Escalating Dorm Rates, Eminent Domain, and Economics 101

Christopher M. Russo
Discourse Magazine
Published October 7, 2021 (1063 words)
https://www.discoursemagazine.com/p/soaring-dorm-room-rates-eminent-domain-and-economics-101

College tuition and fees have been skyrocketing for decades, tripling since just 2000. But another reason for the huge cost of higher education is soaring rates for student housing. The towns surrounding college campuses contribute to the exorbitant bills by restricting off-campus student rentals or banning them outright. This is on top of the standard zoning restrictions that limit the supply of housing in towns everywhere, and it forces more students to pay steep prices for tiny dormitory rooms on campus. My experience illustrates the problem—and a solution.

While attending Rutgers University from 2014 to 2016, I lived at 1126 River Road in Piscataway, New Jersey. It was a seven-bedroom house built in 1924 that the owners, Cindy Paglia and her husband, Andrew, rented out to students. With a small kitchen, well-used furniture and bushes often in need of a trim, it wasn’t luxurious. But it was affordable and it even had fast Wi-Fi.

In fact, it was one of Piscataway’s few privately owned student rentals within walking or biking distance of one of the campuses. Rutgers could certainly use more. Of the 50,000 students at its main New Brunswick and Piscataway campuses, 15,000 live in university housing. The rest commute or pay top dollar for one of the scarce rentals in New Brunswick.

Now the housing shortage has gotten a bit worse: On Sept. 27 the town demolished the house, ending a five-year eminent domain battle. The town claimed it needed the property for a new sewer line to serve Rutgers’ football stadium across the street and to slightly expand a large county park next door.

Government Flexes its Muscles

The case has all the earmarks of eminent domain abuse. The town appears to have given the Paglias a flimsy pretext because the house was surrounded by empty land where the sewer line, if needed, could be re-routed. The town harassed and threatened the family, say the Paglias, and claimed that it was illegal to have tenants living there. And the town is trying to shortchange them on the compensation, making a final offer of $355,000, which was $39,000 less than the Paglias paid in 2005 and well under the $1.2 million they were asking; Zillow valued the house at $449,500. A government always has more money for lawyers than an eminent domain target, so time ran out for the Paglias, who say they were using the property to build a college fund for their two teenagers.

The U.S. Constitution’s Fifth Amendment does allow governments to condemn and take private property, but only for “public use” and with “just compensation.” Those terms allow a lot of mischief and so some states have restricted the use of eminent domain, but not New Jersey. Indeed, for decades, the state has been a center of eminent domain abuse.

The family was the loser in this fight, while the winners were a powerful university and a town that was happy to do Rutgers’ bidding. A middle-class suburb of 57,000 people, Piscataway had sent the Paglias a zoning citation a few years ago stating that it didn’t want students living in the town, according to the family. That was fine with Rutgers since this created more demand for its campus housing.

Off-Campus Savings

But the Paglias provided a more affordable, higher-quality alternative to a dorm for me and six other students, including ones from China, Spain and Latin America. I calculate that the house produced more than $5,000 a month in rent while I lived there. If that sounds like a lot, you haven’t been billed for campus housing recently. I figure I saved $8,000 on my single room during the two years I lived there instead of in a dorm. For the nine-month school year, Rutgers is now charging more than $10,000 for a single room.

The outlandish amounts that colleges and nearby landlords demand for housing—and even the Paglias’ more reasonable rent—signal the need for more housing. Prices coordinate economic production. It isn’t that free markets work without planning. Rather, prices help each of us plan for ourselves and for the needs of others, often providing us with a livelihood in the bargain.

Overregulation interferes with this process. A wide array of zoning and other land-use rules limit homeowners’ freedom to use their property as they see fit, even if they want to tear it down and build townhouses or apartments. These restrictions often create chronic housing shortages. For example, many towns ban or restrict “accessory dwelling units”—smaller apartments in a renovated garage, loft or basement of a single-family home. And towns sometimes limit the rent that landlords can charge, which discourages new construction and extra units added to existing houses.

A Captive Market

Meanwhile, colleges turn the artificial student-housing shortage into a major revenue stream. They arrange special deals with local governments, investor groups and real estate developers and build high-rises along the edge of campus, filling them with students paying high rents. And not only do they charge far-fetched prices for dorm rooms, but they’re also increasingly requiring students to live on campus—and pay for a meal plan—for two, three or even all four years.

Suppose there were a much-less restricted housing market around New Brunswick and that led the university to charge their 15,000 residents much lower room rates, comparable with what I paid. By my rough calculation the school would lose $60 million in annual revenue and might have to cut some of the administrative bloat that colleges are famous for.

Even in a freer housing market, it would be appropriate for local governments to protect the character of their communities. A town might permit accessory dwelling units, sometimes called granny flats, and multifamily homes, but not high-rise apartment complexes. The higher value of the properties would produce more property tax revenue to improve municipal services or cut taxes, which would help quell opposition to a neighborhood’s higher density. Communities could also enforce noise ordinances so that rambunctious college fun stays on campus.

Micromanaging who can live in your house or your town is not how governments secure our natural rights or promote our shared prosperity. It is how they jack up profits for insiders at our expense. The best way to drive down the cost of student housing is to allow more of it. That’s what Cindy and Andrew Paglia tried to do.