Evicted (part 2)

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The subtitle of Matthew Desmond’s Evicted is Poverty and Profit in the American City. The author is interested not only in studying poverty, but in understanding the interaction between poor tenants and their landlords. He begins with the observation that evictions are much more common than they used to be:

Even in the most desolate areas of American cities, evictions used to be rare. They used to draw crowds. Eviction riots erupted during the Depression, even though the number of poor families who faced eviction each year was a fraction of what it is today.

Obviously, we must ask why so many renters are unable to afford their housing. But we must also ask how landlords find it profitable to rent to people who have trouble paying the rent, a situation that bears a suspicious resemblance to subprime lending to borrowers who have trouble making their loan payments. We need to understand both affordability and profitability.

Affordability

Desmond cites a common standard of affordability:

For almost a century, there has been broad consensus in America that families should spend no more than 30 percent of their income on housing. Until recently, most renting families met this goal. But times have changed—in Milwaukee and across America. Every year in this country, people are evicted from their homes not by the tens of thousands or even the hundreds of thousands but by the millions.

At the lower end of the income distribution, wages have not kept pace with the cost of decent housing. The minimum wage for both the United States as a whole and the state of Wisconsin is $7.25 an hour. Even if one works a 40-hour week—and many low-wage jobs only offer part-time hours—that’s only about $1,200 a month. 30 percent of that is only $360. Most of the poor find that they have to spend over half of their income on housing, leaving very little for other expenses.

The loss of manufacturing jobs hit cities like Milwaukee very hard. Those jobs provided an important ladder of upward mobility for people without college educations. Most of the service-sector jobs they were able to get paid less. Women, especially African-American and Hispanic women, were overrepresented in those jobs, so female-headed families were affected the most.

In addition, just when wages for low-skilled labor were declining, welfare reform pushed more poor mothers into the labor force. The Wisconsin Works program was a pioneer in this effort, and it became the state’s version of Temporary Assistance to Needy Families (TANF) when that program replaced Aid to Families with Dependent Children (AFDC) nationwide in 1997. Traditionally, society hadn’t expected unmarried mothers with children to be employed outside the home, but the new program added work requirements to public assistance benefits for able-bodied adults. If a recipient could not find regular employment, Wisconsin Works provided a community job and/or training, but income was set at $673 per month, even less than one would earn in a minimum-wage job. The program also put a five-year lifetime limitation on benefits. For some, this provided a transition out of poverty, but for many female family heads, it simply replaced welfare poverty with working poverty. It also intensified the competition for low-skill employment, helping to hold wages down.

Another development that affected the affordability of housing was the boom in subprime mortgages that led up to the financial crisis of 2008. Abandoning the caution of traditional bankers, a new gang of gung-ho lenders made quick profits by making risky loans. These were often adjustable-rate mortgages with a very low “teaser rate” to create an impression of affordability, but with the potential for large payment increases later. The lenders often didn’t care whether borrowers could make their payments or not, because they quickly sold off the mortgages to financial firms that bundled them for sale to unwary investors. Firms that rate such securities cooperated by underestimating the risks involved. When the housing bubble burst, many owners found that they owed more than their house was worth, and the market experienced a wave of defaults and foreclosures. That left cities like Milwaukee with abandoned homes and displaced homeowners thrown into the rental market. Minority families were hit the hardest, since they had few financial assets besides their homes. “Between 2007 and 2010, the average white family experienced an 11 percent reduction in wealth, but the average black family lost 31 percent of its wealth.”

Profitability

A housing market consists of many sub-markets, with profit-making opportunities at many income levels. Businesses can profit by selling luxurious housing to the wealthy or the bare necessities to the poor. By definition, the poor cannot afford to buy as much as the rich.

But Desmond makes a less obvious point, that the poor are also vulnerable to exploitation, because businesses sometimes make excessive profits by preying on the less fortunate. This is consistent with the old adage that “beggars can’t be choosers,” although Desmond doesn’t use that expression. People who are desperately needy have limited choices and bargaining power, and sometimes put up with being underpaid or overcharged. I think that orthodox neoclassical economics has had trouble acknowledging this. It prefers to describe free markets in which every participant is “free to choose” (in the words of one of Milton Friedman’s book titles), and needn’t engage in any exchange that isn’t free and fair. But freedom and bargaining power are social variables, not constants.

The people of Texas got a taste of desperate need when millions of them lost power during the recent cold wave. They were not only deprived of heat, but many of them were exploited by utility companies trying to extract windfall profits with rate spikes. A democratic society does not have to allow the powerful to take advantage of the needy. That’s why utility companies are usually regulated. Desmond argues that society has to balance the rights of businesses to make money against the rights of citizens to obtain the necessities of life:

If we acknowledge that housing is a basic right of all Americans, then we must think differently about another right: the right to make as much money as possible by providing families with housing—and especially to profit excessively from the less fortunate. Since the founding of this country, a long line of American visionaries have called for a more balanced relationship, one that protects people from the profit motive, “not to destroy individualism,” in Franklin D. Roosevelt’s words, “but to protect it.” Child labor laws, the minimum wage, workplace safety regulations, and other protections we now take for granted came about when we chose to place the well-being of people above money.

A prime example of exploitation in housing markets is the treatment of African Americans during and after their Great Migration from the rural South to cities like Milwaukee. Segregated into ghettos and denied home mortgages even by the FHA, they became a “captive tenant base” at the mercy of inner-city landlords. Real estate speculators also made outsize profits by “blockbusting”—buying houses cheaply from white homeowners on the edge of the expanding ghetto and selling them at inflated cost and one-sided terms to black buyers without other homeownership options. The 1968 Fair Housing Act prohibited discrimination, but it persists in more subtle forms to this day.

Desmond sees racial exploitation as only the most egregious example of a more general process of slum creation. Capitalism did not start out like a game of Monopoly, where all the players get an equal amount of money and an equal chance to buy properties. Capitalism developed within societies already sharply divided between landowners and landless laborers. The transformation of landless laborers into industrial workers created windfall profits for urban landlords.

While agrarian families were driven from the land to increasingly congested cities, the competition for space drove up land values and rents. Urban landlords quickly realized that piles of money could be made by creating slums.

More recently, the failure of low-end wages to keep pace with inflation, along with welfare reform and the 2008 financial crisis, has produced a surge of low-income renters. That creates an opportunity to make large profits without providing a high quality of housing. One sign of that is the relatively high rents being charged for low-end properties.

At the time, median rent for a two-bedroom apartment in Milwaukee was $600. Ten percent of units rented at or below $480, and 10 percent rented at or above $750. A mere $270 separated some of the cheapest units in the city from some of the most expensive.

That meant that a landlord could charge almost as much rent on a dilapidated home in a poor neighborhood as on a decent home in a nicer neighborhood. Not surprisingly then, “In Sherrena’s portfolio, her worst properties yielded her biggest returns.” Squeezing as much money as possible out of needy people aggravates poverty, but it is a viable business model. That also helps explain why some landlords are comfortable accepting drug users and other troublesome tenants.

Some landlords neglected to screen tenants for the same reason payday lenders offered unsecured, high-interest loans to families with unpaid debt or lousy credit; for the same reason that the subprime industry gave mortgages to people who could not afford them….There was a business model at the bottom of every market.

A high rate of eviction has become a normal feature of the low-end rental market. Landlords charge more rent than tenants can really afford; tenants fall behind on rent; landlords refuse to maintain properties; tenants leave or are evicted; and then the cycle repeats with another needy tenant. Evicted tenants sink deeper into poverty for many reasons:

Losing your home and possessions and often your job; being stamped with an eviction record and denied government housing assistance; relocating to degrading housing in poor and dangerous neighborhoods; and suffering from increased material hardship, homelessness, depression, and illness—this is eviction’s fallout.

Desmond believes that allowing this situation to persist is fundamentally at odds with our American values. Whether you agree may depend on what you think our American values are. Democracy? Christian love? Or rugged individualism and unbridled pursuit of self interest. If the citizens of our democracy have the will to tackle slum housing, ways to do so are not too hard to imagine. Desmond’s policy recommendations will be the subject of the final post.

Continued

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