We all know rents have increased, but the reason seems to be alluding our elected officials. The new scapegoat for rising rents is being pinned on artificial intelligence as the root cause of high rents and one company in particular. Why is the government now going after a software company to lower rents? Is one software company really the root cause of inflation? What are the 4 real reasons for housing inflation?
The justice department has a new scapegoat for high rental costs, one software company called Real Page that provides pricing information to large apartment owners. The Justice Department Justice claims RealPage enables landlords to conspire to raise rents. It looks like Trump will continue this fight to try and accomplish lower rents which are a leading cause of inflation.
In reality, RealPage’s tools resemble technologies that many businesses use to adjust prices based on changes in customer demand, market supply and competitor prices. Such algorithms improve price discovery and make markets more efficient.
Who is RealPage?
RealPage gathers data from landlords about apartment vacancy rates, predicted future occupancy, rental prices, executed leases and their terms. It trains an AI model on this data to suggest rents to landlords that reflect market conditions to maximize their income. Charging too much can result in vacancies. Charging too little leaves money on the table.
RealPage collects information on about 16 million of the 50 million or so rental units nationwide. But only landlords with about three million units use its tools. Justice says RealPage’s penetration in some “submarkets” can range from 29% to more than 60%. But the government doesn’t furnish evidence that rents have increased more in those markets.
What about companies like Zillow?
Zillow provides similar pricing information as Real Page. You can look up any property and see what every other property is listed for rent and then it suggests what you should rent your property for. If you pay for the premium product you get even more information about competitors rents. This is very similar to what real page does just on a larger scale and likely with more detailed information
No violation of antitrust by Real Page
Note, I have no dog in this fight with either the fed or real page. With that said, it is a stretch to say the Real Page is violating any antitrust laws as there is no collusion with other parties to set prices. The software merely suggests what price they predict the market will allow and property owners can do what they want with the information. This is very similar to how many use the information on Zillow as a suggestion of pricing not a requirement.
Slippery slope targeting companies relying on data for pricing decisions
It is a very slippery slope to start targeting companies relying on AI models for pricing. Every major company from ski resorts to Disneyworld use pricing models to determine the optimum prices. Think of Airlines, who are one of the early adopters of demand-based pricing. During the holidays flights cost more, every airline is using a model that looks at demand along with competitor prices to determine the optimal price. For example, on a hot route like Atlanta to Denver there is more competition, and pricing will be less than on a flight from Atlanta to Aspen where there is considerably less competition and huge demand. This is basic business decision making using the best data available. The Fed going after one company for creating a pricing model is a bad policy and will ensnare thousands of other businesses.
What are root causes of housing inflation
A pricing model is not even on the top 10 list of reasons why rental prices are going up. Currently there is a mismatch, especially on the less expensive units, between demand and supply. Take Denver for example, rents have increased substantially as builders are not building affordable rental properties that are not government backed due to the high cost of building. So what really is causing rents to skyrocket
- Mismatch in housing location vs demand: There is tons of demand in a city like Denver or Austin, TX as opposed to the inner city of Detroit, yet there is a ton of availability at much lower price points in Detroit, yet people still want to be in Austin or Denver. Long and short there is a mismatch in locations of lower costs and demand.
- Cost of capital to build: As interest rates have increased and financing has dried up, the cost to build apartments and rental units has skyrocketed leading to substantially less building. This is further exacerbating supply issues.
- Building costs: Labor, Material, land costs have all increased making it next to impossible to build cost effective units especially in areas where demand for cost effective units has surged.
- Governmental regulations: Whether it is impact fees, energy efficiency requirements, all electric requirements, etc… all of these changes have increased the cost to build substantially. This further makes it next to impossible to build market rate affordable housing units.
Is AI really the culprit behind higher rents?
Pinning high rents on an AI model is laughable and further targeting one software company for developing an AI model to help better price rentals is absolutely ludicrous. Computer models have enabled businesses across the economic spectrum to be more efficient by optimizing their prices. Think of Vail resorts, prices are higher at the ticket office over Christmas than on a random non holiday Monday. The reason Vail does this is to both manage demand and optimize profit. AI models enable the rental industry to become more efficient by managing demand and supply. At the end of the day, whether Realpage is the information supplier or Zillow or someone else, this information is already available and companies will continue to automate their pricing of rental units. Prohibiting companies from using AI pricing models is a slippery slope that will ensnare every major company.
Furthermore, it is disappointing that our federal government is wasting so much time and resources trying to pin housing inflation on RealPage as opposed to actually working to mitigate the real drivers of housing inflation. I have not seen a single proposal out of Washington that would lower the cost of building, ironically all their proposals are doing the opposite making it more and more difficult to build cost efficient rental units.
Additional Reading/Resources:
- https://www.fairviewlending.com/why-are-house-prices-still-rising/
- https://www.justice.gov/opa/pr/justice-department-sues-realpage-algorithmic-pricing-scheme-harms-millions-american-renters
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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