FTC Staff Comment to the Hon. Ray Moore Concerning Washington S.B. 5601 to Establish Rent Controls for Mobile Homes

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Seattle Regional Office
2806 FeOenal Buildlnli!
91~ Second Avenue
SeattJe, Wuhin£ton 98174
(206) 442-4656
FEDERAL TRADE COMMISSION
Jul y 	1, 	1987
2
Senator 	Ray 	Moore
Washington 	State 	Senate
Olympia, 	Washington 	98504
Dear 	Senator 	Moore:
The 	Federal 	~rade Commission's 	Seatt:e 	Regional 	Office 	is
pleased 	to 	acc~pt your 	invitation 	to 	comment 	on 	Senate 	Bill
5601,1 	which 	would 	establish 	rent 	controls 	for 	mobile 	home
parks. 2 	We 	recommend 	against 	the 	passage 	of 	this 	bill. 	We
~elieve 	that 	even 	short-term 	rent 	control 	would 	be 	undesirable
because 	it 	would 	tend 	to 	decrease 	the 	supply 	of 	mobile 	home
spaces 	a~d increase 	the 	demand 	for 	existing 	spaces. 	Rent 	control
would 	therefore 	exacerbate 	t~e 	shortages 	tha~ already 	exis~. 	We
suggest 	that 	legislation 	to 	eliminate 	impediments 	that 	may
constrain 	the 	supply 	of 	mobile 	home 	spaces 	would 	better 	serve
consumer 	interests.
~he 	Federal 	T=ade 	Commission 	is 	charged 	with 	maintaining
competition 	and 	protec":ing 	consumers 	from 	restraints 	of. 	trade. 3
!n 	accordance 	with 	this 	role, 	the 	Commission 	and 	its 	staff 	submit
writt~n comments 	or 	provide 	testimony 	to 	federal, 	sta~e, 	and
local 	legislative 	bodies 	and 	adminis~=ative agencies 	to 	exp:ore
competitio~-based approaches 	to 	various 	policy 	issues. 	Our 	goal
is 	to 	assist 	decision-makers 	by 	identifying 	how 	various
legislative 	proposals 	may 	affect 	ccmpetition 	and 	consumers.
The 	Commission's 	staff 	has 	previous 	experienoe 	in 	analyzing
the 	effect 	of 	price 	restrictions, 	inclUding 	rent 	controls. 	In
March 	1987, 	for 	e:-:ample, 	Commission 	staff 	provided 	the 	New 	'fork
City'Council 	with 	written 	comments 	on 	several 	prc?osed 	rent
cor.trol 	orcinances. 	Earlier, 	a 	member 	of 	the 	staff 	testified
before 	the 	District 	of 	Columbia 	City 	Council 	on 	that 	city'S
proposed 	Rental 	Housing 	Act 	of 	1985.
1 	This 	letter 	briefly 	addresses 	Senate 	Eills 	5076 	and 	5768 	as
well, 	which 	also 	concern 	mobile 	homes.
These 	comments 	represent 	t~e 	views 	of 	the 	Seattle 	Regional
Office 	and 	of 	the 	Bureaus 	of 	Competition, 	Consumer 	Protection,
and 	Economics 	of 	the 	Federal 	Trade 	Commission, 	and 	not
necessarily 	those 	of 	the 	Commission. 	The 	Commission 	has,
however, 	voted 	to 	authorize 	submission 	of 	these 	comments 	to 	you.
:
3 	~ 	15 	U. S. C. 	§ 	41 	tl 	~.

Senator 	Moore
Jul y 	1, 	1987
Page 	2
We 	appreciate 	the 	concerns 	t~at others 	have 	expressed 	~ith
regard 	to 	rising 	rental 	fees 	in 	Washing~on State 	mobile 	home
parks. 	Mo:bile 	homes 	are 	a 	rnajor 	source 	of 	low-cost 	housing 	in
this 	country. 	Senate 	Bill 	5601 	deals 	with 	rising 	rental 	fees 	by
establishing 	a 	form 	of 	rent 	control 	as 	a 	sho~t-term 	solution,
until 	a 	long-term 	solution 	can 	be 	found. 	As 	we 	will 	explain 	more
fully 	:below, 	we 	do 	not 	believe 	that 	rent 	control 	repre$en~s sound
public 	policy, 	even 	if 	it 	is 	temporary 	in 	nature. 	Nor 	do 	we
think 	that 	rent 	con~rol will 	accomplish 	the 	goal 	of 	avoiding
serious 	economic 	hardship 	for 	large 	numbers 	of 	mobile 	home
tenants. 	We 	believe 	that 	ma=ket-~ased strategies 	that 	can
increase 	the 	supply 	of 	parks 	and 	rental 	spaces 	would 	be 	a 	better
Solution.
Ef;e~ts o! 	Rent 	ConttQl
Rent 	control 	is 	not 	a 	new 	idea. 	The 	conc~pt has 	been 	tested
in 	mar.y 	places 	around 	the 	country. 	One 	lesson 	is 	clear: 	rent
control 	reduces 	market 	incentives 	that 	would 	otherwise 	ODerate 	to
increase 	the 	supply 	of 	rental 	units. ~ 	Rent 	control 	of 	mobile
horne 	spaces 	tends 	to 	=educe 	supply 	because 	it 	reduces 	t~e
profitability 	of 	new 	investmen~s in 	mobile 	home 	parks. 	Wit~ ~ent
control, 	land 	now' used 	for 	mObile 	home 	parks, 	as 	well 	as 	land
that 	migh~ be 	available 	fer 	this 	use 	in 	the 	future, 	w~ll 	in 	sorne
cas es 	be 	more 	profi tabl e 	if 	us ed 	di:f f eren~l y. 	14.15 0, 	~ent 	cont=ol
increases 	uncertainty 	about 	the 	level 	of 	f~ture governmen~
in~ervention. 	The 	uncertainty 	associated 	with 	even 	short-term
rent 	control 	discourages 	investment, 	so 	it 	would 	no~ 	be
surprising 	to 	see 	reductions 	in 	the 	supply 	of 	parks 	and 	s?aces.
Rent 	controls 	may 	also 	create 	an 	excess 	demand 	both 	by
loweri~g the 	price 	(so 	that 	more 	spaces 	are 	demanded) 	ana 	by
dec~easing the 	availability 	of 	spaces. 	This 	will 	aggravate 	any
eXip~ing shortage 	of 	parks 	and 	exacerbate 	rather 	than 	alleviate
th~ problems 	in 	this 	industry.
Rent 	control 	has 	several 	ot~er adverse 	effects. 	First, 	it
tends 	to 	reduce 	quality. 	At 	con~rolled prices, 	owners 	of 	mo~ile
home 	parks 	will 	have 	~ess 	incen~ive to 	maintain 	high 	standards.
This 	may 	lead 	to 	deterioration 	in 	the 	quality 	of 	existing 	mo~ile
4 	The 	adverse 	effects 	of 	rent 	control 	are 	well 	documented.
S~e. 	e. a., 	R. 	Ault, 	~he 	Benefi~$ one 	CQ~ts 	o~ 	Rent 	Cont~Ql 	in
New 	York 	Ci tv 	(1983) i 	C. 	Baird, 	Ren~ COr:t;:Ql; 	'rne 	P~renoi a1
Follv 	(1980); 	Rent 	CQn;rcl; 	Mvths 	and 	Realities 	(W. 	Block 	&
E. 	Olsen 	ed. 	1981); 	Moorhouse, 	Qo,;imal 	HQusino 	Maintenance 	UndSL
Rec': 	CQ:Jt-;;'ol, 	39 	S. 	Econ. 	J. 	(July 	1972); 	and 	Olsen, 	b
Eco:;ometr;,c 	Apalysis 	of 	Rent 	COD,;;;ol, 	80 	J. 	Pol. 	Econ. 	(Nov. jDee.
1972).

5
Senator 	Moore
J'l.lly 	1, 	1987
~age 	3
home 	parks. 	Since 	the 	impoBiticn 	of 	controls 	creates 	an 	excess
demand, 	landlords 	can 	redl.lce 	maintenance 	ana 	3till 	keep 	their
units 	occupied. 	The 	level 	o~ 	maintenance 	becomes 	the 	major
adjustment 	mechanism 	available 	to 	landlorcs 	to 	set 	real 	rental
rates 	at 	a 	market 	level.
Second, 	rent 	control 	may 	reduce 	local 	tax 	revenl.les.
Limi~~ng the 	income 	earned 	by 	rental 	property 	will 	make 	it 	less
valuable. 	Because 	the 	land 	is 	less 	valuable, 	total 	tax 	revenues
raised 	at 	a 	given 	property 	tax 	rate 	will 	be 	less. 5 	For 	instance,
rent 	control 	in 	Cambridge~ ~assachusetts substantially 	reduced
property 	tax 	collections. ~ 	Simi:ar 	results 	were 	found 	in
New 	Jersey, 	where 	the 	~ax 	value 	of 	a 	repre5enta~ive 	30-unit
apartment 	building 	increased 	by 	9\ 	per 	year 	for 	a 	two-year 	period
before 	control 	and 	by 	only 	1. 3% 	a 	year 	after 	control. 7
Th~=d, 	rent 	control 	may 	lead 	to 	discrimination 	in 	the 	rental
market. 	In 	a 	rent-controlled 	market, 	there 	will 	be 	more 	people
who 	want 	units 	at 	the 	stabilized 	price 	than 	there 	are 	units.
Landlorcs 	(or 	park 	owners) 	can 	discriminate 	i~ 	renting 	these
I.lnits 	on 	the 	basis 	of 	personal 	characteristics 	of 	~he 	tenants 	and
still 	rent 	out 	all 	available 	uni'ts. 8
T~ese 	various 	negative 	effects 	of 	rent 	co~~rol are 	~c~
always 	immediately 	visible 	but 	occur 	gracually 	over 	time.
Nevertheless, 	they 	are 	real 	and 	well 	documen~ed.
Does 	Senate 	B~ll 	5601 	Avoid 	These 	Problems?
Senate 	Bill 	5601 	attempts 	to 	avoid 	these 	problems 	by:
(1.) 	establishing 	only 	"short.-term" 	rent 	control; 	(2) 	allowing
rent 	increases 	equal 	to 	t~e 	residential 	rent 	component 	of 	the
Tax 	ra~es 	may 	then 	be 	increased. 	Rent 	control 	can 	also
~e6ult i~ 	a 	rnistaxing 	of 	rental 	property 	in 	relation 	to 	non-
controlled 	property. 	Decisions 	concerning 	the 	use 	and
development 	of 	such 	property 	~ay then 	be 	distorted 	by 	the
differences 	in 	tax 	treatment.
6 	Navarro, 	Re~~ Con;rQl 	in 	Ca~bridae, 	M~, 	78 	The 	Public
Interest 	83-100, 	1985.
7 	~ 	Harney, 	The 	j;cv~sibl~ rex: 	h'ha':
SU~DQr~ Local 	R~~t 	C?C;=Q~s 5-5 	(1982).
HC:TlfiQwners 	",'v 	":0
8 	Spa, 	e, 0.1' 	Navarro, 	Bj,lpra, 	note 	6 	at 	85.

9
Senator 	Moore
July 	1, 	1987
Page 	4
consumer 	price 	index; 	and 	(3) 	allowing 	for 	appeals 	to 	county
boards. 9 	These 	and 	other 	cc~plex provisions 	of 	the 	bill 	should
lessen 	the 	impact 	of, 	but 	may 	not 	eliminate, 	the 	adverse
consequences 	ciscussed 	above. 	Senate 	Bill 	5601 	could 	still 	lead
to 	a 	reduced 	supply 	of 	spaces 	in 	mobile 	home 	parks, 	poorer
quality 	parks, 	lower 	tax 	revenues, 	and 	increased 	opportunity 	fc~
discrimination. 	A 	lower 	level 	of 	maintena:1ce 	would 	stil.l 	be 	the
mechanism 	used 	to 	se~ 	ren~al 	ra~es 	at 	~arket levels. 	Heakening
the 	impact 	of 	rent 	control 	does 	no~ 	turn 	~he6e 	8~ve~se effects
into 	benefits.
Senate 	B~ll 	5601 	states 	that 	rent 	control 	would 	remain 	in
effect. 	until 	"long-term 	solutions 	may 	be 	developed. II 	Al':.hough
short-term 	rent 	control 	may 	do 	less 	harm 	than 	long-term 	control,
it 	has 	been 	observed 	tha~ short-term 	rent 	control 	a~mos~
ineVitably 	becomes 	long-term 	cO:1'Cro1. 10 	Even 	if 	the 	bill 	is
int.ende~ to 	impose 	rent 	con~=ol only 	temporarily, 	the 	pressures
to 	main~ain re~t 	control 	that 	have 	been 	observed 	i:1 	other 	5ta~e9
may 	a1"so 	come 	to 	bear 	in 	Washington.
We 	also 	no~e ~hp. 	ac~in~strative complexity 	of 	Sena~e Bill
5601. 	Local 	~en~ 	control 	boar~s must 	be 	created, 	and 	:or 	mob~le
home 	parks 	eso:abl'.i.shed 	af':.e~ January 	1, 	1986, 	a 	local 	appeal
board 	mus~ determine 	~air net 	operating 	income. 	In 	deter~ini~g
fair 	net 	operating 	income, 	acjustments 	must 	be 	~ade 	for 	increased
or 	d$creased 	expenditures 	on 	a 	dollar-for-dollar 	basis 	for 	a
sizable 	list 	of 	operating 	expenses. 	It 	appears 	that 	the 	local
boards 	would 	opera~e essent~ally as 	small 	utility 	regulatory
agencies. 	Those 	familiar 	with 	such 	operations 	know 	that 	they 	can
be 	costly 	and 	c~mbersome. 	Even without 	addressing 	all 	the
p=ovisions 	of 	the 	bill, 	i~ 	is 	apparent 	that 	Senate 	aill 	5601
would 	crea~e an 	expensive 	and 	complex 	administrative 	apparatus 	to
administer 	rent 	controls 	that, 	in 	our 	view, 	are 	themselves
und"eai=able.
A 	get";er 	~ol ut;or..:.
Be~Q?,l 	9; 	Marke: 	Impediments
A better 	approach 	to 	the 	perceived 	problems 	would 	be 	one
that 	allows 	the 	market 	to 	increase 	the 	supply 	of 	mobile 	home
spaces. 	Senate 	Bills 	5758 	and 	5076 	appear 	to 	represent 	attemp~s
to 	implement 	such 	market 	solutions.
The 	bill's 	appeals 	provisions 	provide 	for 	i~dividual
adjustments 	in 	rents 	to 	compensate 	park 	owners 	in 	cases 	where
rental 	increases 	otherwise 	permitted 	will 	not 	produce 	adeq~a~e
"net 	operating 	income."
lO 	See 	Navarro, 	Sl;n::-a 	note 	o.

1 1
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i
Senator 	Moore
July 	1, 	1987
Page 	5
Senate 	Bill 	5768 	takes 	a 	step 	toward 	a 	long-term 	solution 	in
that 	i~ 	would 	alter 	existing 	local 	planning 	and 	zoning
restrictions 	to 	permit 	the 	placement 	of 	manufactured 	housing 	in
districts 	where 	it 	would 	be 	compatible 	with, 	and 	comparable 	in
value 	t~, 	existing 	or 	developing 	housing. 	Withou~ commenting 	on
the 	merits 	of 	the 	particular 	bill, 	we 	favor 	the 	approach 	ta~en i~
Senate 	Bill 	5768, 	to 	the 	ex~ent it 	reduces 	current 	government
restrictions 	on 	the 	availability 	of 	mobile 	h~me spaces 	and 	thus
increases 	their 	supply.
We 	believe 	that 	Senate 	B111 	5076, 	which 	c~ea~es 	a 	commission
compcsed 	of 	state 	and 	local 	officials 	to 	study 	ways 	to 	increase
the 	availability 	of 	land 	for 	the 	develop~ent of 	mobile 	home
parks, 	also 	has 	the 	potential 	to 	effect 	use:ul 	change. 11 	The
commission's 	charge 	would 	be 	to 	study 	the 	operation 	of 	parke 	and
to 	recommend 	provisions 	designed 	to 	(1) 	increase 	com?e~ition
among 	mo1;)ile 	hOme 	parks, 	(2) 	inc.:=-ease 	~he 	supply 	of 	land
avai:a~le fo.:=- 	mobile 	home 	pa~ks, 	and 	(3) 	address 	the 	problems 	of
cos t 	i ncreas es 	for 	thes e 	pa!:ks. 	To 	the 	extent 	the
reco~mendations succeed 	in 	reducing 	~overnmental i~pe~i~ents to
competition 	and 	supply, 	Senate 	Bill 	5076 	is 	more 	li~ely to 	effect
a 	long-term 	solution. 	Rent 	centrol, 	even 	in 	t~e 	relatively
modest 	form 	contemplated 	by 	Sena~e Bill 	5601, 	has 	~he potential
to 	obstruct 	a 	long-ter~ 	solution.
tn 	conclusion, 	we 	urge 	the 	Legislature 	to 	remove 	market
impediments 	that 	now 	constrain 	the 	supply 	of 	~obile home
spaces. 	We 	urge 	agains~ contributing 	to 	whatever 	pro~lem8
already 	exis~ by 	enacting 	rent 	con~rol and 	thus 	reducing 	supply.
Senate 	Bill 	5076 	Would 	facili~ate finding 	a 	long-term 	solution
in~olving a 	minimum 	cost 	to 	both 	taxpayers 	and 	~obile home
resic.e:--.ts.
Sena~e Bill 	5076 	mentions 	~he possibility 	of 	a 	subsidy 	and
this 	is 	not 	a 	feature 	of 	the 	bill 	we 	endorse. 	We 	also 	note 	a
minor 	draf~ing di:ficulty 	with 	Section 	3(1) (c) 	of 	Senate 	3ill
5076. 	This 	provisio:1 	no .... 	reads, 	i:1 	part, 	"Solve 	the 	problem 	of
continual 	increases 	in 	mobile 	home 	rental 	soaces. 	"We
;;e1i eve 	the 	provi s i on 	was 	i n':ended 	to 	read 	;. Sol ve .the 	p::-o::J. em 	0 of
continual 	i~c~eases in 	costs 	fo: 	~obile home 	rental 	spaces. II

Senator 	Moore
July 	1, 	1987
Page 	6
We 	are 	grateful 	for 	this 	opportunity 	to 	present 	our 	~iew5
and 	hope 	they 	will 	be 	of 	assis~ance to 	the 	Leg~s:aturQ.
Ri chard 	O. 	Zer.tJe, 	J:::.
2conomi$t