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.