In August 1971, President Richard Nixon went on national television and shocked the world by defaulting on the gold-backed dollar system created at Bretton Woods in 1945.
Up to that point, dollars were essentially coupons for real money … gold. Foreign dollar holders could turn in their dollars and walk away with gold at $35 per ounce.
Nixon repudiated that deal without warning, promising it was only a “temporary” measure. That was over 48 years ago … and the world is still waiting.
It reminds us of Ben Bernanke’s promise that quantitative easing was only temporary. Yet, here we are 10 years later and it’s still here.
Yes, we know Jerome Powell doesn’t want to call it QE. Most people forget Ben Bernanke didn’t want to call the original QE “QE” either.
So Nixon tried to take the edge off the gold default by saying it’s only temporary, but he knew the world would react by dumping dollars … crashing the dollar and causing prices to rise.
If that’s confusing, just think of dollars like stocks. When something happens to trigger people to sell, the price falls.
When the dollar falls, it takes more dollars to buy the same products. That’s called inflation. And it hurts people who do business in the falling currency.
So while foreigners were upset about Uncle Sam’s broken promise, those paying attention could sell their dollars quickly and buy gold in the open market.
American citizens were not so fortunate.
That’s because back then it was still illegal for U.S. citizens to own gold. And the government had already taken all the silver out of the coins in 1965.
So even if Americans were smart enough to know what was happening, the best escape routes were blocked. Real money wasn’t readily available to them.
Being aware the American voter would be facing rising prices and falling purchasing power headed into the 1972 election cycle, Nixon attempted to stop inflation by executive order.
In fact, at the same time he defaulted on the gold standard, Nixon also ordered a national freeze on prices and wages.
You read that right.
In the United States of America, the land of the free, bastion of free market capitalism …
… by executive decree, and without warning, it became immediately illegal for a private business owner to raise prices on a customer or increase wages to an employee.
Of course, it didn’t work.
In fact, as discovered through his now infamous penchant for tape recording everything, it’s well-documented Nixon knew it wouldn’t work when he did it.
On February 22, 1971 in a recorded conversation with his Secretary of the Treasury, Nixon said,
“ The difficulty with wage-price controls and a wage board as you well know is that the God damned things will not work.”
“I know the reasons, you do it for cosmetic reasons good God! But this is too early for cosmetic reasons.”
But by August 12, 1971, the Secretary of the Treasury apparently convinced Nixon the time had arrived to put lipstick on the pig …
“To the average person in this country this wage and price freeze–to him means you mean business. You’re gonna stop this inflation. You’re gonna try to get control of this economy. …If you take all of these actions … you’re not going to have anybody…left out to be critical of you.”
In other words, it was all political theater to pander to pundits and voters. It doesn’t matter if it works … or if you even think it can. It only matters that you’re seen trying.
So just 3 days later, Nixon went on TV and pulled the trigger.
What does all this have to do with YOUR real estate investing?
Maybe more than you think. History often has valuable lessons for those who take the time to reflect on it.
You may have heard … California just enacted state-wide rent control.
California’s not the first to do this … Oregon holds that “honor”, having enacted their own version of state-wide rent control last February.
Of course, this is a governmental policy, so any discussion of it runs the risk of turning political and divisive.
But it doesn’t matter whether you or we agree or disagree with the spirit or letter of the law. That’s irrelevant.
The rent control laws are here like them or not, so the more germane discussion is about what rent control on this scale might mean for real estate investors … regardless of political stripe.
Now if you think none of this matters to you because you have no intention of investing in California or Oregon … think again.
Because even though each state’s law is different, the motives are similar … to “do something” (or at least appear to be trying) to address growing homelessness presumably created because “rent is too damn high.”
If this way of thinking catches on (and it seems to be), state-wide rent control could be coming to a market near you.
And like California, rent control laws could be RETROACTIVE.
Think about that.
Let’s say you’re a value-add real estate investor and you find an older, run-down, poorly managed property in a decent area.
You put together a plan and invest generously to improve the property to the benefit of the tenants and the neighborhood, expecting to earn higher rents for a better product.
But AFTER you make your investment, the government decides to make it illegal for you to raise the rents to your projections. And it’s retroactive.
You made a plan and took a calculated risk based on the rules in place … and wham-o! The government changes the rules after the fact.
Call us crazy, but that doesn’t seem fair. At least Oregon “only” made their rent control effective immediately. California’s law is retroactive seven MONTHS.
We understand politicians are trying to pre-empt landlords from jacking up rents before rent control kicks in.
Of course, this reveals a paradigm of how politicians view landlords … as greedy takers looking for every opportunity to screw over their customers.
Funny, some people see politicians the same way … but we digress.
It’s painfully obvious these lawmakers don’t understand real estate investing.
While it’s true, the laws allow rents to rise a “generous” spread of 5-7% over the (artificially low) CPI.
Maybe this is okay for new or fully renovated properties. No cap ex needed.
But the law specifically targets properties over 15 years old … the very ones most likely to need substantial renovation.
Worse, the law does NOT make an exception for capital expenditures, so the limit on rental increases potentially caps the incentive to fix up old, ugly properties.
Will rent control create a greater divide between the nice and not-so-nice areas as existing properties are starved of cap ex?
History says it will. Time will tell if it’s different this time.
Meanwhile, it’s wise for real estate investors to pay attention to laws in places like Oregon and California … even though they may not apply to you … yet.
And because affordable housing is a national problem heading into a heated election year …
… it’s likely other states are looking at the “leadership” of California and Oregon … and could be considering a rent control law variation of their own.
The opportunity could be in the overt and implied exemptions …
Remember, markets are dynamic, complex systems affected by fiscal, tax, monetary, and regulatory policy as much or more than local demographics and economics.
It’s smart to pay attention to ALL of it … and objectively evaluate how each factor might impact you and your portfolio.