What Fitch’s US Debt Downgrade Says About Housing

Edd Hamzanlui

The market has largely dismissed Fitch Ratings’ decision to downgrade U.S. government debt, as it is believed to have little to no impact on investments. I am not debating that here. However, I would like to draw a connection between this particular event and the recent resurgence of rent control provisions, and offer a new perspective on how politics can lead to unintended and possibly counterproductive consequences.

To better understand Fitch’s downgrade, let’s examine the key events that led to it. According to the market and rating agency, one of the main drivers behind the rate drop was “governance,” specifically the ongoing political battles surrounding the debt limit in recent years. While lawmakers paid less attention to the long-term side effects of playing tit for tat in raising the debt ceiling, market observers viewed this differently and saw it as a sign of mismanagement within the institution, which could potentially harm its ability to fulfill its financial obligations. Market does what market is supposed to do: raises flags when it recognizes a shift in risk paradigm.

Now I would like to apply the same concept to certain housing policies and potential long-term drawbacks that can offset their immediate positive outcome. Rent control policies have been placed and studied for decades. Despite their near-term affordability benefits for tenants by capping rent increases and taming hot housing markets for restricted units, they fail to address the underlying issue of a shortage in housing supply. In fact, rent control provisions can discourage new development and capital expenditure, ultimately leading to a smaller pool of available housing stock in less desirable and decaying neighborhoods with indirect negative impacts on the surrounding housing market. Although rent control improves affordability for a limited number of units and may be popular among elected officials in the short term, its negative impact on the housing market can actually reduce affordability in the long run and limit the overall supply of housing.

More Productive Strategies

“Am I being too subtle” when I try to compare the recent U.S. treasury downgrade to rent control policy in order to illustrate the market’s reactions to non-market governmental organizations’ behavior? It might not seem very intuitive, but unfortunately, overlooked consequences have been proved to have a stronger negative impact than once hoped for.

In conclusion, the housing shortage has been widely discussed by professionals in various fields. I suggest that we continue to provide subsidized housing for individuals with “very” low incomes, and instead of implementing short-term restrictive policies, we should prioritize sustainable growth strategies to address the housing crisis that align with our free-market economy model. Other, less popular, strategies for cities and states to consider include: reforming outdated zoning laws to permit multi-housing uses with increased density, relaxing strict parking and other requirements, and relying on the market to regulate itself.

Edd Hamzanlui has worked in real estate finance and banking, private equity, development, construction management and cost consulting, and architecture for nearly two decades. He is currently leading a family office-backed real estate development practice in the New England region focusing on workforce housing.