The conspiracy theories plaguing real estate

Forget what you learned about the birds and the bees.

Some people are convinced that well-off New Yorkers are products of real estate, not biology: They simply materialize when a developer builds market-rate housing.

This is like saying babies are delivered by a stork, but it’s what passes for real estate knowledge among many critics of the industry.

It’s one of the pernicious myths popularized by folks who blame real estate for the high cost of housing. This is more than an annoyance, because it causes elected officials to exacerbate instead of alleviate the crisis.

Here’s a look at some of the real estate poppycock propagated online. We’ll discuss more wacky notions tomorrow in Part II of this column.

High prices are a big conspiracy

In this popular yarn, the industry colludes to keep housing prices and retail rents high. The reality, as readers of The Real Deal know, is that real estate is a cutthroat business. Its players constantly sue, foreclose on, outbid and undermine each other.

One thing they can’t do is control the market.

Developers and landlords plan projects and set asking prices based on demand for their product (homes, storefronts, office space, warehouses). Scarcity matters a lot. If it’s a sweltering summer and there’s only one air-conditioner store in town, customers will bid up the price of its ACs. That, in a nutshell, is New York’s housing market.

Firms that build and buy apartment buildings look for neighborhoods where demand is high and supply is low — especially where it’s likely to remain low. They spell out this strategy in financial statements, earnings calls and pitches to investors.

It’s why, for example, Gary Barnett pursues development sites on the Upper West Side. Because its politicians protect low-scale zoning, if he can somehow build a tower he can charge a premium to live in it. Locals howl, but they actually help Barnett by preventing rivals from developing competitive housing.

Another example of the imagined industry conspiracy is that owners are keeping rent-stabilized apartments empty to persuade state legislators to change the law. With rare exceptions, any owner who can profitably rent an apartment does so. Landlords make money by renting units, not by mothballing them.

Yet even some politicians (yes, you, Linda Rosenthal) claim that hundreds of landlords have secretly agreed to forsake profits for years as a lobbying tactic. That would be like getting lions to stop hunting until the wildebeest population booms.

Capitalism can’t create affordable housing

As New York City, San Francisco and other successful cities have become increasingly expensive, some folks have concluded that capitalism will never create affordable units, and therefore we must “decommodify” housing.

Take out the profit, they say, and rent-seeking investors would go away. In their place, government and benevolent nonprofits would have the playing field to themselves to make housing abundant and inexpensive.

But look around: Capitalism creates cheap, abundant goods. Oatmeal for 19 cents a serving. A 43-inch, high-definition TV for $150. And everyone’s favorite, pizza for 99 cents (it’s now $1.50 in some places, but still).

Why would housing be any different? In many places, it isn’t. Last December I wrote about a renovated one-bedroom Dallas condo with a swimming pool asking $85,000. Mortgage, property taxes and condo dues came to $782 per month.

That October, a Tribeca penthouse rented for $85,000 a month. True, it was seven times larger and posher than the Dallas unit, but the rent equates to nine years of owning the Dallas condo.

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It makes no sense to blame capitalism for Tribeca’s high prices and not credit it for Dallas’ low ones. San Antonio is similarly inexpensive.

Texas is hardly the only place with cheap housing. A study last year found that the median-priced home in Pittsburgh was $175,000, meaning a monthly mortgage payment of $893. A buyer earning $38,274 would qualify for that loan. That’s two workers making $9.50 an hour.

Households making less than $50,000 could also buy the median home in Oklahoma City ($41,739 income required), Cleveland ($44,089), Louisville ($44,314), Memphis, Indianapolis, St. Louis, Buffalo, Birmingham and Cincinnati.

Capitalism is the same in New York and San Francisco as in these other cities. The problem is not capitalism. It’s New York and San Francisco.

When a city does not allow housing production to meet demand, buyers and renters push up prices for the available homes. You don’t always see the bidding wars, because they are built into asking prices. If the landlord raises your rent to $4,000, it’s because someone else is willing to pay that.

Wage rules, the scaffold law and a superior transit system also raise housing costs in New York. But the main culprit is zoning.

Prevented by zoning from building enough housing to meet demand, developers target the most lucrative customers at any given site.

As business leader and former affordable housing activist Kathy Wylde wrote, “It is easy to blame landlords and developers for high rents, but that does not lead to any solutions because neither have significant control over the most important factors that increase the cost of land and construction and discourage the production of housing.”

Only price controls work

People who don’t understand why New York City housing is expensive tend to propose simplistic solutions with bad side effects.

Rent control was introduced as a temporary measure when soldiers returning from World War II overwhelmed the available housing supply. But rather than let developers meet this demand with new housing, politicians eventually made rent control permanent for about half of the city’s rentals. And they continued to limit density with zoning.

As a result, the supply shortage is worse than ever. Most city politicians don’t even want to solve it, because getting the vacancy rate to a healthy number, above 5 percent, would by law end rent stabilization.

Price controls artificially lower rents rather than encourage producers to compete, as they do in, say, Dallas. In New York, rent regulation has led to endless strife between landlords and tenants and caused widespread deterioration of buildings in the 1970s and 1980s. Some were so devalued that owners burned them for the insurance money or just let tenants suffer until the city foreclosed.

Lawmakers eventually allowed rent increases to pay for improvements, but that led to harassment and rent spikes. Legislators reversed course in 2019, bringing back the deterioration problem and freezing tens of thousands of decrepit apartments in unrentable condition.

We know from other cities that well-regulated markets deliver quality and affordable housing as they do for other commodities. Unfortunately, many markets — urban and suburban — limit housing supply so much that prices have run up where demand has increased. New York is a classic example, not an exception. Price controls don’t address a supply problem.

Development creates rich people

This is, as noted, the real estate version of storks delivering babies.

Fact: The real estate industry produces housing, not rich people. Rich people simply buy the product.

Vornado Realty Trust sold a $238 million apartment to hedge funder Ken Griffin, but the developer was not to blame for the investor’s net worth being more than 100 times that amount.

Fortunately, wealthy people are finite in number, and they don’t buy in most neighborhoods. The industry can and does outbuild their demand for housing. For every ultra-luxury project with Central Park views built by Barnett or the Zeckendorfs, scores of other developments target lower earners in lower-profile neighborhoods such as Flushing and Midwood.

But it’s not enough. As long as zoning severely restricts supply, developers will disproportionately build high-end units. This helps lower earners only indirectly, as they move into the units that higher earners vacate when they move up.

Americans generally agree that U.S. capitalism is creating wealth but not distributing it enough.  The top 0.1 percent have more money than they know what to do with, and the bottom 30 percent struggle to get by. The rich eat first, so in high-demand cities that restrict housing supply, lower earners must fight for scraps.

Tomorrow: Real estate myths, Part II