By Roger Alford*
Of all the reasons it could be hard to pay rent each month, did you have an algorithm-powered illegal cartel on your list?
Millions of people across the United States are paying far more rent than they can reasonably afford, with rental housing prices rising far quicker than household income. In 2022, 22.4 million U.S. households were spending more than 30% of their income on rent and utilities, up from 20.4 million in 2019.
Many of these households faced severe cost burdens, with an all-time high of 11.6 million struggling with housing costs that consume more than half of their income. In Chicago, Cincinnati, Minneapolis, Virginia Beach and Washington, year-over-year rental prices are climbing at double-digit rates.
Several factors drive the high cost of rentals, including increasing demand, a dwindling supply of low-rent units, the rising cost of capital to build new rentals, and regulatory barriers restricting the construction of multifamily units.
But there’s another surprising factor driving up rental prices: landlords colluding with the help of technology. The U.S. Justice Department is suing the company RealPage, Inc., accusing it of selling software to landlords that allows them to collectively set prices – the illegal practice of price-fixing. As a former official in the Justice Department’s Antitrust Division and a law professor, I’ve been following the case closely.
The perils of price-fixing
The Federal Trade Commission defines price-fixing as an agreement, conspiracy or combination among competitors to raise, fix or otherwise maintain the price at which their goods or services are sold.
Any agreement that restricts price competition violates the antitrust laws. Examples of price-fixing agreements include commitments among competitors to hold prices firm, adopt a standard formula for computing prices, or adhere to a minimum fee or price schedule.
So when competitors share proprietary, confidential current price information – directly or indirectly through an intermediary – to stabilize or control industry pricing, they have crossed the line into illegal collusion, according to the FTC. That is the case in major portions of the U.S. rental market, the Justice Department argues.
One algorithm for all
In August 2024, the Justice Department and eight states filed a lawsuit in a federal court in North Carolina against RealPage. The Justice Department accused the company of selling software to landlords that collects nonpublic information from competing landlords and uses that combined information to make pricing recommendations.
Landlords who use the software input the rental prices they charge, and the software aggregates all the data from the company’s customers. The software’s algorithm then makes recommendations for what to charge. The recommendations are generally higher than the current market rate, and most customers take the recommendations, which push prices in a market higher.
Even if landlords retain some authority to deviate from the algorithm’s recommendations, it is illegal for competing landlords to jointly delegate key aspects of their pricing to a common algorithm, according to the Justice Department suit. The Justice Department declared that “RealPage replaces competition with coordination. It substitutes unity for rivalry. It subverts competition and the competitive process. It does so openly and directly – and American renters are left paying the price.”
The case is unusual in that, unlike a typical price-fixing cartel, the landlords used RealPage’s algorithms to dramatically improve their ability to engage in price-fixing. Algorithmic price-fixing is typically easier and more effective than other types of cartel behavior. The software can easily aggregate massive amounts of proprietary data, optimize cartel gains, monitor real-time deviations from cartel pricing and minimize incentives to cheat.
“It’s much easier to price-fix when you’re outsourcing it to an algorithm versus when you’re sharing manila envelopes in a smoke-filled room,” Justice Department antitrust chief Jonathan Kanter told The New York Times.
Since 2022, RealPage and various property managers have been named as defendants in more than 30 class action lawsuits alleging the RealPage software is used to unlawfully fix rental prices. Federal courts tend to be sympathetic to such arguments, as shown in the denial of a motion to dismiss the case in one of the private lawsuits filed against RealPage.
In that case, the court held that a price-fixing agreement could exist as a matter of law. Landlords provided RealPage’s algorithmic system with their proprietary commercial data, knowing that RealPage would require the same from their competitors and would use all of that data to recommend rental prices to all of the company’s clients.
Classic price-fixing or data-driven decisions?
Some landlords seem to be aware that in sharing confidential price information to RealPage’s software, they were facilitating the unlawful monitoring and raising of rental prices. The Justice Department complaint quoted a landlord commenting on RealPage’s software, “I always liked this product because your algorithm uses proprietary data from other subscribers to suggest rents and term. That’s classic price-fixing.”
Even RealPage’s own executives have boasted that when landlords collectively use their software, they can use “every possible opportunity to increase price,” according to the complaint.
RealPage argued that its software “simply helps landlords make data-driven decisions” in a competitive market. The company claims its tools are designed to reflect market conditions and optimize occupancy rates, not to engage in price-fixing.
The company describes the impact of its alleged collusion with landlords as “a rising tide [that] raises all ships.” Perhaps a better description for their service is a rising tide that raises all ships for those who have one.
The Justice Department’s case and the private cases are in the early stages of litigation. If the department is successful, RealPage will be barred from engaging in the anticompetitive practices related to helping landlords share proprietary pricing information.
*Roger Alford, Professor of Law, University of Notre Dame.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
39 Comments
"They've been doing it all day, Ref !!!"
Questions:
1. How many LLs set prices by what they think the market can bear? (i.e. charge as much as they can)
2. How many LLs set prices based on cost + margin? (i.e. charge enough to cover costs with a satisfactory return)
'Landlords: Scourge of Society'
Landlords also have a landlord- the bank.
These days the mortgage payment is often higher than what the place rents for. So, instead of complaining about the landlords, those who are not happy to pay rents should go and buy similar property and then pay even more "rent" to the bank. Not to mention the payments to the city council/maintenance tradespeople.
If those same landlords were not competing for houses, there would be less competition, less speculation, less of a ponzi effect. As Ocelot above put it, they are basically scalpers for housing. If Ticketmaster were able to effectively prevent scalping, why is housing, a fundamental right, not treated similarly?
LLs largely left the market and despite the lack of competition due to tyheir absence price falls have been muted. Indeed it's been reported here and elsewhere that rents have fallen across the country despite higher costs (e.g rates and insurance) and I recently saw that there's been a notable increase in availability of rentals in Queenstown.
How is this any different than the Tenancy Services page that gives a landlord an estimate of market rent?
https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/
It is chalk and cheese !!!
The RealPage software collects a significant amount of information about each property, augments it with public data and geospatial data, and provides a far more specific price based on those factors. (I am not proud to say I have written this type of software.)
The Tenancy Services database of tenancies is not a public database, and the public can't access it directly. And if rents in general are considered public data, then it makes no difference if individual landlords disclose those same rents to a third party - its the same data.
Our supermarkets could easily collate pricing data from their competitor's websites.
But imagine if our supermarkets (including all Foodstuffs operators) decided to create a software portal that basically shares with each other their sell prices and recommendations for what they should charge for the next 12 months.
You mean like a portal that inputs all mobile or broadband price plans and then compares them all, which telcos can look at to see what everyone else is charging so they can price match? Hmm, if only those existed ..
https://www.mobilecompare.co.nz/compare-plans/
The Commission urged mobile network providers to ensure that they provide more comparison information to consumers so that they can better understand how much they actually need to spend on their usage.
“We want to see the [telecommunications] industry catch up to other sectors, like electricity, where consumers and comparison websites are making good use of the ability to compare usage and pricing,” says Tristan Gilbertson, Telecommunications Commissioner.
So whats the difference between inputting comparative rent data and then making a recommendation best suited to the user based on that comparative data? Its just another comparison website. How do you think real estate agents price houses? They look at all the prices that houses have previously sold for, and then they suggest a market price. Why is it ok for a real estate agent to do that but a landlord can't?
Those third party price comparison websites would do more to encourage competition than enabling companies to collude. If Skinny Mobile want to increase their customer base, why would they price match their competitors? Do you think these businesses give little regard to their market share?
Are you trying to suggest a price fixing algorithm specifically tailored for landlords is the same as a price comparison website for mobile and power utilities? Here's a quote from the developer of their YieldStar algorithm:
If you have idiots undervaluing, it costs the whole system.
I only do this when looking for new tenants.
And then generally set the price a bit lower to get a good selection of prospective tenants. Once they've signed up, it becomes cost + margin pricing. Most of my tenants have been in their places for years and years. They know they're on a good wicket and the really look after their places.
Me too Chris. When one of my properties becomes vacant, I use an agent to source suitable tenants and advise me on what rents should be. After that I review my rents annually and adjust for unavoidable cost increases (essentially rates and insurances, but not interest). This tends to see my tenants' rents being less than the market rent over time - a kind of return-customer discount. The benefit for me is I don't wear the cost of finding new tenants and vacancies very often.
Recently as rents have fallen, I've noticed my rents have aligned to where the market is for new tenancies, so there's no headroom for an increase this year to cover a 20+% increase in rates, let alone insurance.
I was renting from family once, thy upped the rent $115 per week from the last tenants for me when I moved in. Admittedly I had no rent increases in 4 years or so, but upon us leaving, they rented it for another $200/week more. No mortgage on the house, the weatherboards were rotting on the corners, the wind would get into the roof cavity, the heat pump cranked up full could only keep the place at 17 degrees in a cold southerly in winter, and the pace was damp and mouldy which we had to keep cleaning as no amount of airing the place out would compensate for the water getting in via under the the eaves (Wellington wins + horizontal rain). It was absurd how they could even consider charging more tan what we paid for the place given the state of the house, and their response was "we looked at the median rent and thought we'd be cheeky and ask for near the upper limit".
Are there any long-time commentors on here that could share their real life experiences of price fixing in the murky RE sector in NZ?
There are some good reasons to be anti investor (in property) and anti landlord though. From Taxation professor Lisa Marriott:
" .... the Government made $14.6b in tax cuts this year and most of it is going to landlords. She called this “a very deliberate choice”. Marriott had another statistic. For the six years 2015-2021, 60% of households saw little change in the value of their assets. But the asset value of the wealthiest 40% rose from $1.328 million to $2.024m. And most of that gain was not taxed because it was in property and other asset gains, not income".
Sure. We're not proposing pitchforks for landlords, but to change the rules to be fairer and more economically productive. Many landlords see repairing the rules as a personal attack. And landlords are definitely behind changing the rules to make things worse for our society.
I think everyone should play the cards as they lie. But, "as they lie" includes the potential for a shift in the rules to repairing economically and societally destructive rules.
Com Com does look at this, a large Facebook group received a letter from ComCom after their members were discussing rents in posts. So you are not to discuss prices when you are in trade. I am not aware of any software that calculates and suggests rents in New Zealand and I think it would be illegal here too.
Was to do with the rent freeze over covid.
This is after the Commerce Commission had to warn property investors they could be at risk of cartel-like behaviour after discussing raising rents, en masse, the day after the freeze ends.
https://www.rnz.co.nz/news/national/426054/landlords-expected-to-act-qu…
Tenancy Services literally does this. https://www.tenancy.govt.nz/rent-bond-and-bills/market-rent/
If I look up a 4 bedroom house in my area it suggests $1050 a week is the market rent.
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