business of striking down laws merely because they reinforce the very problems they are supposed to address.

About Larry M. Elkin 559 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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