306: Homelessness and Real Estate, Chicago Is World Class

Welcome to Get Rich Education! I’m your host, Keith Weinhold, with a two-part show.

Real estate is a substantial input into homelessness. Why are people homeless – and why might you & I be partly RESPONSIBLE for it, in fact?

The second part – in general, world class cities don’t make any sense to invest in for cash flow – New York, LA, DC, London, Singapore … but we’re going to discuss one “world class” city that actually DOES. Today, on Get Rich Education.

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Here it is – hey! You’re inside GRE. From Sarasota, Florida to Sarajevo – in Bosnia and Herzegovina – and across 188 nations worldwide. 

I’m Keith Weinhold, this is Get Rich Education.

Even in the affluent United States, there is a large and growing population of vagrants – homeless people … more than half a million of them … and you & I … unknowingly play a role in keeping them homeless.

Why are people homeless? Well, the #1 reason is real estate-related. So that’s why I’m talking about it in the first of two show segments here.

Let’s look at the Top 5 cited reasons that people are homeless.

5th most common – Substance abuse – drugs.

4th – Mental illness.

3rd – Poverty …OK, that’s sort of an obvious one.

2nd – Unemployment

1st – Lack of affordable housing

Lack of affordable housing is the #1 reason that people are homeless. Well, one mission here at GRE is that we PROVIDE society with affordable housing.

But, it’s generally not the same kind of Class D, lowest-end housing that there is – and that homeless people are looking to get into. 

We focus on properties just below the median housing price in some of the lower-cost U.S. metros – B-class and C-Class. That’s a notch or two above where those on the brink of homelessness would be.

The homeless population is more visible in my own home city since the pandemic – and perhaps yours too … now that the unemployment rate is 10%. 

I’m going to tell you what contributes to homelessness – and a lot of this has to do with real estate: contributors are carbon monoxide detectors, minimum wage, salamanders, NIMBYism, and over the long term: rent control.

Now, before we unpack that. Let’s define homelessness.

One of the better accepted definitions is – a condition where people lack “a fixed, regular, and adequate nighttime residence”. That’s “homelessness defined”. 

I think you & I can agree that “homeless” is not the best technical term – right? Because even if someone lives under a bridge, that IS their home.

Houselessness would actually be more accurate.

Vagrancy is an even better way to say it. A vagrant is a person without a settled home or regular work who wanders from place to place and lives by begging.

That’s what we’re really talking about here. But homelessness is the widely understood term, so I’m going to it.

Now, HUD – the U.S. Department of Housing and Urban Development has a lot of statistics on the homeless, and …

… as of 2018, they reported there were roughly 553,000 homeless people in the United States on a given night,[2] or nearly two-tenths of 1% of the population. 

That’s about 1 in 500 Americans then. Well, many people – me included – believe that the real number of homeless is greater than this 553,000.

In fact, private & local reports tell you that the homelessness have increased 40% per annum in recent years – yeah, 40% per year!

A big mistake is that people think about the homeless as all one type. But there are so many different types of homeless. 

There are the temporary homeless –  passing through that 553,000 number.

Some are voluntarily homeless. Others are really couch-surfing because perhaps they were in a divorce or domestic violence situation.

Then you need to realize that about 2/3rd of their population is sheltered, and ⅓ unsheltered. 

Consider too, that there are at least 40,000 homeless veterans. To think that a person could have served this country – and maybe even risked their life for this country – but don’t have a home in this country … can be heartbreaking to think about.

Now, though I’m not sure, I don’t believe that a digital nomad would be considered among the homeless – the laptop entrepreneur that stays at a different AirBnB location, say monthly.   

Before we bring in the real estate angle, let’s get some historical context. Just talking about the U.S. here …

Homelessness emerged as a national issue in the 1870s.[6] Early homeless people lived in emerging urban cities, like New York City. 

Into the 20th century, the Great Depression of the 1930s caused a substantial rise in unemployment and related social issues and distress and homelessness. 

In the 21st century the financial crisis of 2008 and resulting economic stagnation and downturn has been a major driving factor and contributor to rising homelessness rates.

That is probably happening again, right now, in the COVID pandemic.

A Zillow report found that people in communities where the average renter spends more than 30 percent of their income on rent — meaning that they can be described as being “rent-burdened” — are particularly vulnerable to rapid increases in homelessness rates.

Eviction obviously creates homelessness.

Now, some naively think – can’t we just raise taxes to build permanent housing for them & move them all in there? I really doubt that that’s a viable long-term solution. 

Because at some point, if taxpayer funded housing is just “provided” for people, then people don’t have incentive to work & pay the rent.

That’s in general. Right, maybe someone has a disability that prevents them from making a living. 

Some think – maybe we SHOULD impose rent control. Rent control means capping the amount of rent that a landlord can charge.

I’ll tell ya – that could reduce the number of homeless people in some areas that HAVE enough housing. But long-term, rent control is a terrible plan.

Because now an income property owner like you has zero incentive to improve the property any longer. 

Long-term, rent controlled areas fall into serious dilapidation. 

And because homelessness is concentrated in inner cities. It’s those exact same big cities – like New York – that have tried rent control. 

It doesn’t work. So many areas that have tried to impose it, have to repeal it, because it eventually turns areas into ghettos.

What if you own property in an area where rent control were imposed? Even if you did improve your property – not only would you NOT get more rent for it – but you had better believe that property owners all around you wouldn’t be improving their property … and the entire condition of the neighborhood would be on a loooong downhill slide.

You might remember that I devoted an episode to the rent control topic. You can look that up on Get Rich Education Episode 192 if you’re further interested there. 

One factor that contributes to higher housing costs – which prices people out of having any shelter and creates more homeless people are … environmental regulations that limit development in certain areas.

Sometimes you need to leave a development buffer for streams or you can’t build in areas that are wetlands in order to protect flora and fauna.

A rare orchid, or a spotted salamander or a threatened egret or an endangered heron. They say, you can’t build in their critical habitat areas. You’ve got to protect them.

But yet, often, the same type of people that want more environmental regulations are the same people that say that they want more affordable housing options.

Well, when you limit where you can build, now you’ve reduced the housing supply. Real estate pricing is highly susceptible to supply/demand factors, of course.

All these wildlife protections limit supply. That makes prices go up. That prices people out.

Now, maybe you’re thinking I’m anti-environmentalist? No, I’m not taking a side either way. 

It’s just that one needs to understand the cost and the longer-term ramifications of decisions that limit development in protecting the spotted salamander. 

I think it’s easy to make a case that more biodiversity is better than less biodiversity. But the better question is: “At what cost should we protect species? How far do we take it?” 

Environmental regulations in the United States are intended to improve the quality of the environment; preserve ecosystems – that includes wildlife; and protect human health too.

But these regulations are often written without considering how much they will cost.

Another contributor to homelessness is excessive safety regulations.

Again, some safety regulations are good. But how far do we take it? 

My gosh, when an area needs to build more affordable housing for people – which is something that would reduce the homeless rate … and …

Sheesh, a new home today might need fourteen smoke detectors and five carbon monoxide detectors … then the detectors need to be connected to each other so that they can communicate with each other … and all these devices and this added complexity increases the cost of housing.

That makes mortgage payments higher, rent payments higher, and it just prices more people out of the real estate market. The lower end of the income spectrum gets priced out of affordable shelter.

I’m not anti-safety. But at some point, one has got to ask the question, “How much safety do we really need?” 

Even – “What is the cost of a human life?” There actually is an answer to that question. In fact, the EPA pegs the cost of a human life at $10M – one of the highest of any federal agency.  

And then, there’s the entire question of how can you ever monetize the value of a human life. You can make the case … that it’s priceless. That’s a different discussion.   

But the point is, all these safety regulations increase the cost of housing and increase homelessness.

Minimum wage does, in many instances, increase homelessness long-term. 

This might come as a surprise to you. You would think that raising the minimum wage would have to DE-crease homelessness – because a higher wage would mean that low-income workers could now afford housing.

Well, long-term, besides higher wages in an area creating inflation & soon making the cost of everything go UP – including housing …

Think about it from the perspective of if you’re an employer & you have to pay your workers a higher wage – now that minimum wage is higher.

If someone that works for you makes $9 an hour – but they only produce $12 an hour worth of productivity for you…  

And a new minimum wage of $15 an hour is implemented, you’re losing money if you retain that worker. So you would lay them off.

You would find ways to automate – or make a machine do the work that that employee used to do for you. That layoff increases homelessness.

Just look at the number of self-serve checkout kiosks in grocery stores. Those lanes used to be staffed by humans that earned a wage.

With a hike in the minimum wage up to $15 an hour, you’d begin to see a trend where more fast-food restaurants have self-serve kiosks. You’ll have fewer humans there.

That’s because some employers can’t afford to pay people $15 an hour. Every self-serve digital kiosk that you see represents a laid-off worker.

Talk to your parents or grandparents and they’ll tell you that gas stations used to be attended by humans that would pump your gas for you, check your tire pressure, check your fluid levels – that’s been gone for a couple generations.

Now, an increase in the minimum wage would help get some people out of homelessness short-term … yes. 

I’m giving you insight so that you can see both sides & see the long-term consequences of government intervention into the free market.

Let’s say that you’re an employer at a warehouse, the minimum wage is $15 an hour and you want to hire someone to help you sweep floors & do odd maintenance jobs around this warehouse that you own.  

Well, now it’s illegal for you to hire them at $12 an hour. You’d love to give a kid a job and help him learn – and you can’t make the numbers work at $15 an hour. 

So now he’s unemployed because the government said, “No. You can’t hire him at $12 an hour.” That’s what a $15 minimum wage says. Try looking at it from that angle.

Another phenomenon that keeps people homeless is NIMBY – Not In My Backyard.

NIMBYists are the ones that say, “No, I don’t want you to build low-cost housing in my neighborhood, because I’m afraid that it’s going to ruin the character of my neighborhood and it’ll stifle the rate of home appreciation here.”

Lafayette, California is a wealthy San Francisco suburb. It is nestled in Contra Costa County, where its residents fight to stop what they call a “very urban,” “unsightly” 315-unit housing development 

It was recently profiled by The New York Times.

Over in the suburban community of Cupertino, California—we’re talking Silicon Valley now—local activists spent years trying to stop the development of an abandoned mall into apartments, half of which would be rented out to lower-income tenants at below-market rates.

In  Berkeley, California, activists often argue against new housing on the grounds that it will threaten their community’s sustainable character.

Well, what is another example of NIMBYism? 

At a recent Zoning Adjustment Board Meeting in Berkeley, I think one resident summarized NIMBYism really well – and this was published in the New York Times – they said “Berkeley needs to prioritize a livable, sustainable environment for people who already live here” …

… when they were opposing a 57-unit development of student housing. They went on to say: “We are not obligated to sacrifice what is best about Berkeley to build dorm rooms.” That’s the end of what they said.

NIMBY – this “Not in My Backyard” opposition to new housing development – centers on concerns of property values and crime and gentrification and environmental sustainability. 

Even though it’s often not their intent, the result of NIMBYism is that less housing gets built, housing costs go up and homelessness … rises.

So, let’s draw some conclusions here and look at some actionable ways that you can make things better.

Though it isn’t immediately apparent – carbon monoxide detectors, minimum wage, salamanders & egrets, rent control, and NIMBYism – all go right through the heart of real estate investing and contribute to the long-term cycle of homelessness.

A giant takeaway for you here, is that, what is the common denominator in ALL of these factors. There is one common theme. 

You know what that is – it is Government intervention.

Government intervention and interference in the free market – is the contributor here – excessive safety, minimum wage, protecting salamanders & egrets, rent control, and NIMBYism. 

Every single one of them. 

And now, maybe if you’re a new Get Rich Education listener – especially – you might be wondering, am I some anti-government guy where I think that the answer to EVERYTHING is free market economics.

Well, though I think that less government would be better. 

I’ll tell you that SOME government regulation is good – just less than what we have now. 

For example, look at all the smoky, hazy pollution in Pittsburgh, PA in the 1970s. It was a hazard to your health just to walk Pittsburgh then.

You might have heard about this: famously, in the summer of 1969 – An oil slick in Ohio’s Cuyuhoga River caught on fire.

Companies were committing rampant pollution such that it was a hazard to human health.

Well, government regulations like the Federal Clean Water Act Of 1972 helped to clean that up.

So, that regulation helped. Government has a role, but it’s often overly intrusive.

When it comes to you helping the homeless directly, I like the campaign slogan that says, “Give real change, not small change.” 

That means, don’t give money directly to panhandlers on the street. Where do you think that your goes then? Probably straight to cheap monarch vodka in those plastic bottles.

Also, if you don’t want to see homeless people in your neighbourhood, don’t give to them if they’re on your city’s street corner – like they are mine – because you’ve just given them an incentive to show up there again & do the same thing.

So instead of small change, give real change. When you donate to your local homeless shelter or soup kitchen, your money is going to do MORE REAL GOOD for the homeless.

It’s going to provide them with shelter, or educational resources, or a computer so that they might be able to apply for a job. That’s real change.

You want to help the homeless? I think that’s great. That’s kind. Give real change, not small change.

When it comes to NIMBYism and the environment, there’s a great saying out there.

What do you call a developer –  someone who wants to build a house.  Well, what do you call an environmentalist – someone who already owns the house, [LAUGHING] because they don’t want anyone else to build there, right?

Well, we avoid investing in coastal areas here at Get Rich Education. They’re what I call the volatile markets – they have a history of more regulation, more rent control, and more laws that are disadvantageous to property owners.

Just more reason … as to why we invest in the U.S. Midwest & South. They’re what I call the stable markets.

You’re listening to Get Rich Education, Episode 306.

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Again, What do you call a developer –  someone who wants to build a house.  What do you call an environmentalist – someone who already owns the house.

Kind of exciting next – A world class city where the real estate numbers actually make sense for you … straight ahead.

I’m Keith Weinhold. This is Get Rich Education.