It's clear why President Joe Biden desperately wants to bring down housing prices and rent. With mortgage interest rates double what they were when former President Donald Trump took office, mortgage payments have roughly doubled since 2020, and rents are up in many cities by more than 30%.
So much for the dream of homeownership. And just finding an affordable rental unit larger than a dorm room is getting harder all the time.
Biden blames "greed-flation" for the high rental costs. He's now proposed a two-pronged plan to combat rising rents. First, he wants to reinstate rent controls in major metro areas and impose financial punishments on landlords if they raise rents by more than 5% a year. And second, he wants to make it illegal for landlords to use computer algorithms for setting prices.
Rent control has been going on for nearly 100 years in major cities, and it was started in New York decades ago when demand for apartments was outstripping supply. Rents came down for those lucky few who grandfathered into sweet deals on rent-controlled apartments, but for everyone else, housing costs got MORE expensive.
Even many liberal voices in cities that followed suit soon admitted the errors of their way. Study after study from conservative to liberal groups found that the policies backfired. Rent control led to a deterioration in the quality of housing, less amenities and fewer appliances, and far fewer new units coming on line. All of these reactions hurt renters and made housing conditions worse.
A major impact was that the supply of available apartments fell, and homelessness went up when families couldn't find affordable units. With controls on the profits that landlords could earn, new construction of apartment buildings nearly shut down in the areas where the rents were regulated.
For these reasons, starting in the 1980s many cities began to acknowledge the policy failure, and price controls were relaxed or abandoned. But bad ideas never completely die. (Vice President Kamala Harris wants to bring back unpopular mandatory school busing of kids outside their local district.)
Even Democrat economists are now warning that Biden's rent control will only discourage new housing developments, which -- next to tackling general price inflation -- is the single most effective way to address housing prices.
Jason Furman, chair of the Council of Economic Advisers under former President Barack Obama, said that "rent control has been about as disgraced as any economic policy in the tool kit. The idea we'd be reviving and expanding it will ultimately make our housing supply problems worse, not better."
He's right. When Cambridge, Massachusetts, got rid of its rent controls in the 1990s, it saw an influx of property improvements. San Francisco, on the other hand, increased its rent caps and quickly saw a 15% reduction in supply, which actually increased rent by 5%.
Price controls cause shortages. This is an iron law of economics.
Equally foolish is the Biden idea -- supported by a handful of radical Democrats in Congress -- to ban pricing software that allows landlords to set rents based on changes in supply and demand. This is called "dynamic pricing," and it's been going on for 100 years or more. Rents adjust (up and down) to the change in the number of people looking for units. Computer software allows firms to do this more efficiently.
The government uses dynamic pricing for Amtrak and tolls based on customer demand. Why shouldn't landlords?
Computer algorithms can actually drive housing costs down as well as up, especially in situations where fewer people are looking to rent in an area. This is hardly price-gouging.
If Biden wants lower housing costs, he should examine his own policies of spending and borrowing trillions of dollars, which have reduced real take-home pay and driven up the cost of building new houses and apartments. His green policies have also driven up these costs in cities.
Blaming landlords, computer programs and "corporate greed" for higher prices is like blaming umbrellas for the rain.