Moneybeat: Landlords, renters, and the government

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: All right, time now to talk business, markets and the economy with financial analyst and advisor, David Bahnsen. David is head of the wealth management firm, the Bahnsen Group, and he is here now. David, good morning.

DAVID BAHNSEN: Good morning. Nick, good to be with you.

NICK EICHER: All right. David, a couple of key data points this past week: a reading on inflation, a reading on economic growth, one of them down, one of them up, both good. Could it be said, David, that the soft landing that we've been hearing about, reducing inflation without sending the economy into recession, that we've accomplished that?

DAVID BAHNSEN: Yeah, I think that that's been mostly a fait accompli for quite a while, because the the essence, the violence of the tightening cycle, meaning the suddenness, the rapidity with which rates went way higher, from 0% in May of 2022 to eventually 5.5% by July of 2023, you really would have expected to see recessionary consequences by the end of 2022 certainly into the early part of '23 and so there's been a number of reasons we've talked about over the last couple years as to why I think that didn't happen.

The issue now Nick is not so much recession or no recession, inflation or no inflation, it's on the margin. It's in two particular different areas. You know, how quickly will we get prices lower with housing? How will the ramifications be in the economy when they do begin cutting rates, what will some of that look like? There's a few other things that are still to be determined, but that this particular bout of Fed tightening has not created a recession I think is at this point undebatable.

NICK EICHER: David, we did not get a chance to talk about this, because, well, as you know, we have had a couple of weeks where huge news has broken over the weekend and so it feels nice to sort of be returned to normal. So I'm going to ask you about an old story which is going to feel new because we, again, we didn't get a chance to talk about it. It was this plan where the White House was asking Congress for a policy to place a 5% cap on rent increases each year, and this would apply to landlords who have more than 50 rental units, conditioning an important federal tax deduction on this rent control.

In other words, they get to keep the deduction if they comply. They lose it if they don't. So two things: first, your analysis of this proposal, David, and second, I recognize this as a as a form of price control, and maybe let's make that our defining terms as we wrap up today.

DAVID BAHNSEN: Well, there's a few things that we have to kind of look at here. First of all, how many units are we talking about where there really are landlords who own over 50 units, where their market capacity to raise rent would be over 5% year over year? I don't think the White House actually believes this is something that is real life. It is much more political and cosmetic, and yet, there have certainly been periods where rents may have been more than 5% below market, and landlords and owners and developers would have had an opportunity to set the market rate. And it would have required them, in this case, to forfeit economics that they purchased the property believing they had so there is, all at once, something that is mostly political, cynical and potentially economic destructive.

But why do we need to do this to begin with? This is the question I always want us from a matter of first principles to ask, is there an ability to raise rent over 5% if the market rates are not that level? In other words, the only reason somebody could raise rent 6%, 7%, 8% is if the market would bear it out, and there is surely another landlord somewhere who does not have rents going up that much, and therefore people are competing for price. If I'm wrong, and actually there's greed, and there's other factors at play where people are getting away with things that we just find absolutely unseemly, and we just believe there is no other remedy than for Joe Biden and the White House to set what rents ought to be in Barstow, California.

My question is, why would that only apply to apartments. Why would the government not be the effective price setter across the economy? Why not set how much prices can go up for all sorts of items? The reason, of course, is that government intervention where they become the price setter intervenes with incentive for production. And if there is apartments that are under market, they ought to be going up in rent more than 5% and if they're not, no one's going to be raising prices more than 5% so always and forever, the question is, who is most qualified to set those prices, and in this case, that includes the growth of prices, the rate of increase. Is it the buyer and the seller, or is it the federal government, the beltway, the body of people who have run up $35 trillion of debt in their own stewardship of economics? Am I more impressed with their ability to steward a P&L, a balance sheet or a checkbook, if you will? Or do I think landlords and tenants have the ability to figure this stuff out on their own?

That's why, to me, the entire thing is extremely misguided and ultimately pushes prices higher because federal intervention of these things takes away incentive to build new supply. And so when you distort incentives for production, you end up with less competition which provides a higher price level, not a lower price level. And this is the unequivocal testimony of history about price fixing.

NICK EICHER: David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen Group. You can check out David's book, Full-Time: Work and The Meaning of Life at the website fulltimebook.com. David, I hope you have a great week. I'll see you in a couple of weeks.

DAVID BAHNSEN: Thanks so much, Nick.

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