CORRUPTION WATCH-Los Angeles has economic professionals like Christopher Thornberg of Beacon Economics, who should know better, supporting the vast corruption in Los Angeles’ housing policy by claiming that constructing high-end luxury apartments and condos creates homes for poor people. His mythical justification, as set forth in Conan Nolan’s NBC News Conference on Sunday, December 31, 2017, is that wealthy people will move out of older homes into the new places, freeing up those older places for poor people.
- Reality: The city is tearing down rent-controlled housing so fast that the supply of homes for poor people is not increasing.
- Reality: Los Angeles’s rent control [Rent Stabilization Ordinance (RSO)] only applies to units constructed before 1979. Thus, destroying all those old buildings forever removes rent control units and hence removes the most affordable housing, which can never be replaced.
- Reality: Under LA’s RSO, rent control ends when a tenant moves out and the next tenant must pay the market rate. Thornberg acted as if rent control keeps the rent at original rent control levels even as tenants come and go. He probably knows that is not true; perhaps he was careless.
- Reality: Rent control re-attaches to a pre-1979 building when the new tenant moves in at the market rate rent. Thus, tenants who remain several years can stabilize their rent to reasonable increases based upon the CPI and not based upon the fraudulently hyped housing prices.
However, the City is having rent-controlled housing destroyed at break-neck speed. Economist Thornberg says that unless we build high-end luxury apartments, people will gentrify the poorer neighborhoods which still have single family homes.
- Reality: Apartments/condos are not fungible with detached homes which have their own yards. Family Millennials do not want apartments. Thus, constructing more apartments will not lessen gentrification of single family areas in South LA and Boyle Heights.
- Reality: Family Millennials do not want apartments and condos, but crooked developers can
skim off the most money from large projects. For example, HUD gave hundreds of millions of dollars to make CRA housing accessible to the disabled, but the developers pocketed all the money. Thus, developers build where they can steal the most and not where the actual demand exists.
- Reality: Wall Street and its friends at City Hall restrict the supply of detached homes on the market to create an artificial shortage in that segment so that they can rent out their detached homes at above-market-rate rents. Also, the detached homes which do sell will carry disproportionately large mortgages.
Los Angeles’ Inflation Problem
As Thornberg mentioned, inflation can be a problem for any economy; yet, he refused to admit that the increase in LA housing prices represents artificially induced inflation. “Inflation” exists when the buyer pays more but gets nothing more. A house which would have sold for $750,000 two years ago but sells for $1 million today has 25% inflation. Of course, the seller loves it, but for someone like Thornberg who is supposed to be concerned for the over-all economy, it is reckless to conceal the massive inflation in LA housing. People are paying more but receiving nothing more.
The prime beneficiary is Wall Street due to the extra high mortgages the buyers take out when they pay an extra $25,000 for a home.
Corruptionism Is Not a Form of Capitalism
Under a regular capitalist system -- be it Adam Smith, a Mixed-Economy or Keynes -- this type of long-term scam would be over already. However, when corruption has turns into Corruptionism, different factors come into play. Basically, Los Angeles is in the throes of another round of Accounting Control Fraud. (Google: William K. Black)
The basic difference between a capitalist system with corruption and Corruptionism is that with regular corruption, a few thieves are stealing public funds, but with Corruptionism, the thieves own the government and they use their control to divert public funds into their own pockets. That is why the Los Angeles City Council unanimously approves every construction project no matter how many laws it violates.
Angelenos’ incomes did not increase to pay for the higher housing prices, e.g. mortgages and rents, but instead Angelenos have devoted a higher percentage of their income to housing. Also, Young Millennials who still had the Dorm Style mode of living doubled and tripled up in apartments in DTLA and Hollywood. Often parents would subsidize the kids' rent. The fact that the Young Millennials were a temporary phenomenon was no secret. Who was surprised that, as young people age, they start families and leave behind their childish ways. “When I was a child, I spoke as a child, I understood as a child, I thought as a child; but when I became a man, I put away childish things” -- 1 Corinthians 13.
Family Millennials want detached houses and this requires them to come up with down payments; they want to build equity and that requires a reasonable mortgage. Thus, the demand for the small apartments in Transit Oriented Districts is disappearing. Instead, the Family Millennials’ new life style
causes them to leave Los Angeles for places where they can afford a detached home.
The City Hall Crooks Are Not Fools
Since developers and economists like Christopher Thornberg understand demographic trends, they knew that as the Young Millennials would turn into Family Millennials, and would abandon Dorm Room style of living, making it necessary to create a new pool of money for the City to give to the developers. They used the ruse of Affordable Housing.
The Garcetti Administration conned the voters to approve $1.2 billion in bonds for affordable housing. As we predicted before the election, most of those funds for Affordable Housing goes to developers of market rate housing on the pretext that they will add Affordable Units to their market rate complexes.
As we shall see, the developers will bankrupt their LLCs and LLPs, then the courts will remove the affordable requirements, leaving only market rate apartments/condos.
Eventually, Systemic Fraud Crashes Any Economy
Because the LA housing market is an exercise in Accounting Control Fraud, constructing more density will not satisfy the Family Millennials’ demand for detached housing. We are driving out our next middle class and along with them, employers are leaving Los Angeles. The new tech employers are opening shop in other states; soon, Texas will be hosting more tech start-ups than California.
Accounting Control Fraud always results in economic collapse: Equity Funding in 1970, The Savings and Loan Scandals in 1980's, Enron’s Double Entry Accounting during the 1990's, the Subprime Mortgage, Crash of 2008…and so on.
(Richard Lee Abrams is a Los Angeles attorney and a CityWatch contributor. He can be reached at: Rickleeabrams@Gmail.com. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.