The San Francisco Board of Supervisors recently approved an ordinance that bans “algorithmic devices” used in suggesting rent prices and occupancy levels. The algorithm uses data provided by landlords in a city to advise landlords. It had the curious effect of always suggesting higher rental prices and often advised landlords to have vacancies to push up rentals. The company at the heart of the controversy was not named in the ordinance, and is known as RealPage and serves 10% of San Francisco’s rental market, and some 19.7 million rental units in the United States. In effect, what this “rental management” software does is allow landlords to collude to fix rentals, while claiming that they are only following objective advice. RealPage has denied recommending vacancies and says that they do not decide rent prices.
San Francisco’s market is tight. The city has one of the worst housing crises in the country. Recommendations of vacancies in a tight market sharply increase rents. If you’re desperate, and can’t get a place to stay, when you finally do get one, you will pay everything you have to secure it. If you're a landlord and use this software, and you see your revenues magically increase, you’re going to be very happy with RealPage. RealPage has an incentive to worsen the housing crisis because that’s what’s good for landlords. A 2022 investigation by ProPublica unearthed how RealPage’s algorithm, “YieldStar”, works:
“To arrive at a recommended rent, the software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge.”
In other words, landlords are given insights based on what everyone else is charging, and they revise their prices upwards. That’s how the allegations of collusion come up. RealPage says, not so fast, that’s not how it works. Individual landlords don’t get told what everyone else is being charged, so there are no antitrust violations. Technically, that’s true: data from competitors is part of the data that goes into a recommendation, so landlords see the recommendation without the competitor data. It’s collusion at a distance, which is not something that would be possible if you were setting gold prices. Many people have started to buy homes at a premium to their value, banking on RealPage’s ability to extract high rents from tenants.
High interest rates have made homeownership impossible for anyone earning less than $108,000 a year, $50,000 more than you needed pre-pandemic, and with poorly designed zoning laws, and a home construction industry struggling for workers, the supply of new, affordable homes is not likely to increase anytime soon. The Federal Reserve’s data on active listings of homes shows that, although there has been some recovery, we are far from the number of active listings in 2017.
Source: FRED
As of June 2024, there were 884,273 active listings, compared to 1.46 million in July 2016. In that time, the population has continued to grow. Of course, rents have exploded just in the post-pandemic era. Wall Street firms have gotten into the act, as home values have grown at 2.4 times the inflation rate, a year.
What RealPage is doing is setting a match to gasoline. It is exploiting the hardship of millions of people for its own benefit. San Francisco’s first-in-the-nation move has to be commended. People are starting to wake up to what realPage is doing. There have been more than thirty class-action cases filed against RealPage and its clients, and these have been consolidated into one filing under theUS District Court of Middle Tennessee. The Department of Justice has followed suit and in Marchi this year launched an investigation into RealPage’s activities. According to Politico, this is the first time that a firm has been investigated for algorithmic price fixing. Although the DoJ has not commented on their investigation, they did weigh in on the class action to say that price fixing is price fixing regardless of whether it happens in a smoke-filled room or through an algorithm.
Given the strong association between rent price increases and RealPage’s entry into a market, the DoJ has a very strong case. In fact, RealPage boasts that it can help its clients “create incremental yields”, which in common speak means, earn greater-than-market returns. The DoJ needs to stop RealPage in its tracks.
