The Guru Is In

It’s Ba-a-a-ck

By David A. Smith
February 25, 2022 5 min read

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Forcibly caged in 1982, and virtually somnolent for the last two decades, inflation is back with such a vengeance that the Administration is using ever more grandiloquent circumlocutions to deny its existence.   

In the fall of 1974, I was a rising college senior, watching on our dorm’s black-and-white television the snaking lines of cars waiting to pump their five gallons of gas. While the feckless vice-president-turned-mockable-president brandished a football labeled WIN, urging us to Whip Inflation Now, I was thinking, I’m sure glad I’m not in that. A year later, I was in that, eventually scrambling my way to the lowest possible rung of affordable housing syndication, as a temporary typist at Boston Financial. There, under the able tutelage of a senior partner, I spent the next eight years doing workouts of affordable housing properties whose economics had been upended by recession, stagflation, intractable inflation and finally shock-therapy economic detoxification via draconian interest rates, peaking just as I was getting married and buying a condo.  

Living through trauma imprints memories and survival instincts. If mine are any guides, here’s what we’re in for. 

1. Gas prices are inflation’s miners’ canary. Always displayed at every service station and updated in real time, they become everyone’s economic barometer, and as such a constant irritant and source of anxiety. (Why is that, anyway? When transportation costs and loss of time are factored in, is a nickel a gallon worth driving three miles out of your way for?) 
2. Inflation’s severity is initially pooh-poohed as isolated, industry-specific, regional or transitory. (Likewise, forget about the disrupted-supply-chain excuse; when the products are flowing, they will cost more – in fact, they already cost more, you just can’t buy them as easily as you’d like.) Substitute ‘Arab Oil Embargo’ for ‘COVID-19’ in today’s headlines and they read like those from almost half a century ago. 
3. Spikes in utility and operating costs stress property cash flows and pressure replacement reserves. Back in the 70s, affordable housing capital needs assessments had not been invented yet and operating reserves were always underfunded, so the results were instant delinquencies. Now we have better replacement reserves, but they too are finite. 
4. Maintenance is invisibly deferred as site managers try to make their quarterly numbers. Pressure not to disappoint higher-ups leads to short-termism about replacing worn or outmoded components. This can go on for anywhere from three months to a year and a half before those upstairs notice enough to realize it’s a costly mistake.   
5. Rent collections slow down, even among households that have been good tenants. When a household’s immediate costs rise or its income falls, many a family puts food on the table now by paying rent later.   
6. Residents without income subsidy get squeezed and slowly fall delinquent. When income wanes—layoffs, reduced hours, overtime cutbacks or falloff in side-hustle gigs—the typical affordable housing household runs out of things on which it can scrimp.  Eventually rent paid a couple of weeks late becomes a month’s rent subconsciously skipped.    
7. Regulated rent increases often fail to match rising costs. Expenses (market driven) and rents (politically or formula driven) rising at different rates. Regulators’ social conscience to keep rents affordable can skew their budgetary approvals. Properties can be caught in a timing-mismatch scissors. 
8. ‘Normal’ delays in income subsidy payments, like Section 8, create cash flow pinches. Regulators responsible for processing subsidy payments may lack the owner’s or manager’s sense of intense urgency. 
9. Rent increases that are approved are not always achievable in the market. As the substantial rental advantage that many unsubsidized Low Income Housing Tax Credit properties have shrinks or vanishes, marketing and leasing that used to be easy becomes unexpectedly hard. Structural vacancy rises. Remaking marketing, leasing and applicant screening procedures takes time and doesn’t always work.   
10. The employee workforce becomes harder to recruit, retain, motivate and manage. Many on-site workers are themselves renters, being squeezed by the same household budgetary pressures as the property’s residents. Worrying at home translates to distraction at work.   
11. The recession is belatedly acknowledged only when it has deepened. Elected officials are often among the last to know, and among the last to act on what they know. 
12. The recession lasts several years. The 2008 ‘Great Recession’ was actually an asset repricing born of capital shock. A recession born of inflationary economic readjustment takes longer to work itself out. 
13. Refinancing becomes progressively harder as interest rates rise and credit tightens. Pro tip: borrow long fixed while you still can.   
14. Workouts based on share-the-misery and protect-the-asset become the hot new skill. It requires learning new and complex skills, as well as frequently unlearning previous rules of thumb, and not everybody has the knack. 
15. Federal budgetary tightening becomes a political drumbeat: easy to pledge, hard to fulfill. Budget squeezes make rough political waters even rougher.   
16. The reset requires drastic policy action, such as Paul Volcker’s, when in short order “the days of ‘easy credit’ turned into the days of ‘very expensive credit.’ The prime lending rate exceeded 21 percent.”    

So went my first eight years in the business, from 1975 through 1982. Still, be of good cheer; we’ve learned so much since then I’m sure this time around everything will be much less painful.