Happy Tuesday and welcome to another edition of Rent Free. This week, we look at whether shadowy real estate companies and their rent-recommendation software have really created an unbeatable apartment cartel.
Is RealPage Really Responsible for Rent Hikes?
Among the many alternative explanations to the idea that American housing prices are artificially high because of regulatory limits on new home construction, one theory in particular is gaining popularity: that rent-recommending software is enabling landlords to jack up rents to above-market levels.
By this telling, cities' rental markets are dominated by landlords using software provided by Texas-based company RealPage to set rents. This, in turn, creates an effective and likely illegal cartel. Landlords who should be competing with each other are blindly following the recommendations of the same third-party software to raise rents and keep units vacant.
Much of the past decades' increased rents, and all the attendant consequences of housing unaffordability, homelessness, and more, can all be laid at the algorithm's feet, according to this theory.
That's the story anyway. There are lots of reasons, from basic economics to recent rent trajectories, to think that the story is more fantasy than reality.
The Background
Like most bad memes in housing policy, the idea that RealPage is responsible for sky-high rents comes from a ProPublica investigation.
In 2022, the liberal investigative journalism outlet published an exposé on RealPage, which detailed the companies' promises about the rent-increasing potential of its rent-recommendation software and the testimony of real estate professionals that it really did make landlords more willing to raise rents and tolerate vacancies.
That article has since spawned antitrust lawsuits from the attorneys general of Arizona and Washington, D.C., against RealPage and landlords who use its rent-recommendation products. Several consumer class action lawsuits have also been filed against RealPage and landlords using its software.
The U.S. Department of Justice (DOJ) has filed multiple "statements of interest" supporting these lawsuits. President Joe Biden himself promised to crack down on third-party rent-recommending algorithms in this year's State of the Union address.
All the while, an increasing number of increasingly heated articles have criticized RealPage for high double-digit, metro-wide rent increases, and alleged "indoctrination and surveillance" of client landlords who might get cold feet about driving rents up.
Pushback
This past week, RealPage itself published a multi-page response to its critics.
Chief among its arguments is that its market penetration is much less than has been described in media investigations and lawsuits—with around 30 percent of rental units using its products in metro areas where it has the highest concentration of clients. Nationally, owners controlling less than 10 percent of units use its rent-recommendation software.
If the vast majority of landlords don't use any RealPage products, its clients couldn't possibly have enough market power to act as a price-setting cartel reaping above-market returns, the company argues.
That would make sense. You can only reap monopoly rents when you actually have a monopoly.
RealPage's response also says that its customers accept its "floor-plan-level rental price recommendations for new leases" less than 50 percent of the time. That's further evidence that its software isn't "setting" prices.
The Economics
Obviously, landlords wouldn't pay for RealPage's products if they didn't make them more money.
But landlords aren't in the business of maximizing rents. They're in the business of maximizing profits. Depending on market conditions, maximizing profits can involve increasing rents to take advantage of rising demand or cutting rents to retain tenants when demand (and therefore prices) are falling.
The limited academic research on the effects of rent-recommendation algorithms suggests that's exactly the effect rent-recommendation algorithms have: They make landlords more responsive to changing market prices, which means a greater willingness to raise and lower rents.
"During the great recession from 2009 to 2010, the adopters of the algorithm lowered rents and increased occupancy, compared to comparable non-adopters in the same submarket," wrote University of Pennsylvania researchers Sophie Calder-Wang and Gi Heung Kim in a paper published on SSRN last year, and last revised in March 2024. "Conversely, during a period of economic recovery from 2014 to 2017, the adopters of the algorithm increased rents and reduced occupancy."
Calder-Wang and Kim's paper also only looked at data from 2005 to 2019, which captures the recession and post-recession recovery.
A lot has happened in rental markets since. That includes the massive, temporary rent plunges in places like San Francisco in 2020. It would also include more recent falls in rents in Austin.
What might explain those rent declines?
The typical supply-and-demand story can answer that question: falling demand during the pandemic in San Francisco and a glut of new supply hitting the market in Austin.
A conspiracy theory about RealPage software-created cartels has a harder time addressing those, or any, rent declines.
Supply, Demand, and Prices
Calder-Wang and Kim's paper does find that in markets undergoing post-recession economic recovery, greater use of rent-recommending algorithms is associated with "significantly higher rents and lower occupancy."
But their paper is equivocal on whether this is a result of algorithm-enabled among landlords or more efficient pricing from individual landlords prioritizing their own profits in an environment of rising rents.
Again, there's a straight-forward, supply-and-demand story to explain that phenomenon: In hot markets, rent-recommendation software recommends landlords raise rents. And there's a lot of hot markets right now.
Booming sunbelt towns have experienced lots of in-migration. High interest rates have kept a lot of would-be homebuyers in the rental market. By helping landlords more efficiently price their units in these hot markets, one could imagine rent-recommendation software helps raise prices temporarily.
Short-term volatility in rent prices misses the more fundamental factors of overall housing supply.
Housing writer Kevin Erdmann recently wrote, "Supply is a long-term, slow twitch factor. The problem of inadequate supply takes years or decades to become catastrophic and it will take years or decades to fully reverse. Any sharp, short-term changes in housing rents or prices have nothing to do with supply conditions."
Erdmann's main point was to throw some cold water on YIMBY triumphalism about falling rents in Austin. But his argument could just as easily be deployed against catastrophizing about RealPage's impact.
At the end of the day, rents and home prices are way lower in Dallas and Phoenix than in San Francisco or Los Angeles. The former cities have a lot more units owned by landlords using RealPage products. They also have a lot more housing. Therefore, they're cheaper.
That's a pretty intuitive answer. It's also a lot neater than computer-created housing cartels.
Quick Links
- Even where home-based businesses are allowed by the zoning code, they still face a lot of non-zoning restrictions solely because they're not operating out of a traditional storefront. Virginia is trying to remedy this situation with a new law, effective July 1, that allows home-based food businesses to sell products at events outside the home.
- Beginning in 2021, Raleigh, North Carolina, adopted a suite of YIMBY zoning reforms that loosen regulations on townhomes, accessory dwelling units, and the like. Axios reports on comments made by the city manager to the city council that a full third of new housing in the city was made possible by the recent reforms.
- In Los Angeles, Costco is getting into the housing development. Recent state reforms allow certain mixed-use developments to get streamlined approvals from city hall. The big box store has reasoned it'll be faster getting its new Los Angeles store approved if it adds some housing to it as well.
- An Islamic group is suing the government of Lodi, Michigan, for denying its application to build a mosque in a single-family area. The lawsuit accuses local officials of effectively zoning religious buildings out of town, which they argue is a violation of the federal Religious Land Use and Institutionalized Persons Act.
- New renderings for a new commercial tower at 15 Penn Plaza in Midtown Manhattan have been released. The real estate blog New York YIMBY has details of what the proposed "PENN15" tower will look like once fully erected.
- The U.S. Treasury Department is rolling out a few new programs to increase financing for affordable housing.
The post RealPage Conspiracy Theories appeared first on Reason.com.