Houston’s Laissez-Faire Rents

By: Wojciech Kic

When describing Houston to our out-of-town visitors and friends, we are sometimes short for words that describe the uniqueness of the city. For example, we have a distinct skyline . . . but so do many other great cities. We have public parks and theaters . . . but there are towns that have more public facilities. We also have a large medical center . . . but other communities are not far behind. And the mention that Houston has no zoning creates a dubious expression and an immediate “I don’t see anything special about that” dismissal. Precisely.

A no-zoning real estate market is an invisible asset unique to the Houston area. No zoning means an absence of non-market planning in real estate. In Houston, usage of each parcel of real estate is left to market forces. As a consequence, each parcel of land is utilized (for the most part) to its highest and best use. As in laissez-faire markets for other products and services, the invisible effect of no-zoning creates continued abundance of competitively priced residential and commercial real estate.

Our visitors’ disbelief about the absence of zoning is difficult to overcome. After all, no sane community would accept the construction of freeways or gas stations next to single family houses or townhouses. Likewise, no law-abiding citizen would welcome a commercial development nearby. An argument that a profit-driven developer has no interest in a gas station in the middle of a residential community is not enough. Local examples of expensive, new residential developments arriving next door to already existing gas stations, 10-lane highways and fast food facilities (to an out-of-town visitor) lack credibility.

The conduct of builders and developers in a laissez-faire real estate market does not match the assumptions made about them by zoned communities.The concern about the need to protect some members of the community from other members of the same community is invalidated. On the contrary, local confidence in the laissez-faire real estate market provides the Houston community with an abundant inventory of real estate product exactly when and where needed.

The rent pricing mechanisms in laissez-faire rental real estate markets are different than in markets characterized by affordable (for all income levels) housing shortages. In a regulated market there seems to be an excess number of tenants. Hence, rent is priced high and rent negotiations are common. In a laissez-faire real estate market, it is very rare when more than one person wants to rent a property at the same time as another. Once the tenants find a property that meets their pricing expectation, they lease it.

In Houston, tenants have access to all the real estate market information. Common sense is further validated by observation of the real estate market and its function in a precise manner that is expected by the tenants. Because the tenants have access to all the real estate market information, they tend to pay the maximum rent but not a dollar more. In an abundant laissez-faire real estate market, tenants themselves become an entity, maximizing oppor tunities in its own laissez-faire fashion. Thus tenants review the housing opportunities by visiting only the properties where the posted rent does not exceed the tenants’ expectations.

Tenants have no rational need to negotiate with a landlord whose posted rent exceeds market conditions. It is simply not the tenants’ job to correct the landlords mistake. Overpriced properties are not likely to get rented.The few prospects the overpriced properties attract will only increase the prospects’ confidence to rent from a competitor. The delight of prospects in that decision is not shared with the losing landlord.

The importation of rent pricing techniques from markets with limited housing opportunities does not work well in a laissez-faire real estate market. For example, whether scheduling appointments at the same time or holding open houses, the regulated market landlord’s intended result is the same: to create a winner in a competition between individuals where personal victory represents a greater profit to the landlord. In the laissez-faire markets, individuals who become tenants as a result of such a competition quickly realize that the decision to rent is a mistake that must be undone as quickly as possible, often with the most expensive consequences to the landlord . . . including lost time, money and reputation.

Prospective tenants sometimes lack all the information needed to make a correct decision. Therefore, such tenants compensate their lack of sufficient market information by testing landlord’s veracity.The laissez-faire real estate market rent is immediately validated by the landlord’s responses. If a landlord perceives such a query as a negotiation and responds with a rent concession, he will likely find himself without a new tenant. However, on occasion, landlords must recognize that tenants do not make decisions alone; tenants in their decisions frequently must find approval of others. Therefore, in the end, landlords do make the rent concession without which tenants cannot gain approval of others in their renting decision. A landlord’s advance knowledge of tenant scarcity makes such a concession a matter of survival.

Thus, in Houston, landlords must be concerned about the minimum profit before placing the property for lease.The posted rent must be equal to or less than the market expectations. But that’s not all. Because locally the tenants maximize their housing market opportunities, all offerings must be presented to the prospects in their ultimate condition.

In the reality of a laissez-faire real estate market, there is no free lunch, yet there is prosperity. Acceptance of laissez-faire real estate is a stretch for our visitors. For those investing, acceptance that the markets (read: tenants) rule is the key to a profitable ownership.

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