UPDATE: Relevant to this article, there was an Executive Order changing some "price gouging" rules for Manhattan Beach. See our important Feb. 4 follow-up post, "Two Huge Changes Affect Local Rental Rates." In sum, some exemptions were created, while the "price gouging" rules remain largely in place.
-----------------------------------------------------
In the rapidly moving real estate market in Manhattan Beach these days, the issues of "price gouging" and rental price limits loom large for some tenants and property owners.
In just 3 weeks since the tragic L.A. County fires broke out, we're seeing almost a mass migration into our town. (We kinda saw this coming, and wrote way-back-then: "More people are going to want, and need, to move to Manhattan Beach.")
We see both a wave of sales that's unprecedented for January, and quick absorption of rental listings – furnished and unfurnished. Nothing lasts.
Our office's own rental listing at 10 Cambridge in Manhattan Village (asking $14,750/mo.) got its first application 30 minutes after going online. We had several more inquiries and showings, but it was put to bed super fast. We continue to get calls from families looking for anything new that might be coming.
All of us who work locally are trying to bring new inventory online – whether that means homes for sale, or homes for rent.
But there are barriers. Rental prices are controlled under the state of emergency.
How controlled?
'Price Gouging' Rules Limit Rents Two Ways
You've probably already heard about how "price gouging" restrictions in the law limit price increases to 10% on properties that have been rented, or advertised for rent, within the past year. (See this Jan. 15 post.)
Our Village listing was impacted by that regulation – the market might have delivered $18K or more per month otherwise.
But if a property has not been rented within the past year, there's a price range specified by law, and it's well below what the market likely would bear for most Manhattan Beach properties.
We have had so many requests for this data, we decided to make a chart:
To reference our 4BR Village listing again for an example, we could ask $14,750 because it had been rented for $13,500 previously. Without a rental history, it would have been capped $6,000/mo. lower.
Outraged by the low numbers?
Keep in mind, those figures come out of legislation that was written after a comparable fire situation.
Origin and Function of Maximum Rents Under Emergency Regs
The Tubbs fire in 2017 was, by some measures, the most destructive wildfire to hit California (at the time), impacting Napa, Sonoma and Lake counties, and destroying more than 5,000 homes – many in Santa Rosa. Watching how displaced residents were charged high prices for shelter in the aftermath, the California legislature worked up regulations that became Penal Code Section 396.
The relevant part caps prices charged for leases up to a year at 160% of the "fair market rent established by the United States Department of Housing and Urban Development."
The HUD "fair market rent" (FMR) is broken down by ZIP code. It is significantly higher for Manhattan Beach 90266 than for many nearby communities, if still quite low. (See it here on the HUD site.) The FMR is ordinarily used for purposes of determining how much the government will pay for housing assistance, such as Section 8 vouchers.
Using the "HUD base" rents, we calculated the amounts that a local owner may legally charge for 3BR-6BR units.
Penal Code Sec. 396 also allows an additional 5% to be charged for leasing a home furnished. It prohibits additional charges for "any other good or service."
Hey, wait, Dave!
What about those extra lines, with the calculated figures + 10%? Like, on an unfurnished 4BR, is the maximum price $8,880, or $9,768?
It turns out that there are two competing interpretations of the same law. One is that the firm, maximum price is 160% of the HUD figure. Another is that a base "rental price" is 160% of the HUD figure, and that owners may charge up to 10% more than that amount. For now, state Attorney General Rob Bonta's office is sticking with the narrower reading, which is why we would advise anyone wishing to charge the extra 10% to get their own qualified California real estate attorney to weigh in. (Heck, in the 4BR example, that's more than $10K over a year, so it's worth checking.)
What Happens If Allowable Rates Are Too Low?
Oh, but all these rates are far below what many displaced families would be willing and able to pay for a home in Manhattan Beach, you say.
You're almost certainly right.
If the rates limited by statute are stupidly stringent, property owners might do one of three things:
1) Refuse to rent out properties that they otherwise would make available (we've already heard this more than once);
2) Offer properties in something of a parallel or "grey" market, using word-of-mouth or other methods while not listing properties publicly; or
3) Find a way around the rules entirely.
There's some element of risk to #2 and #3, which means that many owners will simply hold their properties off the market. That means fewer homes for people who want to be here, and who could pay.
The big problem with #2 is that two parties (owner and tenant) can fully agree upon an arrangement that later could be judged illegal. By skipping the MLS and Zillow, you initially avoid the legions of online sleuths who are hunting down and reporting some listings as "price gougers," but you're still taking a leap of faith that the deal will never become a problem. Be nice to those tenants! Respond immediately to every request! What?!? You rented to a lawyer?
Seriously, do we really want to be putting owners and real estate agents in legal jeopardy for helping to arrange housing for displaced families?
Now, we're very much aware of what seems to be a (currently) legit way to go the #3 route, but we don't offer legal advice here. (We do take phone calls and reply to messages, however. Contact Dave here.)
There's a fourth option, too, which is to wait out the "state of emergency" that gives Penal Code 396 its force today. This declared emergency is slated to expire on March 8th. But if it gets extended, see the three steps above.
What seems like a great market imbalance here comes about partly because so many displaced families seem to be coming from Pacific Palisades (though not exclusively). In large part, these families have substantial resources to get what they want and need, but in some ways, the market cannot offer it to them.
So instead of alleviating pain, suffering, and displacement, these well-intended regulations – borne of a similar wildfire situation – may be causing harm.
----------------------------------------------------------------------
POSTSCRIPT: Next week, we'll attend the Board of Directors meeting for the California Association of Realtors. (Dave is a Director of C.A.R.) Wildfire impacts and questions of public policy and real estate will be live topics.
We began to float the idea of changes to PC 396 informally here and there, in advance. We're not quite sure the problem is easily seen by folks outside this area as anything but a demand for more money by wealthy Manhattan Beach homeowners. So it might take some work to see change.
