California's Eviction Ban Will Worsen Current Economic Woes

Yes, tenants are losing their jobs because of the COVID-19 shutdown, but forcing businesses to provide services for free would have a ripple effect.

California Gov. Gavin Newsom recently issued an executive order that creates a statewide moratorium on evictions. Such orders are just a fancy term for an edict—something passed unilaterally by the governmental leader without the normal legislative process that includes public hearings, public votes and other checks and balances.

When restraints on the government's power are removed, citizens are left at the mercy of the person who issues them. Fortunately, Newsom's eviction-related proposals are less ominous than they could have been, but stay tuned if the coronavirus curve doesn't flatten out fairly soon.

"The order prohibits landlords from evicting tenants for nonpayment of rent and prohibits enforcement of evictions by law enforcement or courts," the governor's statement explains. "It also requires tenants to declare in writing, no more than seven days after the rent comes due, that the tenant cannot pay all or part of their rent due to COVID-19."

It's hard to know exactly how this will pan out. Newsom is requiring tenants to retain documentation to prove they can't pay rent because of a job loss or other coronavirus-related matter, but they aren't required to submit that information to their landlord in advance. Tenants are "obligated to repay full rent in a timely manner" and can still be evicted whenever the edict is lifted. Got that? And local governments are free to impose additional rules.

Housing activists were right that Newsom's decision is confusing, but they are wrong to call for something more draconian. "I think we're deeply disappointed that it isn't just a blanket moratorium on evictions," the executive director of one housing-advocacy group told a newspaper. A blanket ban would essentially be a "free rent" declaration, which would send shock waves throughout the housing market.

Yes, tenants are losing their jobs because of the COVID-19 shutdown, but forcing businesses to provide services for free—at least temporarily—would have a ripple effect. It could ultimately force small landlords out of the business, leaving more renters at the mercy of mega-apartment companies that generally are less willing to work with tenants when they have hard times.

In full disclosure, I own some rental houses. Like many small landlords, this is a side business. My wife and I depend on the rent not only for our income, but to pay the mortgages, repairs and, in some cases, the utilities for those properties. The governor has "requested" that financial institutions waive foreclosures, but I have no intention of missing payments and getting to that dire point.

Federal lending authorities have instructed loan servicers to provide a year of waivers for mortgage holders (90 days for those who own commercial buildings), which means our payments would simply be added to the end of the loan. That's an acceptable approach, albeit one that should be done voluntarily and not by federal order.

People are perfectly capable of coming up with creative solutions on their own. The Coase Theorem postulates that bargaining "will lead to an efficient outcome…as long as the transaction costs associated with bargaining are negligible." In other words, if property rights are well defined, most people will negotiate a reasonable solution. Unfortunately, government edicts impede voluntary agreements by creating new rights, uncertainties and transaction costs.

Most landlords will work with their tenants. That's what they do even when there isn't a pandemic that's leading to vast economic dislocations. No sensible landlord is going to initiate an eviction proceeding in the midst of the current mess.  News to housing advocates: Owners want to keep their customers rather than find new ones. No one wants to explain to a judge why they're evicting a good tenant who had a sudden COVID-related job loss.

But even though the governor's order requires tenants to make good on the rent, we know that's largely a pipedream. In my experience, once a tenant gets more than a month behind in rent, it's unlikely they'll ever get caught up with their payments give how tough it is to come up with all that extra cash. Government officials clearly aren't thinking through the long-term effects of their actions.

By the way, had our state and local governments not so thoroughly distorted California's housing market through years of growth controls, regulations and excessive building fees, the housing market would be far more resilient. There would be more units available at reasonable prices—and less of a precarious situation for renters in particular.

The market economy is based on the concept of willing buyers and sellers. When we jettison our system of governmental limits any time a crisis hits, we threaten the very things that have made our society so affluent, free and resilient. There's a reason our founders created a system that limits the ability of officials to govern by diktat. We're in uncharted territory here, but we ought not abandon those limits—even in an unprecedented situation.

This column was first published in the Orange County Register.