America's Rent-Seekers:
Individual Interest and the Common Good

Edward J. Dodson

[Reprinted from Land & Liberty, Summer 2002]

Homeownership is generally accepted as a very positive component of healthy communities. This is particularly true in the United States because of the diversity of our population. Homeownership brings a commitment to place and to civic involvement that in more homogeneous and less mobile societies is culturally imbedded.

The rate of homeownership in the United States is around 67.5% -- increasing in some regions of the country but falling in others for a variety of reasons. At the same time, owners of property who do not live in the community are often more interested in maximizing net returns on their investment than in property maintenance, community involvement or providing quality services to tenants. Tax laws that permit accelerated depreciation write-offs do not help. Even in markets where values and cash flows are increasing, owners of income-producing properties do not uniformly invest these cash flows back into their properties.

Clearly, the motivations of property owners are as diverse as the nature of the markets in which they operate. One of the important arguments for shifting to a land-only based property tax is the financial reward this provides to owners who improve their locations to maximize cash flows (and, conversely, the financial penalty imposed for not doing so).

Ironically, where advocacy for this change in public policy has found a receptive audience is in communities where the overall investment environment has become so deteriorated that civic leaders are desperate to stop the financial bleeding. In these communities one of the common denominators is that homeownership is not the source of household net worth for a significant portion of the residents. Land prices may be low in many of the residential neighborhoods, but the cost to construct new housing units exceeds the ability of those willing to live in these neighborhoods to compensate a builder for the full cost of development. Desperation, it seems, is required before people do what is truly right for the common good of the community, even if some of the motivation is to penalize those who previously took the greatest advantage of long-standing dysfunctional public policy.

Deep down in the subconscious of those who own homes and businesses in depressed communities, there is almost always the hope that "property values" will rise. Only a small percentage of property owners realize that what they are hoping for is a rise in land prices. Most people do not think very deeply about the effect aging has on the value of buildings.

Depreciation is something accountants worry about. Even in communities where real estate prices have been falling over a long period of time, many property owners continue to make repairs, and some even make major improvements (which they must fund without bank financing because there is not a dollar-for-dollar increase in collateral value being created by the improvements). However, most individuals who possess financial reserves are looking to invest where cash flow is strong and/or "appreciation" is highly certain.

All across the United States we see the consequences of the "rent-seeking" behavior that is to a great extent not appreciated by those engaged. Even those of us committed to reform of the socio-political arrangements that provide the fuel for rent-seeking decisions are, in our private affairs, actively engaged in the dance. We might shy away from the most egregious forms of rent-seeking (e.g., ownership of rundown apartment buildings in nearly-abandoned inner city neighborhoods, milking the property for as much cash flow as we can get without spending anything on maintenance or repairs, etc.), but even as homeowners in suburban communities we hope and expect to pocket unearned gains on the sale of the land on which our dwelling sits. This "equity" makes up a significant portion of the assets we rely on to pay our living expenses once we reach the age of retirement from whatever occupation we have pursued.

Among minorities, who have far lower rates of homeownership, what community leaders are looking for is to make the existing system work for their group members as the path to "wealth building." Minority community leaders recognize the damage caused by absentee owners and by land speculation. What they want is for land parcels to be acquired and developed by non-profit organisations committed to reinvestment of positive cash flows generated from commercial properties or apartment buildings. And, for lower income homeowners they want property values to increase gradually (at least to a level that moderately exceeds the cost to construct new units or rehabilitate existing houses). One might refer to their objectives as "rent-seeking limited." Community Land Trusts are generally organized on roughly the same model, allowing the homeowner to capture some portion of the capitalized uncollected location rent as an incentive to meet requirements such as minimum periods of owner-occupancy and property maintenance.

For those of us who do not live in communities intentionally structured to restrict rent-seeking benefits or in communities severely economically depressed, we hope the market, the economy and our locale (township, county and school district) will be good to us - by which we mean that our house and lot will be assessed for tax purposes at far less than current market value, and that when we are ready to sell housing prices (remembering that we are largely oblivious to land prices) are very much higher than when we made our purchase. We are also hopeful that housing (i.e., land) prices are considerably lower wherever we might be moving so that we can either purchase a larger house and land parcel for the same amount, or acquire a similar property in another area while putting most of the profits into the stock market.

Most of the household wealth-building that has occurred in the United States since the end of the Second World War has occurred because of the ownership of residential land. A 2001 report by the advocacy organization United For A Fair Economy cited 1995 data indicating that for Whites the median household net worth - housing equity included - was $61,000. For Blacks net worth was just $7,400, and for Hispanics just $5,000. Homeownership rates for Blacks and Hispanics are increasing in conjunction with the expansion of household incomes among a segment of this population. However, over one-quarter of all Blacks and Hispanics remain in poverty. Even for Whites, the dependency on homeownership for net worth has serious implications for the future.

Real estate values can be borrowed against, of course, to cover living expenses; and, in fact, Americans have been borrowing against housing and land values to an almost unimaginable extent. Credit card debt has also skyrocketed, to well over $600 billion. Even a short-term interruption in employment and income is likely to pull a middle-income household into a chain of defaults on outstanding debt and eventually into bankruptcy.

The most successful strategy for accumulating wealth in the United States is to inherit it, then create a diverse investment portfolio that includes stocks, bonds, real estate, raw land, precious metals and government securities. These individuals who have added to inherited fortunes and others fortunate to have otherwise accumulated great wealth comprise the top 1% of households who control over 38% of the total net worth of all households in the United States, an increase of over 42% just since the early 1980s. Besides inheritance, entry into the top 1% club can be achieved by great business success or by rising to the level of C.E.O. in a large corporation even if there are no profits earned during your tenure. You may be highly talented at some sport or in one of the arts. The more you have to start with from one of these sources, the more successful you are likely to be as a rent-seeker.

The game is rigged. We know the game is rigged. A few of us know in what way the game is rigged. With those who are actually winning the rent-seeking game, the challenge is to convince them that changing the rules is the right thing to do - that it is for our common good. With those who are losing the game or who are not in the game, the challenge is to convince them the remedy proposed is just. Neither task has proven to be easy. I suspect that some medical research will confirm that rent-seeking is hard wired in our brains and has moved over from a learned to an instinctive behaviour. What might that mean for the idea of humankind as a social animal working with common interest?