I recently accepted a job as an Instructor at Western Carolina University. Given I currently live in Syracuse, New York, this position requires me to break my lease and move to North Carolina. When informing my landlord of my new job and what it means for our contractual agreement, he informed me that he’d be willing to waive the penalties for breaking the lease if I moved out sooner rather than later. The rental market in Syracuse is incredibly hot, and he could earn higher rent by re-renting my apartment than if I stayed. I had initially planned to remain in New York through the summer and only break one month of my lease. But the deal he offered me will save me about $4,000 in rent and utilities. He wins, I win, and I took the deal.
When discussing this with some friends, one friend responded, “what a scum landlord.” This rocked me back on my heels. How was the landlord being scummy? This seemed like a win-win: I was released from a contract I no longer valued and saved about $4k. He was likewise released from a contract he no longer valued and will be able to earn a higher rent. I asked my friend to elaborate, and my friend said, “he’s scum because now he can rent at an inflated price.” My friend didn’t see a win-win situation. My friend saw a win-win-lose. I won. The landlord won. The future renter did not.
Is this a proper evaluation? Here we need to look at both what is seen and what is unseen. What is seen is simple: I save money. The landlord earns more rent. The future renter pays a higher rent than I pay now. By what is seen, it does look like a win-win-lose. But what is unseen tosses that logic on its head. The apartment now becomes available sooner than it otherwise would have by releasing me from my lease. The number of rental units in Syracuse marginally increased. This means that the market rent marginally decreased from where it would have been if I did not vacate. Yes, the landlord is earning higher rent than a year ago, but that is an irrelevant comparison. The relevant comparison is what it would be if I wasn’t vacating. If I wasn’t vacating, the future renter would have to compete with other renters for fewer apartments, resulting in higher rents (if they could get an apartment at all). The future renter is also a winner here. When we look at both the seen and the unseen, the situation becomes a win-win-win.
A quick note on prices: the rental and housing markets are very hot right now (and a recent study suggests about half of the increase in prices is due to work-from-home). I spoke to my landlord in the morning, and he already had a prospective renter by that afternoon. One can argue that this future renter is still a “loser” as they have to deal with the rising prices. But this assertion relies on a misconception of market pricing: no one promised you’d be happy at market prices. All price theory tells us is that higher relative prices signals increased value for the marginal unit. They send the signal that there are opportunities by reallocating resources. In this case, the higher market rent in Syracuse signaled to the landlord that his property was becoming more valuable. It signaled that my property right to the apartment was not as valuable as it had previously been to me.
Additionally, the market rent signaled the future renter that they had better value this apartment or look elsewhere. This signal coordinated our activity: the landlord gets higher rent, I get released from a losing deal, and the renter gets an apartment. He may grumble about the rent price (as I know I will when I go to sign a lease in North Carolina), but he still wins.
PS, there is another lesson here: talk to people. You never know what opportunities may exist.
Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University.
READER COMMENTS
Matthias
May 31 2022 at 9:20pm
People seem to have really weird moral intuition about how ‘just’ prices should behave..
Jon Murphy
Jun 1 2022 at 7:46am
To one trained in economics (or who reads this blog), the reasoning is weird. But to one who doesn’t understand the role of prices and the unseen effects, it’s not weird at all.
MarkW
Jun 1 2022 at 6:56am
When discussing this with some friends, one friend responded, “what a scum landlord.”
It’s weird that few people think home sellers are scummy when they try to make as much money as possible when selling their house, but many hate landlords when they do the same while renting their properties.
Jon Murphy
Jun 1 2022 at 7:43am
And labor, for that matter. It is not scummy to want higher wages, but it is scummy to want higher return on capital.
Pierre Lemieux
Jun 2 2022 at 11:15am
Jon: I had the same reaction reading Mark’s comment: these wage-gouging workers!
vince
Jun 3 2022 at 6:24pm
Over and over I hear employees complain that their employer is lame and underpays and abuses the employees. I suggest that those employees band together, start a business their way, lure all those good underappreciated employees, and put the misguided employer out of business. In response, I get the deer-in-the-headlights look.
Everett
Jun 4 2022 at 5:53pm
For a multi-employee business, and many sole-proprietorships too, I’d imagine it would take at least a couple of months of not having to worry about paying the bills in order to make a business plan and do the market research sufficient to get a business loan.
Some people are talented and knowledgeable enough to do this as a side-gig from a main job. But most people haven’t ever been taught or learned on their own the first thing about this process. And unless they’re lucky they aren’t going to get help without paying for it. Which again goes back to the needing a couple of months income, or more, or wealth.
Jon Murphy
Jun 5 2022 at 12:27pm
On top of that, starting and running a business is a very risky endeavor. Employers only get residuals (that is, whatever is left over after all costs have been paid). Employees have a claim on revenue (wages) before the employer does. Furthermore, if a firm goes under, the employee only gets laid off. The employer could lose everything (depending on what they used for collateral) Being an employee is much less risky than being an employer.
So, while I think there is some merit in the whole “start a business if you don’t like how things are done” argument, I don’t think it’s the best response. Rather, if employees feel they are underpaid, they should search for a new job.
vince
Jun 5 2022 at 7:25pm
1. “For a multi-employee business, and many sole-proprietorships too, I’d imagine it would take at least a couple of months of not having to worry about paying the bills in order to make a business plan and do the market research sufficient to get a business loan.”
That’s what capital markets are for.
2. “Some people are talented and knowledgeable enough to do this as a side-gig from a main job. But most people haven’t ever been taught or learned on their own the first thing about this process.”
But those who won’t or can’t like to complain about their employers and pontificate about how the business should be run. That’s my point., If they are so sure, stop complaining about it and do it.
3. “On top of that, starting and running a business is a very risky endeavor. ”
That’s right. And that’s why businesses should make profit, which has become a four-letter word for those who don’t take the risks and don’t run businesses.
Everett
Jun 7 2022 at 1:01pm
I understand where you’re coming from. But some employees are effectively at rock bottom and risk losing everything if they lose their job. Unemployment only compensates so much for so long.
Everett
Jun 7 2022 at 1:05pm
Eh. There’s effectively no risk other than losing a job for a paid-off business, or for the executives of very large companies that they didn’t found.
These workers followed your advice and bought their business: https://inthesetimes.com/article/providence-cafe-coop-union-labor-workers-rhode-island
vince
Jun 8 2022 at 12:41am
“Eh. There’s effectively no risk other than losing a job for a paid-off business”
Huh ???
Bill
Jun 1 2022 at 1:02pm
Congrats on your new position at WCU.
Jon Murphy
Jun 1 2022 at 1:36pm
Thank you!
Greg G
Jun 1 2022 at 2:04pm
Congratulations on the new job and the mutually beneficial negotiation with your landlord Jon.
Many, if not most, people have some faulty intuitions about how market prices do and should work. This post gives me great confidence that Western Carolina University made an excellent decision in hiring you and that you are fully equipped to do an excellent job of challenging the faulty intuitions of your students.
Jon Murphy
Jun 1 2022 at 4:41pm
Thanks!
Dylan
Jun 1 2022 at 2:49pm
Congrats on the new job, Jon.
I didn’t find it odd that your friend thought the landlord behavior was scummy, but I was surprised for the reason. To me, I thought it was the fact that he made the waiving of the fees contingent on you moving out sooner rather than later. I’ve broken a number of leases over the years and have never been charged a fee because I’ve done so in markets that are perpetually warm to hot.
I would have expected a conversation that was more like “Hey Jon, you’ve been a great tenant and we’ll be sad to see you go, but congrats on the new opportunity! Just so you know, the markets here are really hot right now, so if you want to move out earlier and get settled in to your new location sooner, I’d be happy to waive the breaking of the lease fee. But, if your plans require you to move out towards the end of summer, that works too and I’ll still waive the fee.”
And, maybe it did go down something like this, but the way it was written made me feel like you had to leave right away if you wanted to not have to pay a fee for breaking the lease?
Either way, I wouldn’t classify it as scummy, but I could see why others might.
Jon Murphy
Jun 1 2022 at 4:44pm
So, that was poor wording on my part. The conversation went something like this:
“Hey Mr. Landlord. I got a job in NC, so unfortunately I’ll have to break my lease.”
“Great news! Congrats! By the way, if you want to break sooner, I’ll have no problem renting out your apartment [JMM: part of the lease says you pay rent until new tenants sign]. If you want to move out sooner, I don’t think there will be a problem. I’ll waive the break fee.”
(I am going off memory, so things could be missing)
I did not interpret him as saying the break fee would only be waived if I moved out in June.
Dylan
Jun 2 2022 at 12:22pm
Thanks for the clarification, that’s pretty similar to how my conversations have gone when I’ve had to break a lease and makes a lot more sense.
Good luck with the new job and the new home. Beautiful part of the country.
Jon Murphy
Jun 2 2022 at 12:30pm
Thank you! I cannot wait to live there. I was blown away by the beauty on my campus visit
Thomas Lee Hutcheson
Jun 2 2022 at 6:38am
It’s sad that so few people have taken (and “taken to heart” :)) Econ 101.
Jon Murphy
Jun 2 2022 at 12:02pm
My friend did take Econ 101 (that was actually how we met), but it was way back in 2007, so I forgive them 🙂
vince
Jun 3 2022 at 6:25pm
At least he really picked up on the Marxism.
Jon Murphy
Jun 6 2022 at 9:08am
It’s not really Marxism. My friend just forgot some details.
Grand Rapids Mike
Jun 5 2022 at 1:44pm
Part of the problem is how Econ 101 is presented. When I took it eons ago, the course was wrapped up incalculating demand and supply curves etc. Very little spent on practical real world issues. I think this explains your friend explanations. Econ is a super important subject that few really grasp. This is heighteded by the fact that people love to spend other peoples money, the demand and supply concept is out the window when they have no skin in the game. As a side note, this applies to econ professionals. How else can anyone explain that many noted economists were forecasting the USSR economy would exceed the US just before USSR imploded.
Also Congrats on your new job. This little experience would seem to be a real world example to include in a class discussion. Also as book assignment Milton Friedman’s Free to Choose is suggested. Required my children to read it with followp discussions. They would never have given your friends response. Just Saying.
Jon Murphy
Jun 5 2022 at 3:56pm
Agreed with your diagnosis. In my teaching and academic articles, I like to use lots of real world examples.
Everett
Jun 5 2022 at 2:42pm
Counter argument:
Landlords like this are effectively acting as a cartel in a never-ending bid up of profit margins (just as CEO salaries were bid up by a yearly comparison to the ‘average’ CEO salary). Unlike standard businesses small landlords are unlikely to use this increased profit margin to manufacture more housing to address the supply limit (though some larger landlords do). At best they might remove some of the home-ownership stock and convert it to rental stock, which is a wash in aggregate housing demand while typically bidding up property values and consequent taxes (with consequent increased rents). Thus we have the worst case scenario of capitalism – increased profit margins and ongoing supply limitations.
There are some benefits as you say, especially when new small landlords come into the market with newly manufactured ADUs or multi-family extensions. But there will only be so much of this sort of housing stock added by new small landlords.
It takes an actual analysis, not just Macroecon 101, to determine whether this is a net good or net bad with respect to cost-benefit for renters and would-be homeowners.
The ‘best’ landlords from a tenant’s perspective are those who charge a rent that meets their costs and a little extra for rainy days. These landlords optimize for a positive landlord-tenant relationship and good long-term tenants who are the best benefit to the local neighborhood.
The ‘worst’ landlords are absentee slum-landlords with rigid policies and yearly rent increases higher than the rate of inflation.
Where your soon-to-be-ex-landlord falls in this spectrum I do not know.
Everett
Jun 5 2022 at 2:56pm
Everything’s connected. So part of the analysis determining whether this is good or bad would have to look at the incentives for employers to locate in the area with the increasing rents.
Jon Murphy
Jun 5 2022 at 3:55pm
Never reason from a price change.
Jon Murphy
Jun 5 2022 at 3:54pm
Not likely. There are many landlords, especially in Syracuse, and lots of substitutes. Cartelization would have prohibitively high enforcement costs. Simple supply and demand gets us an explanation. We needn’t assume a conspiracy.
Besides, it was a negotiation between me and the landlord. I am not forming a cartel with him.
Except that’s not what’s going on. Supply increased in my story. Building new units are not the only way to increase supply. In my case, it’s simply freeing up some stock.
Why do you assume that? Lots of research shows people with rather pay high prices but have quantities to buy than pay low prices but face shortages. Sure, people would like to pay lower prices all else equal, but if those lower prices mean they cannot get what they want, then they get real angry.
Here in Syracuse, there’s an infamous apartment complex called Skyline. It is run as you say: rent priced just to meet costs. And the city just seized it because the landlord wasn’t investing in the property. It was violent (two murders last year), falling apart, and blocked sewage issues, etc.
vince
Jun 5 2022 at 7:15pm
Back to Econ 101 again.
1. “Landlords like this are effectively acting as a cartel in a never-ending bid up of profit margins (just as CEO salaries were bid up by a yearly comparison to the ‘average’ CEO salary).”
How are landlords acting as a cartel? They compete for tenants.
2. “small landlords are unlikely to use this increased profit margin to manufacture more housing to address the supply limit (though some larger landlords do). ”
Landlords aren’t home builders. If prices go up, builders build more houses.
3. “The ‘best’ landlords from a tenant’s perspective are those who charge a rent that meets their costs and a little extra for rainy days.”
Best according to whom? Why should landlords base rents on a little extra rainy cash, rather than what is a fair, negotiated price. It’s a business!!!
Everett
Jun 7 2022 at 1:26pm
1) “Effectively acting as” not “effectively being a”.
2) “Landlords aren’t home builders.” – Some of them are, both large landlords and small landlords. In a well functioning capitalist system increase in demand relative to supply is supposed to bring new manufacturers/stock to the market, not just result in a bid up of prices. I understand it’s complex with the housing market given regulations, NIMBYism, and entrenched interests of current owners.
3) “Best according to whom?” – I stated from a tenant’s perspective. Not all tenant’s may agree (such as our author), but many of them (such as me) do.
4) “Lots of research shows people with rather pay high prices but have quantities to buy than pay low prices but face shortages. ” – I agree. This isn’t the point I was making. I address this in (2).
5) “Here in Syracuse, there’s an infamous apartment complex called Skyline.” – Sure, sucky situations exist. There are going to be examples of poorly run complexes with jacked-up rents as well. Jack up the rent enough and you will drive those more prone to violence and other illegal activities away. What does this have to do with my point?
6) “Except that’s not what’s going on. Supply increased in my story.” – Yes, by one unit. With a consequent increase in price, something we generally wouldn’t expect from a free market. But of course rental contracts aren’t a free market (once signed), and for good reason on both sides. It would be nice if your landlord invested some of that extra money in new housing.
7) “Cartelization would have prohibitively high enforcement costs” – That’s the thing. It doesn’t have to be enforced as long as enough landlords constantly increase prices based on what everyone else is doing. Just like the CEO pay example. The supply/demand situation of rental housing isn’t like typical products, even when there’s no supply issues (as people self-segregate, buy the best they can afford as opposed to good enough). If my analogy is correct, landlords will only drop prices so much in a renter’s market before keeping units off the market in order to boost prices. If it’s incorrect then the price will keep dropping until the landlords with the highest costs are priced out of the business.
8) I would take a pay cut to be employed away from a large metro area. I moved here for the job (and was paid relocation to do so), so it’s not completely true that employers locate where workers are (or want to be). At least not in proportion to the preferences of the putative employees (as seen in part with the mass migration away from cities allowed by remote work opportunities during COVID, something I could not participate in due to the nature of my job).
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