I posted this on Ariah's blog, but thought you might be interested in seeing here as well:

Certainly it is not a good thing when owners of rental property do not maintain the property for the benefit of their tenants. The tenants are paying for the right to occupy the property and presumably for the landlord to maintain it to a certain degree. Clearly, many times it is the case that tenants don’t get what they pay for, because the owner may not maintain it in a way that makes the rent paid by the tenant a fair bargain for what they get in terms of a quality living space.

So, problem granted – what is the solution?

There are multiple protections against this built in to the free market. For example, if I am a tenant and my landlord does a poor job of providing me a good living space in exchange for the rent I pay, then I have the right to move out, or not renew my lease at the end of its term. No landlord can make someone rent his or her space, just as no restaurant owner can make someone eat at his or her restaurant if its food is not palatable, and no other business person can require others to do business with them. So, to a certain extent at least, the tenant must take up for himself, refusing to rent if the landlord refuses to deliver a good product. This should be the “vested interest” that the landlord has, that is, that his property will not stay rented unless it is attractive enough to potential tenants.

Obviously, in many areas it is the case that the rental property offered is not very good. So, why is that so, and how to fix it? I would submit to you that government intervention is part of the problem rather than a likely solution. I won’t pretend to know all the numbers here, but certainly it is true that a large portion of so called “low-income” rental housing is paid for by the government under Section 8 and other programs. Now, in order to be Section 8 certified, landlords must have their properties evaluated by the government to be sure it meets Section 8 standards before it will pay the rent for families who qualify for the program. Having the government inspect the rental spaces and then pay the rent is certainly huge government involvement. If government action and involvement is the solution to this problem, then why are these rental spaces and neighborhoods still in such bad shape? If this government involvement has not solved the problem, then what makes you think that any more or different government action will help?

I think the reason that governmental involvement like this is part of the problem is that it takes out the normal market forces that should drive this exchange between landlord and tenant. If I am a Section 8 tenant, and therefore it costs me nothing to live in the space, then I do not have the same motivation to push for better maintenance of the space. It is a simple maxim that when you work for something and pay for it yourself, you care more about it than you do if it is provided to you for free. Sure, I’d like to live in a nice place, but heck, it’s free, so maybe I won’t complain so much.

As for your suggestion that landlords not be permitted to own property unless they live nearby, that brushes up against one of the more important freedoms that we have in this country, which is the right to private property. In general, we can own whatever we want to own with minimal interference from the government. Whether it would solve the problem of blighted areas or not to have landlords be required to live in the neighborhood themselves is doubtful. Whether it is constitutional or not is even more doubtful, but let’s look at whether it would work or not anyway.

If it worked to bring up the standard of the available housing because the landlord would want to live in a nicer place, then the housing would be worth more, and therefore the poor people that you are trying to help would be pushed out. How would you stop this? Obviously if a property owner repairs or renovates his units he will have to charge more in rent for them in order to make the money back, or do you expect that he will plug all kinds of money in to fixing the places up and then charge the same rates? Would you make a landlord spend more on improvements than he could make back in rental income?

Force the banks to “liquidate” the properties they take by foreclosure? That is exactly what banks do with foreclosures. Don’t you wonder why people want to buy foreclosures? Because they are such a bargain! Look at the property record for any property that has been foreclosed on and then sold by a bank. The numbers will look something like this: Owner purchased for $100K, borrowing $95K from the bank in order to do so. Owner defaults, and bank forecloses on the house, auctioning it off for $60K, which was the highest bid. Occasionally, the bank may bid on its own foreclosure at auction and buy it back for that $60K, then try to sell it for a little more, but usually to no avail. Either way, a $100K house gets picked up by someone for much less than it sold for originally.

This also illustrates that the specter of big banks salivating over the prospect of foreclosing on homeowners is bogus, because banks never make a profit on foreclosing on someone’s home. They lose big time when that happens.

Also, when you just toss out there that banks should be forced to sell rather than sit on houses, you forget a couple of other things. First, holding those properties is not without costs. Each house represents a loan of money that the bank made to some person that they could not collect back in the form of payments. Banks make money on money - that is, loaning it out or investing it in the hope of a return in the form of money from interest of dividends from profit. When they have to take a house back instead of that money, they get hurt. So, to suggest that the banks are selfishly just holding on to the houses as if that is the thing they most want to do, then you are just not thinking accurately about the situation.

Secondly, as for suggesting in general that banks should be the ones to take a hit financially, you forget that banks are not just faceless entities. Banks are owned by shareholders, who include rich fatcats, but also school teachers, bus drivers, factory workers, and sometimes even bloggers. So, when you root for the banks to take a hit, you are rooting for every shareholder in the bank to take a hit, which means lost money from retirement funds, etc. Even if you don’t own stock in a bank, when it goes down you hurt as well because of the interconnectedness of the world’s economies. If Bank of America loses tons of money because it has tons of foreclosures, then lays off its workers who then stop buying goods and services from Wal-Mart or Aldi, then Wal-Mart and Aldi stop buying food and goods and services from their suppliers, and lay off their workers, and the downward spiral continues. It is never as simple as just sticking it to The Man or the fatcats, or the big corporations, or whatever. We are all in it together to a very large extent.

This has rambled on quite a bit, but my main point is this: sure, there are some people who are richer and some who are poorer. Some people who are poor because they made bad choices and some who are in spite of making all the right choices. Likewise there are some people who have plenty because they worked hard and played by the rules, and some who stepped on others to get what they have. However, I challenge anyone to tell me what earthly system is on the whole better at rewarding good work, punishing wrongdoing, and providing a decent standard of living to all than capitalism.

A few links to some essays by an economist who does a much better job of making these points:

“The Entrepreneur As American Hero”

http://www.hillsdale.edu/news/imprimis/archive/issue.asp?year=2005&month=03

“Capitalism and the Common Man”

http://www.gmu.edu/departments/economics/wew/articles/fee/capitalism.html

“Greed Versus Compassion”

http://www.gmu.edu/departments/economics/wew/articles/fee/greed.html

This is why I wondered if a homeowners association couldn't do more good than just prohibiting someone from owning if they don't live there. A HOA could police if someone didn't properly care for a property, etc. In addition, a city or local government should have codes enforcement officers to make sure that grass is mowed, etc. But all communities are only as strong as the people who live there. If no one calls to complain, then the problem won't be addressed.

Anyway, I do appreciate you stopping in, Aaron. Please come more often.

HOA's can certainly do a lot. As voluntary, private organizations, they do not brush up against unconstitutional restrictions on the right to own property, since government action is not involved. Certainly also local Codes or Health Departments can enforce rules, regs, and laws meant to protect public health and safety. However, nothing spurs a landlord in to action more than a vacancy - if ppl refuse to rent from a bad landlord, then he will have to clean up the joint.