The Nakba, Two Years On

Here’s how Gibbon describes the fall of the city now known as Istanbul:

In the first heat of the pursuit, about two thousand Christians were put to the sword; but avarice soon prevailed over cruelty; and the victors acknowledged, that they should immediately have given quarter if the valour of the emperor and his chosen bands had not prepared them for a similar opposition in every part of the capital.  It was thus, after a siege of fifty-three days, that Constantinople, which had defied the power of Chosroes, the Chagan, and the caliphs, was irretrievably subdued by the arms of Mahomet the Second. Her empire only had been subverted by the Latins: her religion was trampled in the dust by the Moslem conquerors.

Aside from the direct effects of death, property loss and exile on the inhabitants of the city, the fall of Constantinople had two prominent secondary effects.  The first was stress placed on the Orthodox church.  Although Greek-speaking Christians lost political power in Asia Minor with the loss of the city, the Patriarchate remained (and remains) in Istanbul.  That means that the pool of talent for leadership of the Orthodox church is to this day limited to young men from the ever-decreasing Greek community in Istanbul.  This, in turn, has had significant effects on relations between the eastern church and the church based in Rome and its offshoots.  The second was the age of exploration.  By capturing Constantinople, the Turks cut off the traditional, east-bound trade routes to Asia.  This set off the race for a western route to Asia.  This, in turn, led to the discovery of the Americas and it made Atlantic-facing European countries like Spain, Portugal, France, England and the Netherlands that had until then been cultural and economic backwaters into superpowers.

These events are seen differently through non-western eyes.  For the Turks, May 29, 1453 was not a disaster.  Instead, it was the day when their oldest, grandest and most beautiful city came under Ottoman control.  Although no record remains of what the inhabitants of North America thought upon first contact with the Europeans, the smart money says that they did not consider the arrival of the funny-looking people in the big ships to be a ‘discovery’ of the land where they, the natives, had lived for millennia.  By the same token, Israelis refer to 1948 as the year in which their country gained independence.  Palestinians refer to it as the year of the Nakba, or the ‘Disaster’.

To compare small things with big, owners of manufactured housing communities in New York State have our own Nakba.  That was the passage of The Housing Stability and Tenant Protection Act of 2019, S. 6458, A. 8281 on June 14, 2019.  Like many disasters, it was horrific for the residents of the communities most directly affected by it, and it has had significant unexpected consequences.

(Like the fall of Constantinople to the Greeks in Asia Minor, the Nakba was the worst setback for our community, but it was not the last.  If we were to extend the historical parallel, the passage of the New York State COVID eviction moratorium and its subsequent extension would be the expulsion of the Greek community from Smyrna and the exchange of populations in 1922.  That is material for another post.)

In relevant part, here is what the Nakba legislation did:

• Rents both for lots occupied by resident-owned homes and for park-owned homes could only be increased by 3% in any twelve-month period.  This cap could be increased to 6% if the owner could show that the increase would be used to offset either capital costs or increased operating costs;

• Holdover evictions were eliminated;

• Security deposits were limited to one month’s rent;

• It was forbidden for owners to refuse to rent a lot or a home to a potential resident because of the resident’s past rental history; and,

• “Rent-to-own” contracts were defined and onerous disgorgement and punitive damage remedies were given to residents whose rent-to-own contracts were terminated prior to maturity.

Plenty was wrong with the Nakba legislation on Day 1.  By limiting park owners’ remedies and preventing them from doing reasonable due diligence, it forced residents to live next to bad neighbors.  It discouraged capital upgrades and on-going maintenance.  It created the perverse incentive for park owners to raise lot rents every year regardless of whether a rent increase was needed.  It confused the rights and obligations of owner-residents with those of renters of park-owned homes.  It ignored the problem of deferred maintenance on newly-purchased parks.  It took the dream of home-ownership away from one of the most vulnerable sections of the state’s population.  And by doing all this without input from the industry, it did so in a way that made well-crafted solutions to housing insecurity that could benefit park residents impossible.

But that is old news.  We are here to discuss how the Nakba legislation holds up now, in the face of a changed economic environment.  In order to do that, it is useful to look at two graphs.  The first is a picture of rates of inflation in the US from 1914 to 2021 as measured by the Consumer Price Index.  The second is interest rates from 1789 to the near-present, as measured by the yield on the 10-year Treasury bond.

I would reproduce the applicable graphs here, but technical clumsiness and copyright laws prevent me from doing so. Newfies and Kerrymen are reminded that they can access the graphs by clicking the applicable links, supra.

The graph of the CPI shows three things.  First, inflation spiked in 2021.  In 2019, the year of the Nakba, the CPI was 2.29.  In 2020, it was 1.36%.  This year, it was 6.2%.  That is a 240% increase.  Second, it shows that since 1991, we have been in an atypically low inflationary environment.  The CPI exceeded 3% from 1966 to 1990.  It peaked at 13.29% in 1979.  Third, the graph shows that inflationary spikes are intense and unpredictable.  Prior to 1991, the graph looks like the skyline of Manhattan, with negative years during the Depression and double-digit peaks during and after both World Wars.  Inflation spikes occur in conjunction with unforeseen historical events, they are severe and they are sudden enough to give a park-owner whiplash. 

The interest rate graph shows that, while inflation has been low for the past two decades, interest rates today are peanuts.  As of this writing, the yield on the 10-year Treasury is 1.627%.  That is the lowest it has been since our nation’s founding.  The only time during which we have experienced a comparable interest rate environment was during the Second World War, when interest rates were kept aggressively low to encourage the sale of government bonds.

What does this mean for owners and residents of manufactured housing communities in New York State post Nakba?  Quite a bit. 

First – it shows that we are vulnerable to an interest rate squeeze.  Readers who have read Michael Lewis’ classic Liars Poker will recall a character called The Human Piranha.  Every second word out of THP’s mouth is the “f” word.  On the trading floor he presents as, well, a piranha.  When he is tasked with training a group of new traders, he launches into a disquisition about how some French investors are “getting their fucking faces ripped off” because they had purchased a bunch of bonds without hedging interest rate risk. The current rate environment puts park owners in a similar danger.  We all either own our parks subject to mortgages, or we need to exit our positions by selling our parks to buyers who will borrow to finance their purchase.  Interest rates now are at historic lows.  That is great now so long as it lasts – but mortgage terms adjust and rates, like everything else, revert to the mean.  It is unclear when this mean-reversion will happen, but it will happen, and when it does, the revenue cap imposed by the legislation will leave us as naked as the French.  The Nakba legislation will rip our faces off.

We are also threatened by an inflation squeeze.  A 3% cap on revenue might have made sense in 2019, when the CPI was below that level; it does not make sense today.  As mentioned before, the CPI for 2021 was 6.2%.  This means that, for 2021, expenses will increase by 6.2%, but revenue will remain capped at 3%.  The failure of the Nakba law to account for changes in the rate of inflation requires park owners to lose money by keeping the lights on.

The people worst hurt by this will be the people who the law was designed to protect, i.e., our customers.  So long as I am losing money, I can’t fix potholes.  I can’t upgrade sewer and water mains, pour code-compliant pads, buy new homes, rehab empty homes or fix POHs with leaking roofs.  The spirit is willing but the cupboard is bare.  This means that my customers who live one flat tire or bent rim from bankruptcy will be that much closer to economic ruin.  It means old ladies will have to sit in the rain, and families with small children will have to live next to attractive nuisances.  That is wrong.  The Nakba legislation was passed with the intent of helping mobile home park tenants.  It has had the opposite effect.

Of course I care about my bottom line, but this is not only an economic hit for me.  I got into the manufactured housing business because I wanted to provide clean, safe and affordable housing for people who need it.  I came to it from a corporate career that was lucrative but spiritually bankrupt; the mission of helping working people keep a roof over their head is, simply, good.  The Nakba legislation makes it difficult for me, and people like me, to fulfill that mission. 

There are fixes to the Nakba legislation.  The easiest would be to let the market sort out pricing, but that appears to be a political non-starter.  Another would be to institute a rental insurance program that works (ERAP is a good idea, badly executed).  Another would be to key rent caps off of a benchmark fair market value lot rent, calculated with reference to a mix of local market-value apartment rents, park purchase price and deferred maintenance costs.  Rent caps should be pegged to inflation and interest rates.  A SONYMA financing product that takes the needs of park owners into account as well as those of residents would help.  An efficient and fair alternative to the courts that allows residents and owners to deal with recalcitrant neighbors and residents and would also be useful.  These are feasible policy solutions that would help all parties; I suspect that they have not gained traction in Albany because they do not allow lawmakers to score political points in the same way as hot-button phrases like ‘rent control’, ‘security’ and ‘eviction’ do.  However, they are all pieces of a goal worth striving for.

When I lived in Brooklyn, I became friendly with a Palestinian guy who ran a corner store near my apartment.  He taught me how to say “Hello”, “Thank you” and a few swear words in Arabic.  We spoke about politics often.  Once, when he was going off about the Israeli occupation, I shrugged and said, in my best faux Brooklyn accent, “Whaddya gonna do?”  He didn’t miss a beat: “Keep up the resistance!”.  We need to do the same, although we need to do so with lobbying, education and litigation, instead of bottles, bricks and car bombs.  The Nakba legislation is a disaster, and its effects will get worse in the coming economic environment.  Our customers will suffer if we do nothing to roll it back.  We can change it, but only if we keep up the pressure on Albany to pass well-crafted legislation, rather than engaging in political showmanship.