Eviction policies: "Right-to-Counsel" drives up rents so much that homelessness increases by 15%, welfare is dampened, & default premia increase a lot; rental assistance lowers renters' default risk, reduces homelessness by 45% & evictions by 75%, & increases welfare

The welfare effects of eviction policies. Boaz Abramson. Standford Academic Market Program, Nov 2021. https://stanford.edu/~boaza/evictions_abramson.pdf

Abstract: This paper studies the implications of rental market policies that address evictions and homelessness. Policies that make it harder to evict delinquent tenants, for example by providing tax-funded legal counsel in eviction cases ("Right-to-Counsel") or by instating eviction moratoria, imply eviction and homelessness are less likely given default. But higher default costs to landlords lead to higher equilibrium rents and lower housing supply. I quantify these tradeoffs in a model of rental markets in a city, matched to micro data on rents and evictions as wel"Right-to-Counsel" drives up rents so much that homelessness increases by 15% and welfare is dampened. Since defaults on rent are driven by persistent income shocks, stronger protections are ineffective in preventing evictions of delinquent tenants, and lead to a large increase in default premia. In contrast, rental assistance lowers renters' default risk and as a result reduces homelessness by 45% and evictions by 75%, and increases welfare. Eviction moratoria can prevent a spike in evictions following a rare economic downturn, as long as they are used as a temporary measure.

1 Introduction

Approximately 2.2 million eviction cases are filed against renters every year (Desmond et al., 2018). A growing body of research documenting the negative outcomes associated with housing insecurity has triggered a public debate over policies that address evictions, as well as homelessness more generally. Policymakers across the country have considered enacting stronger protections against evictions, for example by providing free legal counsel in eviction cases (“Right-to-Counsel”), or by instating eviction moratoria. Rental assistance programs are also often proposed as a tool to promote housing affordability. While these policies provide a form of insurance to tenants who cannot pay rent, they can also affect equilibrium rents and housing supply. In this paper, I study the equilibrium effects of these policies. To this end, I propose a quantitative model of heterogeneous households who rent houses from investors, but can default on rent and face the risk of eviction. On the one hand, by making it harder to evict delinquent tenants, stronger protections provide greater insurance against idiosyncratic risk. On the other hand, they lead to higher equilibrium rents and lower housing supply because they weaken households’ ability to commit to paying future rent. I quantify the model using moments on evictions and rent, and then use it to evaluate the main rental market reforms that have been proposed. I find that “Right-to-Counsel” reduces evictions but drives up rents so much that it increases homelessness and reduces welfare. In contrast, means-tested rental assistance lowers tenants’ default risk, reduces both homelessness and evictions and increases welfare. The key force driving these differences are the dynamics of risk that underlie defaults on rent. When the shocks that lead to default are persistent, lawyers’ ability to prevent evictions and homelessness is limited because delinquent tenants are likely to continue defaulting until they are eventually evicted. At the same time, in a persistent risk environment, making it harder to evict delinquent tenants leads to relatively large increases in default premia and rents. Rental assistance promotes housing affordability and is welfare improving because it lowers default risk, as opposed to making it harder to evict tenants who have already defaulted. Consistent with this logic, I find that a temporary eviction moratorium following an unexpected unemployment shock, of the magnitude experienced at the onset of the COVID-19 pandemic, has little effects on rents and prevents a spike in evictions and homelessness. I identify the particular dynamics of risk that underlie defaults on rent using novel micro data on evictions. Using survey data, I document that the main risk factors driving defaults are job loss and divorce events, and that these shocks are associated with 1 persistent income consequences. By linking the universe of eviction cases to a registry of individual address histories that records demographic characteristics, I identify the populations that are at a particularly high risk to default and face eviction: young, less educated, and single households. I then provide evidence suggesting that these populations also face remarkably high and persistent income risk. The model accounts for these facts by explicitly modeling unemployment and divorces as sources of income risk, and by allowing the parameters of the income process to depend on age, human capital, marital status, as well as on divorce events. At the heart of the model are overlapping generations of households who have preferences over numeraire consumption and housing services and face idiosyncratic income and divorce risk. Households rent houses from investors by signing long-term leases that are non-contingent on future states. A lease specifies a per-period rent which is fixed for as long as the lease is ongoing. To move into the house, a household must pay rent in the same period in which the lease begins. The key feature of the model is that in subsequent periods households may stop making rent payments. When a household begins a default spell, an eviction case is filed against it. The eviction case extends until the household gets evicted or until it stops defaulting. Each period in which the household defaults it is evicted with an exogenous probability, which captures the strength of tenant protections in the city. A household who defaults but is not evicted lives in the house for free for the duration of the period, and accrues rental debt into the next period. Households with outstanding debt from previous periods can either repay the debt they owe, in addition to the per-period rent, or continue to default and face a new draw of the eviction realization. Guided by recent evidence on the consequences of eviction (e.g. Humphries et al., 2019), I model the cost of eviction as consisting of three components: temporary homelessness, partial repayment of outstanding debt, and a penalty on remaining wealth that captures, among others, health deterioration and material hardship that follow eviction. Houses are inelastically supplied by landowners to investors, who rent them to households. From the investors perspective, rental leases are risky assets. Investors incur a per-period cost for maintaining the house, but might not collect rents if their tenant defaults. Rental rates can depend on household observables and reflect the costs of default on rent to investors, such that in equilibrium investors break even. Houses are indivisible and there is a minimal size of housing. Households that cannot afford to move into the smallest house are homeless. The presence of a minimal house size reflects minimal habitability requirements and is consistent with the negative relationship between expenditure shares on rent and household income that I document from micro data. 2 In this setting, stronger tenant protections introduce more contingency in rental leases. They allow delinquent households to remain in their house for longer periods of time, thereby providing them with a better chance to avoid eviction and homelessness by repaying their debt later on. However, this increases the costs of default to investors, which leads to higher equilibrium rents and lower housing supply. Quantitatively, this trade-off depends on local rental market conditions. When renters’ income dynamics are such that the shocks that lead to default are transitory in nature, stronger protections can prevent evictions by providing delinquent tenants with more time to recover from a bad shock. However, if persistent shocks are the primary driver of defaults, protections are less effective because the shocks cannot easily be smoothed across time. The elasticity of housing supply in the city is also a key parameter for evaluating protections against evictions: when supply is less elastic, the effect on house prices is amplified. I quantify the model to the San Diego-Carlsbad-San-Marcos MSA, where homelessness is a major problem and high-quality eviction data are available. I specify an income process that allows for the distribution of both transitory and persistent components to depend on the household’s age, human capital, marital status, as well as on divorce events, and I estimate it to match the empirical evidence suggesting that households who are more likely to face evictions also face higher and more persistent income risk, and that divorces are both a driver of eviction and are associated with high income risk. I exploit detailed eviction court data to identify the strength of tenant protections in San Diego: the likelihood of eviction given default is identified by the average length of the eviction process, and the garnishment parameter governing debt repayment upon eviction is identified from the share of debt collected by landlords. I jointly estimate parameters with no direct evidence using a Simulated Method of Moments (SMM) approach. The estimation successfully matches facts on homelessness, evictions, rents and house prices. In particular, I estimate the minimal house size such that the average rent in the bottom housing segment matches the average rent in the bottom quartile of rents in San Diego. I identify the (dis)utility from homelessness from the homelessness rate in San Diego. The wealth penalty associated with eviction is identified from the eviction filing rate, which is the share of renter households who face an eviction case during the year. I am able to separately identify the homelessness service flow and the eviction penalty because both evicted households and those who do not sign a rental lease suffer from homelessness, but eviction carries the additional penalty. When homelessness is worse, both homelessness and eviction filings drop, but the eviction penalty shifts the two moments in opposite directions. A larger penalty disincentivizes default, but makes homelessness more attractive because staying out of the rental market elimi3 nates the risk of eviction. As a check of the model, I evaluate its fit to non-targeted moments. First, I show that while the model is estimated to match the overall eviction filing rate in San Diego, it also accounts for how eviction risk varies across households. The model matches the disproportionately high eviction filing rates observed for young households as well as the general downward trend across ages. It also does well in matching the share of eviction filings that are related to divorces. This is due to income data regularities, in particular younger households are poorer and are more likely to experience negative income shocks, and divorce is associated with elevated income risk. Second, I find that the model is qualitatively and quantitatively consistent with the empirical relationship between expenditure shares on rent and household income. I use the model to infer that the vast majority of defaults on rent in San Diego are instigated by persistent income shocks. In particular, 68% of default spells begin with a negative persistent income shock, 30% are due to a combination of both a negative persistent shock and a negative transitory shock, and only 2% are driven by a transitory shock alone. In this highly persistent risk environment, shocks cannot easily be smoothed across time, and there is limited scope for preventing evictions by making it harder to evict delinquent tenants. I then consider three policy experiments. In the first, I study the effects of instating a “Right-to-Counsel” reform. To do so, I employ micro level estimates on how legal counsel strengthens tenants protections against evictions. The “Shriver Act”, an RCT conducted by the Judicial Council of California in San Diego, finds that lawyers prolong the eviction process by approximately two weeks and lower debt repayments by 15% (Judicial Council of California, 2017). These estimates identify the parameters of the counterfactual eviction regime associated with “Right-to-Counsel”, namely a lower likelihood of eviction given default as well as a lower garnishment parameter. To evaluate the equilibrium effects of a city-wide “Right-to-Counsel” reform, I compute the steady state under these stronger tenant protections. The main result is that “Right-to-Counsel” drives up rents so much that homelessness rises by 15% in equilibrium. Since defaults are mostly driven by persistent shocks, lawyers are unable to prevent evictions (and homelessness) of delinquent tenants: the share of eviction cases that are resolved with an eviction (rather than repayment of debt) is nearly one in the baseline economy, and is only slightly lower under “Right-to-Counsel”. At the same time, the increase in default premia drives low-income households into homelessness. The eviction filing rate falls by 14%, but this is because the most risky tenants are priced out of the rental market. This result highlights that the evaluation of 4 tenant protections should take into account not only the effect on evictions, but also on housing affordability and homelessness. The reform also has distributional effects through its effect on house prices. As default premia increase, middle-income households are forced to downsize from upper to lower quality housing segments. This shift in demand for rentals leads to an increase in the house price in the bottom segments and a decrease in the house price in upper segments. Since rents partly reflect the price of housing, this amplifies the increase in rents driven by higher default premia in bottom segments, but mitigates the effect in upper segments. In fact, for high income renters in the upper segments who pose little risk for investors, rents are lower following the reform. In terms of welfare, I find that “Right-to-Counsel” dampens aggregate welfare. Welfare losses are particularly large for households at the bottom of the income distribution, who experience the largest increases in default premia. In contrast, rich renters experience rent declines and are better off. The second policy I consider is a means-tested rental assistance program that subsidizes $400 of monthly rent to households with income and savings below a threshold of $1, 000. I find that the program reduces homelessness by 45% and the eviction filing rate by 75%. Rather than making it harder to evict delinquent tenants, rental assistance lowers renters’ default and eviction risk. It also promotes housing affordability for households who previously could not afford to move into a house, both because it subsidizes their rent but also by lowering their default risk and therefore the rents they face. I find that the aggregate welfare effect of rental assistance is positive. However, effects differ across the population. Poor households who are eligible for the provision, in particular the young and those with human capital, are better off. However, households who are poor enough to rent low quality housing but not poor enough to be eligible for the subsidy are worse off because they pay higher rents. This is because the price of housing in the lower quality end increases, consistent with the common argument that rental assistance fuels demand for housing. Finally, I evaluate the program’s cost against an estimate of the savings in terms of expenses on homelessness, and find that the policy is cost-effective: it results in annual net gains of 8.3 million dollars to the San Diego MSA. I then evaluate the effects of enacting a temporary moratorium on evictions in response to an unexpected increase in the unemployment rate. I compute the transition dynamics following an unemployment shock of the magnitude observed in the US at the onset of COVID-19, for two scenarios: with and without a 12-month moratorium. I find that a moratorium significantly reduces homelessness and evictions along the transition path. This is because a large number of households who default on rent during the moratorium are able to repay their debt before being evicted. Compared to the “Right-to5 Counsel” reform, the moratorium successfully prevents homelessness because it provides delinquent households with a substantially longer period of time to repay their debt, and has little effect on rents because it is temporary in nature.