Stocks rose yesterday in a bumpy ride to fresh highs for the Dow. Small caps have gotten a boost with the increased likelihood of lower rates sooner.
Don’t tread on real estate investment. It was an oppressively hot day, not well suited to make my usual crosstown walk over Wall Street toward the World Financial Center, but I did it nonetheless, and with a bowtie… and with my collection of technology slung across my back. It was a tough weekend dotted with stormy weather, and by yesterday morning I was still stunned at the news events that unfolded over the weekend. I had few answers as I touched my foot onto the island Manhattan. My regular readers know that in my daily walk, I pass the iconic New York Stock Exchange. Yesterday morning, the exchange had a huge American flag draped across its stone facade and its windows each sported the Stars and Stripes as well. I don’t know why the stock exchange chose the flags yesterday, but I have to say that it was just what I needed. Thank you, NYSE!
In a recent interview on Fox News Radio, I was asked about a proposed, Federally mandated rent hike cap (you can listen here: https://megaphone.link/FOXM8923468607). I had not studied the proposal and I am not sure that there was even anything available to study, but the answer, for me at least, was simple. Regulation is rarely the answer! In short, NO. The real estate market is very efficient and naturally functioning supply and demand always prevails. I am well-aware that rent inflation is a real problem right now… I write about it several times a month, especially right after an inflation report is released. However, if you go to the root cause of the problem, you will find that there is a lack of supply. Less supply causes prices to go higher, which in this case is rent. Those increases are the market signaling the need for more supply. With higher rents, developers are incented to enter the market and supply is created, which ultimately slows rent inflation. Go ahead, think about it for a moment.
Now here is the problem with regulation. Regulation is anticompetitive, costly to administer, and it infringes on property rights. Real estate investment represents a significant portion of the US investment ecosystem, and it relies heavily on private investment. If property rights are infringed upon, investors will have less of an incentive to participate, thus worsening the supply dearth. Now, here is the kicker. By regulating rent hikes, the Government will exacerbate the problem! If rent hikes are capped, the profitability for real estate investors decreases, which discourages new construction, causing a reduced supply of rental units.
Of course, all of this reallocation of resources takes time, and skyrocketing rents are a real problem now, but there are more productive ways to get the market back on track to efficiency. Policy should be designed to speed the process of natural market forces. To increase supply, policy could include things like expanding zoning or by increasing finance facilities for development in underserved areas. I dare say… streamlining the bureaucratic process of attaining permits, could certainly help get supply online in a less-costly, more timely manner. Oh, and higher for longer interest also intensifies the supply deficiency by decreasing profitability.
Renown economist, AND FELLOW RUTGERS ALUM, Milton Friedman wrote in his 1962 treatise “Capitalism and Freedom,” that “the great mistake is to judge policies and programs by their intentions rather than their results.” With two candidates vying for the top spot in Washington, we can expect many proposed policies in the months leading up to the general election. They will all reflect great intentions. The burden is on us to determine whether the results will have the intended effects. The choice is ours… choose wisely. Thank you, again, New York Stock Exchange.
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