Eviction Moratorium: Long-Term Effects Ignored

(KVTA image)

Since the COVID-19 lockdown began in March, California law has prohibited the eviction of tenants who could not pay rent. The bill signed into law last night extends the eviction moratorium into next year: [bold added]

The legislation, AB3088, grants tenants who have lost income because of the coronavirus pandemic a reprieve on their missed rent and gives them five more months before they must start paying again in full...

AB3088, by Assemblyman David Chiu, D-San Francisco, would shield tenants facing financial hardships because of the pandemic from being evicted over any missed rent from March through August. The money would be converted into civil debt, which landlords could pursue in small claims court starting March 1.

Tenants would be expected to to pay a quarter of their total rent between September and January, with the rest becoming civil debt. If they could not pay at least 25% of the rent for those five months by Jan. 31, their landlords would be allowed to file to evict them starting in February.

Landlords would have to give residents 15 days to affirm under penalty of perjury that they have lost income because of the coronavirus. Those who make more than 130% of the median income in their area, if it is above $100,000, could be asked to show proof — an attempt to crack down on wealthier tenants who have engaged in solidarity “rent strikes” during the pandemic.

There is a next-to-zero chance of collecting the unpaid rent once a tenant moves out, so basically the State will have taken tens of $thousands per rental unit from property owners in order to effect public policy.

Many owners cannot afford to go without rent for a year. I know elderly landlords who rent out their homes to pay, partially, for their assisted living apartments, which cost $10,000 per month. I know another single-property owner who is taking her condo off the market. Her story:

I've always rented my place at 10-15% below other condos in the area. I try to pick good people who pay the rent on time and are happy with their lease.

My tenant of three years began asking for a reduction of rent in April. I knew his business was hurting so I said yes. Every month he would call me asking for a reduction from the price, which was already discounted. I knew he had a rainy-day fund as well as a PPP loan granted in May. I suspect he was playing me and had the money, but he did pay his lower rent on time. My condition was that he move out when his lease expired. Now that he has done so, I will leave the condo vacant though it means I have to absorb $2,200 per month in expenses. No one is giving me relief on my mortgage, property taxes, or homeowners association dues. Thank goodness I have a rainy-day fund, too.

But why not get a new tenant?

It's too much risk taking on someone who I can't evict if he doesn't pay. Eviction is how you enforce rental agreements. Also, the security deposit protected me against losing much if you can evict within 30 days. If I can't evict someone for a year, I won’t rent it. Maybe I’ll let a friend or relative stay there.

This law, through its one-size-fits-all approach, has permanently changed the rental market in California. It has permanently increased the risk of being a landlord by showing how easily California can override contracts for a year in the name of a health crisis. (The landlords do get a little something--purportedly 25% of the rent due--but if the tenants don't even pay that they still get to stay rent free until February.)

I doubt the State intended for landlords to remove rental units from the market, but that's a very foreseeable consequence of imposing a new risk on an industry.

The State, IMHO, should have let the many thousands of rental arrangements play out as they were meant to, then spend monies from the general Treasury to address the homelessness and health fallout. Instead, California is making the landlords pay.

Someday there will be stories about small landlords losing their retirement savings, the means of paying for assisted living, or the house they meant to leave to their children, but I doubt they'll get much play in the news.

[Update: in a move similar to the California law President Trump declared a moratorium on residential evictions:

Relying on a public health law intended to prevent the spread of an illness, the Trump administration said Tuesday it is implementing a national four-month moratorium on residential evictions.

To stop evictions, health officials are relying on the 1944 Public Health Service Act, which gives the administration broad quarantine powers. The moratorium, which will run through Dec. 31, applies to individuals earning less than $99,000 a year and who are unable to make rent or housing payments.

Whether by means of Federal law, State law, or executive order, long-term eviction moratoriums will have far-reaching consequences on housing markets. Some landlords will lose their properties, many rent liabilities will be too large for small claims court, more tenants will declare bankruptcy, housing supply will be withdrawn because of higher owner risk, tenant credit requirements will rise, and there will definitely be more paperwork.]

[Update 2: Will Property Rights be Permanently Diminished?]