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GLASCO v. HILLS

February 24, 1976

Barbara GLASCO et al., Plaintiffs,
v.
Carla HILLS, Individually and as Secretary of the U.S. Department of Housing and Urban Development, et al., Defendants



The opinion of the court was delivered by: BIUNNO

 The present application is for a preliminary injunction to restrain the collection of rents authorized by the federal agency which regulates the rentals on housing projects financed under the federal housing program.

 One of the arguments is that federal law on the subject does not preempt the field, leaving the City of Newark free to also regulate rents under the local ordinance. Since both sets of regulations take the form of setting maximums, the effect of this posture would be to set the maximum rent at the lower of the two maximums.

 The history of rent control in the United States is a spotty and irregular one, more so than for price regulation as such. There has never been any general recognition of a justification for rent control in the last half century except during World War II, which saw a nationwide system of economic controls at the national level to regulate and control all prices, including wages and rents as well as commodities and services, along with rationing of commodities felt to be subject to the risk of short supply, such as meat, butter, gasoline and fuel oil.

 Since World War II there has been very little in the way of similar economic regulation, the general policy choice being that the competitive private enterprise system traditional here yields more acceptable results for the system as a whole over the long run than do systems of detailed regulation. Part of the reason for this attitude no doubt resides in a recognition of the fact that unless substantially all significant areas of economic activity are brought within the control system, the goals of regulation will be frustrated by the existence, side by side, of several sets of markets, some regulated and others not. Another factor, of course, is the massive administrative workload which any general economic control system engenders, along with the considerable costs for manpower and supplies which accompany it. These costs and this expenditure of manpower produce no usable commodity or service; they are unproductive; they add nothing to the gross national product.

 Of course, this is not to say that there are no areas of economic regulation. There are such areas. Perhaps the oldest such area is that of the public utilities, whether they be for rail, bus and motor, air or vessel transportation, or for electric, gas, water, sewerage or telephone services. But these are vastly different in character from rent control. These categories are based on the notion that the capital costs of setting up to render the service are so high that the economy cannot afford to take the risk of financial collapse of an enterprise due to competition. The policy decision here is to grant limited monopolies -- monopolies being the potentially most efficient form of economic endeavor -- and to superimpose regulation as a substitute for competition.

 Another area of control, quite unique, is that of milk price control. Here the object is to protect the producer, processor and supplier of milk against the risk of price declines due to cyclical oversupply, which if allowed to occur would drive some inefficient producers out of business and thus reduce the productive capacity for turning out what is thought to be an essential food. The economic control here takes the form of establishing a minimum, rather than a maximum, price.

 In New Jersey, minimum prices for cigarettes and posted prices for gasoline are set to protect the State's revenue from the taxation of these commodities against diversion, and posted minimum prices for alcoholic beverages are set to avoid encouraging their undue consumption.

 In Europe, perhaps the most widely known instance of rent control is that of Paris, and many volumes have been written about it by many scholars, the consensus of which evidently is that rent control there has failed to achieve its purposes because of the effect it has had in destroying any motive to add to the supply of housing.

 In this country, the most extensive system of post-war rent control probably has been in New York City. There, the system is one of a dual market, with rent controls applied to existing housing but not to new housing. This has had the effect that anyone familiar with the subject would predict, namely that the private new housing is aimed at tenants in a high economic bracket. The inevitable result is an ample supply of new luxury housing, leaving it to government projects to provide financing for middle income and low income housing. The inability of the governmental agencies to meet their overextended financial obligations, supposedly to be met from revenues of operation, has contributed to the financial disaster experienced by both the City and State of New York, with incidental adverse impact on the financial capacity of all other State and local governments and agencies throughout the country.

 At the national level, the effort in respect to housing has taken various forms. Most of them have approached the problem from the standpoint of financing the construction of housing. For that segment of the market that includes owner-occupied housing, the federal government provides guarantees of mortgage loans through FHA and VA. Four economic elements are involved here: loan amounts at much higher proportion of the value of the property than are available on a prudent, conventional mortgage; lower interest rates than the money market conditions would command for comparable risk; longer amortization schedules (and hence lower monthly payments); and a guarantee of full payment to the lender in the event of default.

 Aside from providing economic support of this kind at the consumer end, which helps provide means to satisfy the demand and thus stimulates construction, which in turn enlarges the supply, the federal programs have also attacked the problem more directly from the supply end. This has taken several forms, which may be used alone or in combination. One form involves the making of grants to help meet the cost to a local government agency (usually a housing authority) to acquire title to badly rundown areas of a city, to demolish the buildings, clear the area and prepare the site for redevelopment construction. This makes available at feasible cost land that would otherwise be so expensive as to foreclose the likelihood of privately financed clearance and redevelopment.

 Another form consists of making available loans, or guarantees of loans, with very long amortization terms either at interest rates far below going market levels or with payments to so reduce the net interest rates as to provide financing otherwise wholly unavailable to meet construction costs. These devices serve to stimulate construction and thus add to the supply. Finally, and more recently, it has provided rent supplements to help individual occupants to meet the market price of available housing. This device functions by increasing the number of individuals who can meet the price, thereby increasing the demand and hopefully stimulating the provision of supply by maintaining the prices that will attract capital. See, e.g., Coppergate v. Lynn, 391 F. Supp. 821 (D.C.N.J.1975).

 The programs have had varying degrees of success, with the experience with PruittIgoe in St. Louis being the example of complete disaster.

 None of these methods purports or attempts to attack the problem of housing supply, demand or price directly. All attempt to deal with some aspect of the economic relation on a long-term basis in some way that is intended and designed to moderate the problem.

 Whatever the effective value of the existing methods may be on a long-term basis, they are essentially ineffective in a period of economic upheaval such as has existed since about late 1969, when interest rates began to rise. Since then, they have reached historic highs (about August or September of 1974) and the economic scene has been compounded by double-digit inflation, a decline in economic activity and an eruption in the cost of petroleum-based products generated by the quadrupling (or more) of the price of petroleum from the OPEC nations.

 In the traditional sense, there is not and has not been a true housing shortage since the end of World War II. The war period, during which no housing construction was allowed, saw a housing shortage of the traditional, physical type. Growing families were obliged to double up. Attics, basements and garages were converted to housing space. Single-family homes were converted into multiple family homes or rooming houses. Nothing of that sort appears on the current scene.

 The nature and pattern of the so-called housing shortage today has entirely different characteristics. In the sunshine belt, which encompasses the southern segment of the continental United States from Florida to California, there are hundreds of thousands of housing units completed or under construction for which there are no buyers or tenants, even though there is a strong population shift to that area. REIT's are experiencing financial collapse by the score.

 Rising real estate taxes, rising costs for space heating, rising costs for lighting and cooking, rising costs for water and sewerage, have reached levels at which the cost of operation can exceed the cost of the housing space itself.

 Whether owner-occupied or rented, housing has a number of components going into its annual cost. One is return on the investment, part of which may be represented by interest on the mortgage. Another is depreciation and obsolescence -- housing is a wasting asset. Maintenance and repair, which includes periodic painting, is another component. Operating services, such as electric, gas, heating fuel, water and sewerage form another component. Real property taxes form still another component. And unlike some other forms of economic activity housing has little, if any means for moderating costs through productivity gains or the economies of scale.

 The cost of occupying an owner-occupied home, or of renting an apartment, is the result of all these components, over which there is little, if any, control.

 Consequently, the regulation of rents is both a sophisticated and delicate affair, both because of the lack of control over the components of cost and because of the high risk of a flight of capital if the level is set too low. The latter aspect, of course, only aggravates the problem.

 In New Jersey, the history has been clear. In the post World War II era, bills for rent control systems of one kind or another have been introduced regularly and none has been able to command support approaching a majority of both Houses, at least since the expiration of L. 1953, c. 216 (a limited statute). It was not until 1973, when a rent control ordinance of Fort Lee was held to be within the general powers of a municipality to enact, that there was any potentially permanent form of rent control in the State since the end of World War II. Inganamort v. Fort Lee, 62 N.J. 521, 303 A.2d 298 (1973). The pattern in the Legislature appears to be that there is a strong minority in favor of such legislation and a strong minority opposed to it, with neither side able to command a majority. Municipal officials, being subject to different economic constituencies, have shown a greater receptiveness to rent control, subject to the degrading effect it has on the ratables base for the real estate tax.

 In the early 1970's the emergency economic controls established at the national level to attempt to combat strong inflationary forces through control of costs and encouragement of productivity gains did include limited forms of rent control. With the termination of most of that program, the effort to control rents was taken up at the municipal level and led to the holding, for the first time in New Jersey, that the municipal delegated authority included the enactment of rent control ordinances. Inganamort, supra. But see, especially, the dissenting opinion of Conford, P.J.A.D.T.A., 62 N.J. at 538-546, 303 A.2d 298.

 That much having been decided, constitutional challenges to the specific ordinances of a number of municipalities followed, and the first rulings by the Supreme Court of New Jersey were handed down in December of 1975. These cases were Hutton Park, 68 N.J. 543, 350 A.2d 1; Brunetti, 68 N.J. 576, 350 A.2d 19; and Troy Hills, 68 N.J. 604, 350 A.2d 34.

 In all the cases, the court made no ruling on the constitutionality of any of the ordinances as applied to a particular owner, either because the record lacked the data on which to evaluate the rate of return, or because the administrative remedy through application to the local board (not in the ordinances but added by the court) had not been exhausted. And it is indicated that the economic unit to be employed for this purpose is the "individually administered apartment complex" (68 N.J. at 627, 350 A.2d 34), while challenges to unworkability were left open for lack of an adequate record and the absence of findings at the trial level (68 N.J. at 599, 350 A.2d 19).

 The court's hope for legislative adoption of a uniform enabling act (68 N.J. at 573, 350 A.2d 1), is probably forlorn. The sustaining of the validity of the defectively drawn ordinance is more likely to reduce pressures on the Legislature to enact anything, while the court's own division on the standards of measurement will ...


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