When Lawyers Make Things Worse

Tyler Cowen pointed out Boaz Absramson’s working paper, which suggests that certain policy measures that were intended to assist tenants in their protection may lead to increased homelessness. “The Welfare Effects of Evictions, Homelessness and Policies,” examines several policies that aim to improve the lives of tenants and shows their results.

The abstract is here:

This paper examines the consequences of policies in rental markets that deal with evictions or homelessness. In order to protect tenants from being evicted during difficult times, policies which make it easier for landlords to remove delinquent tenants (e.g., providing tax-funded legal assistance in eviction cases (“Right–to-Counsel”)) or by instating eviction moatoria), can help. Higher default costs for landlords can lead to lower equilibrium rents, and a decrease in housing supply. This could mean that homelessness may increase. These tradeoffs can be quantified using a model of the rental markets within a city. The data is then matched to microdata on rents and other evictions. I also consider shocks such as income or family structure. My findings show that the “Right to Counsel” drives rents up so much that homeless people are now 15% more likely to be homeless and that welfare is lessened. Tendency to default on rent is driven by income shocks. Making it more difficult to evict tenants tends to prolong the eviction process, but not prevent them from being evicted. Rent assistance reduces the default risk of tenants and, as such, reduces homelessness and evictions by 45% and 75% respectively. It raises welfare even though it comes at a cost to taxpayers. Temporary measures such as an eviction moratorium that is used in the event of an unanticipated economic downturn may also be effective to avoid evictions or homelessness.

Let’s close the paper with this conclusion

Although there is a lot of interest in these issues, very little information exists about the equilibrium effects on evictions and homelessness, and how rents and housing stock can be adjusted. These policies are quantitatively evaluated in this paper in a dynamic equilibrium simulation of the rent markets of a city in which tenants can default on rent, and risk being evicted and homeless. It is calibrated to San Diego County. The results match micro data about evictions and homelessness as well as risk dynamics that lead to defaults on rent. The quantified model is then used for counterfactual analysis.

My experience is that default premia are driven up by “Right to Counsel” so that equilibrium homelessness increases by 15% Lawyers make it more difficult to remove tenants in default, but they cannot prevent them from being evicted. These shocks which cause defaults such as job losses and divorces are often associated with permanent income consequences that cannot be easily smoothed over time. The highest welfare losses are suffered by low-income households, who experience higher rents and are excluded from the market. However, the rent that they are paying is risk-free and lower than the housing supply. In general, the “Right-to Counsel” policy reduces aggregate welfare. The County of San Diego is responsible for a 37.4 million dollar annual monetary loss.

Renter’s assistance that is means-tested and affordable seems to be a better option. The subsidy reduces homelessness in the area by 45 percent, and it lowers the number of people who file for eviction. Subsidy insurance reduces default risk and makes it easier to expel tenants who are already in default. These are the primary beneficiaries. Because they are paying higher rents, which is a result of the increased housing supply and increase in house prices, some households with more income are less fortunate. In addition to improving aggregate welfare, rental assistance is also associated with net financial gains. The rent subsidy cost is much lower than the homelessness savings.

In conclusion, I assess the effect of temporary moratoriums on evictions as a response to an unemployed shock similar to the one experienced in the US in 2003. The moratorium does not prevent homelessness or evictions on the transition pathway. Because the moratorium has a temporary effect, it is important that rents do not rise.

Even though lawyers might not be happy to hear it, this paper backs the belief that policies that reduce housing costs are better than ones that improve the legal protection or provide greater legal defense. Abramson focuses his attention on means-tested rent assistance, however, he believes that the result is a function housing affordability. This would support other policies to increase housing accessibility and affordability (e.g YIMBYism rather than NIMBYism). The conclusion that housing shortages increase homelessness is supported further by Abramson’s findings.

This study also shows that intentions alone do not tell us much about the likely outcomes of a policy. It is important to remember that even though a policy is meant to be helpful, it is unlikely that it will help anyone, especially when compared with possible alternatives.